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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
For the fiscal year ended December 31, 1997
/ / Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to __________
Commission file number 0-27464
BROADWAY FINANCIAL CORPORATION
(Name of Small Business Issuer in Its Charter)
DELAWARE 95-4547287
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4800 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90010
(Address of Principal Executive Offices) (Zip Code)
(213) 634-1700
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $0.01 PER SHARE
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for past 90 days.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. /X/
State issuer's revenues for its most recent fiscal year. $9,120,000.
State the aggregate market value of the voting stock held by
non-affiliates, based on the average bid and asked prices of such stock as of
March 19, 1998 as quoted on The Nasdaq Stock Market: $10,901,018.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 863,447 shares of Common
Stock at March 19, 1998
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrants' 1998
Annual Meeting of Shareholders are incorporated by reference into Part III
hereof.
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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)
totaled $9.1 million. The Company used 50% ($4.1 million) of the net Common
Stock proceeds and 100% ($911,000) of the Preferred Stock proceeds to
purchase the capital stock of Broadway Federal. The remaining proceeds were
retained by the Company.
The Company's principal business is serving as the holding company for
Broadway Federal. The Company is subject to regulation and examination by the
Office of Thrift Supervision ("OTS") as a savings and loan holding company.
Prior to the completion of the Conversion, the Company had no assets or
liabilities and did not conduct any business other than that of an
organizational nature. The executive offices of the Company are located at
4800 Wilshire Boulevard, Los Angeles, California 90010, telephone number
(213) 634-1700.
BROADWAY FEDERAL BANK, F.S.B.
GENERAL
Broadway Federal is a community-oriented savings institution dedicated to
serving the African-American, Hispanic and other communities of mid-city and
South Central Los Angeles, California. Broadway Federal conducts its
business from four banking offices located in Los Angeles and from a banking
office located in the nearby city of Inglewood, which also houses the Bank's
loan origination and loan service departments.
Broadway Federal's principal business consists of attracting retail deposits
from the general public in the areas surrounding its branch offices and
investing those deposits, together with funds generated from operations,
primarily in residential mortgage loans. To a lesser extent, Broadway
Federal invests in nonresidential real estate loans secured primarily by
church properties and certain other types of loans. In addition, Broadway
Federal invests in securities issued by the U.S. Government and agencies
thereof, mortgage-backed securities and other investments. Through its
wholly-owned subsidiary, Broadway Service Corporation ("BSC"), the Bank also
receives commissions from the sale of mortgage, life and fire insurance. BSC
also provides trustee services to Broadway Federal. Broadway Federal
originates and purchases loans for investment and for sale. Broadway Federal
retains the servicing rights with respect to virtually all loans sold.
Broadway Federal's revenues are derived principally from interest on its
mortgage loans and, to a lesser extent, mortgage loan servicing activities,
and interest and dividends on its investments. Broadway Federal's principal
expenses are interest paid on deposits, together with general and
administrative expenses. Broadway Federal's primary sources of funds are
deposits and principal and interest payments on loans and short-term
borrowings.
The Company and the Bank are regulated by the OTS and the Federal Deposit
Insurance Corporation ("FDIC") and Broadway Federal's deposits are insured up
to applicable limits by the Savings Association Insurance Fund ("SAIF") of
the FDIC. Broadway Federal is also a member of the Federal Home Loan Bank
("FHLB") of San Francisco. See "--Regulation."
The Bank is currently classified as "well-capitalized" under the OTS capital
regulations.
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STRATEGIC OBJECTIVES
The Company's strategic objectives are to maintain the Bank's
well-capitalized regulatory capital status in order to take advantage of
future expansion and growth opportunities, including internal growth and
growth through acquisitions of branch offices or other institutions, while
managing such growth, maintaining a strong net interest margin, maintaining
asset quality, reducing expenses and non-performing assets and limiting
exposure to credit and interest rate risk. The Company seeks to accomplish
these objectives by: (i) utilizing retail deposits as its primary source of
funds (as these are considered to be more stable and of lower cost on average
than borrowings), principal and interest payments on loans and other sources
of funding; (ii) maintaining a substantial portion of its assets in loans
secured by residential real estate primarily located in Broadway Federal's
primary market area of South Central Los Angeles; (iii) retaining in its
portfolio primarily adjustable-rate mortgage loans ("ARM"s) to reduce
Broadway Federal's exposure to interest rate fluctuations; (iv) continuing to
improve Broadway Federal's visibility and market share in the communities it
serves through increased outreach efforts, branching and enhancement of the
services it offers; and (v) reducing Broadway Federal's non-interest expense
through more efficient operations to the extent consistent with its
commitment of service to the underserved communities of mid-city and South
Central Los Angeles.
MARKET AREA AND COMPETITION
The Los Angeles metropolitan area is a highly competitive market in which
Broadway Federal faces significant competition in making loans and, to a
lesser extent, in attracting deposits. Although Broadway Federal's offices
are located in low and moderate income minority areas that have historically
been underserved by other financial institutions, Broadway Federal is facing
increasing competition for deposits and residential mortgage lending in its
immediate market areas, including direct competition from a number of
financial institutions with branch offices or loan origination capabilities
in its market area. Most of these financial institutions are significantly
larger and have greater financial resources than Broadway Federal, and many
have a regional, state-wide or national presence. Management believes that
this competition has increased substantially, particularly with respect to
one- to four-family residential lending activities. Many larger
institutions, able to accept lower returns on loans in Broadway Federal's
market, do so to attract a sufficient volume of such loans in response to
increased emphasis by federal regulators on financial institutions'
fulfillment of their responsibilities under the Community Reinvestment Act.
See "--Regulation--Community Reinvestment Act."
For much of the period since World War II, the communities of mid-city and
South Central Los Angeles had a predominately African-American population
and, although there is significant variation among communities in South
Central Los Angeles, a substantial portion of the area has historically
consisted of low and moderate income neighborhoods and commercial areas.
While the area remains predominately low and moderate income in nature, in
more recent years the population has changed, with a rapidly growing Hispanic
community, as well as Asian and other ethnic communities.
Historically, there have been relatively few retail banking offices of other
financial institutions located in Broadway Federal's primary market area.
This fact, coupled with the fact that the deposit needs and preferences of
its customers tend to be for passbook or other transactional accounts, rather
than higher cost certificates of deposit, has enabled Broadway Federal to
maintain a significantly higher proportion of its deposit funding in such
accounts. Management believes that this results in Broadway Federal
realizing a substantially higher interest rate spread and margin than many
other savings institutions.
With respect to its lending activities, Broadway Federal also tailors its
business strategy to the communities it serves. Broadway Federal's loan
originations consist primarily of relatively low balance loans on one- to
four-family properties, loans on multi-family properties and, again
reflecting its community orientation, church properties. Broadway Federal's
borrowers often request low loan amounts which produce loans with relatively
low loan-to-value ratios. To facilitate loans to low and moderate income
borrowers, Broadway Federal utilizes flexible credit underwriting standards
and accepts various forms of alternative documentation substantiating the
prospective borrower's credit worthiness. For example, Broadway Federal will
accept higher ratios of housing expense and total expense to borrower income
because it believes that many low and moderate income borrowers are able to
devote a higher percentage of their income to housing without material
default experience. Broadway Federal will also, in cases it believes to be
appropriate, accept a greater incidence of late payments by
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loan applicants on their other financial obligations if it can be
established that these events were beyond the control of the borrower and are
not likely to reoccur.
LENDING ACTIVITIES
GENERAL. Broadway Federal emphasizes the origination of adjustable-rate
loans primarily for retention in its portfolio in order to increase the
percentage of loans with more frequent repricing, thereby reducing Broadway
Federal's exposure to interest rate risk. At December 31, 1997,
approximately 82% of Broadway Federal's mortgage loans had adjustable rates.
Although Broadway Federal has continued to originate fixed-rate mortgage
loans in response to customer demand and Broadway Federal's need for certain
assets which do not reprice regularly, a large portion of the conforming
fixed-rate mortgage loans originated by Broadway Federal and some of its ARMS
are sold in the secondary market, primarily to the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC")
and other financial institutions. The decision as to whether the loans will
be retained in Broadway Federal's portfolio or sold is made at the time of
loan origination. At December 31, 1997, Broadway Federal had $222,000 in
fixed-rate loans classified as held for sale.
The types of loans that Broadway Federal originates are subject to federal
and state laws and regulations. Interest rates charged by Broadway Federal
on loans are affected by the demand for such loans and the supply of money
available for lending purposes and the rates offered by competitors. These
factors are in turn affected by, among other things, economic conditions,
monetary policies of the federal government, including the Federal Reserve
Board, and legislative tax policies. Federal savings associations and
savings banks are not subject to usury or other interest rate limitations
under California law.
LOAN PORTFOLIO COMPOSITION. Broadway Federal's loan portfolio consists
primarily of first mortgage loans not insured or guaranteed by any government
agency. At December 31, 1997, Broadway Federal's loan portfolio totaled
$105.9 million, of which approximately 51.84% was secured by one- to
four-family residential properties, 29.82% was secured by multi-family
properties and 15.44% was secured by nonresidential properties, with
approximately 71% of such nonresidential properties being church
properties. At that same date, approximately 69.90% of Broadway Federal's
one- to four-family mortgage loans, 98.17% of its multi-family residential
mortgage loans, and 92.40% of its nonresidential mortgage loans had adjustable
rates.
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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.
<TABLE>
<CAPTION>
DECEMBER 31,
......................................
1997 1996
.................. ..................
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
...... .......... ...... ..........
(DOLLARS IN THOUSANDS)
Real Estate:
Residential:
<S> <C> <C> <C> <C>
One-to Four-Units............... $ 54,902 51.84% $50,671 51.48%
Five or More Units.............. 31,588 29.82 29,573 30.05
Nonresidential.................... 16,356 15.44 16,449 16.71
Construction...................... 446 0.42 226 0.23
Land.............................. 315 0.30 -- --
Loans Secured by
Savings Accounts.................... 1,862 1.76 1,428 1.45
Other........................... 445 0.42 83 0.08
........ ....... ....... .......
Total Loans......................... $105,914 100.00% $98,430 100.00%
........ ....... ....... .......
Plus:
Premium on Loans Purchased...... 71 --
Less:
Allowance for Loan Losses....... 1,054 1,174
Loans in Process................ 143 130
Deferred Loan Fees, net......... 820 812
Unamortized Discounts........... 57 54
........ ......
103,911 92,260
Less:
Loans Held for Sale............. 222 --
........ ......
Total Loans Held for Investment..... $103,689 $96,260
........ .......
........ .......
</TABLE>
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LOAN MATURITY. The following table sets forth the contractual maturities of
Broadway Federal's total loans at December 31, 1997. The table does not
reflect the effect of scheduled principal repayments. Principal repayments
on loans totaled $9.2 million and $8.3 million for the years ended December
31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------------
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................ $ 455 $ 7 $ 9 $446 $1,937 $ 2,854
------- ------- ------- ---- ------ --------
After one year:
After one to three years...... 83 117 1,255 -- 18 1,473
After three to five years..... 624 272 526 -- 145 1,567
After five to ten years....... 1,611 2,714 1,299 -- 47 5,671
After ten to twenty years..... 9,971 24,514 13,451 -- 100 48,036
More than twenty years........ 42,158 3,964 130 -- 61 46,313
------- ------- ------- ---- ------ --------
Total due after one year...... 54,447 31,581 16,661 -- 371 103,060
------- ------- ------- ---- ------ --------
Total Amounts Due................. $54,902 $31,588 $16,670 $446 $2,308 $105,914
------- ------- ------- ---- ------ --------
------- ------- ------- ---- ------ --------
</TABLE>
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The following table sets forth the dollar amount of total loans receivable at
December 31, 1997 which are contractually due after December 31, 1998, and
whether such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------
ADJUSTABLE FIXED TOTAL
---------- ----- --------
(IN THOUSANDS)
Real Estate Loans:
<S> <C> <C> <C>
One-to four-units................. $38,435 $16,012 $ 54,447
Five or more units................ 31,010 571 31,581
Nonresidential real estate........ 15,105 1,242 16,347
Construction and land............. 315 -- 315
Other............................. 161 209 370
------- ------- --------
Total............................. $85,026 $18,034 $103,060
------- ------- --------
------- ------- --------
</TABLE>
ORIGINATION, PURCHASE, SALE AND SERVICING OF LOANS. Broadway Federal
originates and purchases loans for investment and for sale. Loan sales come
from loans held in Broadway Federal's portfolio designated as held for sale
and loans originated during the period that are so designated.
It is the current practice of Broadway Federal to sell most conforming
fixed-rate mortgage loans it originates, retaining a limited amount in its
portfolio. Broadway Federal also may sell ARMs that it originates based upon
its investment needs and market opportunities. Broadway Federal recognizes
the cash gain or loss on the sale of the loans at the time of sale based on
the difference between the net cash proceeds received and the carrying value
of the loans sold. In addition, excess servicing, which is the present value
of any difference between the interest rate charged to the borrower and the
interest rate paid to the purchaser after deducting a normal servicing fee,
is recognizable as an adjustment to the cash gain or loss. The excess
servicing gain or loss is dependent on prepayment estimates and discount rate
assumptions. Historically, such excess servicing gains or losses have not
been material to Broadway Federal. At December 31, 1997, Broadway Federal
had $222,000 in fixed-rate loans and no ARMs categorized as held for sale.
See "--Recent Accounting Pronouncements."
Broadway Federal retains the right to service most loans sold, for which it
receives monthly loan servicing fees that are payable by the loan purchaser
out of loan collections in an amount equal to an agreed percentage of the
monthly loan installments collected, plus late charges and certain other fees
paid by the borrowers. Loan servicing activities include monthly loan
payment collection, monitoring of insurance and tax payment status, responses
to borrower information requests and dealing with loan delinquencies and
defaults, including conducting loan foreclosures. At December 31, 1997,
Broadway Federal was servicing $8.2 million of loans owned by others.
From time to time, Broadway Federal has purchased residential loans
originated by other institutions based upon Broadway Federal's investment
needs and market opportunities. The determination to purchase specific loans
or pools of loans is subject to Broadway Federal's underwriting policies,
which consider the financial condition of the borrower, the location of the
underlying property and the appraised value of the property, among other
factors. During the years ended December 31, 1997 and 1996, $7.9 million and
$2.0 million, respectively, in loans were purchased by Broadway Federal.
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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.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
------------------------
1997 1996
------------ ----------
(IN THOUSANDS)
Gross Loans:
<S> <C> <C>
Beginning Balance:........................ $ 98,430 $91,213
Loans Originated:
One-to Four-Units....................... 6,164 5,005
Five or More Units...................... 3,849 9,630
Nonresidential.......................... 1,971 1,751
Construction............................ 321 205
Loans Secured by Savings Accounts....... 1,270 795
Other................................... 723 --
-------- -------
Total Loans Originated.................... 14,298 17,386
Loans Purchased............................. 7,923 2,001
-------- -------
Total New Loans........................... 22,221 19,387
-------- -------
Less:
Transfer to REO........................... 1,710 1,163
Principal Repayments...................... 9,224 8,337
Sales of Loans............................ 3,690 2,670
Loan Write-Offs........................... 113 --
-------- -------
$105,914 $98,430
-------- -------
-------- -------
</TABLE>
ONE- TO FOUR-FAMILY MORTGAGE LENDING. Broadway Federal offers ARMs and FHA
fixed-rate loans secured by one- to four-family residences, with maturities
up to thirty years. Substantially all of such loans are secured by
properties located in Southern California, with most being in Broadway
Federal's primary market areas of mid-city and South Central Los Angeles.
Loan originations are generally obtained from Broadway Federal's loan
representatives, existing or past customers, and referrals from members of
churches or other organizations in the local communities where Broadway
Federal operates. Of the one- to four-family residential mortgage loans
outstanding at December 31, 1997, 30.38% were fixed-rate loans and 69.62%
were ARMs.
The interest rates for most of Broadway Federal's ARMs are indexed to the
11th District Cost of Funds Index ("COFI"),with others indexed to the 1-year
Treasury Index ("Treasury"). Broadway Federal currently offers loans with
interest rates that adjust both monthly and annually. Borrowers are required
to make monthly payments under the terms of such loans. Some of its loan
programs have payment schedules that permit negative amortization (that is,
portions of the interest on loans that have adjusted upward due to interest
rate index increases are not payable currently and are instead added to the
loan principal). Broadway Federal currently has approximately $13.2 million
in mortgage loans that may be subject to negative amortization. Negative
amortization may involve a greater risk to Broadway Federal because during
periods of high interest rates the loan principal may increase above the
amount originally advanced. Broadway Federal believes, however, that the
risk of default is not substantial due to Broadway Federal's underwriting
criteria, including relatively low loan-to-value ratios, and the relative
stability of the COFI.
Broadway Federal qualifies its ARM borrowers based upon the fully indexed
rate as of such date (COFI or other index plus the applicable margin, rounded
to the nearest one-eighth of 1%) provided by the terms of the loan. However,
the initial rate paid by the borrower
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is often discounted to a rate determined by Broadway Federal in accordance
with market and competitive factors. As of December 31, 1997, the
introductory discount rate offered by Broadway Federal on ARMs that adjust
monthly was 3.75%, which was below the fully-indexed rate based on the COFI,
which was 4.96% at such date. For ARMs that adjust annually, the
introductory rate offered by Broadway Federal at December 31, 1997 was 1.75%
below the fully-indexed rate based on the Treasury, which was 5.49% at such
date. As of December 31, 1997, the fully-indexed rates on ARMs that adjust
annually and those that adjust monthly were 8.375% and 7.625%, respectively,
above COFI. Broadway Federal's annual ARMs adjust by a maximum of 2.0% per
adjustment. There is no adjustment limit on the monthly ARMs, other than on
election by the borrower to limit its payment increase to 7.50% annually,
which could result in negative amortization on the loan. Both annual and
monthly ARMs have a lifetime adjustment limit which is set at the time
the loan is approved. At December 31, 1997, Broadway Federal charged fees of
up to 1.5% of the original loan amount for its one- to four-family ARMs.
Because of interest rate caps, market rates may exceed the maximum rates
payable on Broadway Federal's ARMs.
Broadway Federal offers fixed-rate mortgage loans with terms of 5, 15 and 30
years, which are payable monthly. Interest rates charged on fixed-rate
mortgage loans are competitively priced based on market conditions and
Broadway Federal's cost of funds. Origination fees charged on fixed-rate
loans were up to 2.50% of the original loan amount at December 31, 1997.
Broadway Federal's policy is to originate one- to four-family residential
mortgage loans in amounts up to 80% of the lower of the appraised value or
the selling price of the property securing the loan and up to 95% (and under
certain circumstances up to 97%) of the value if private mortgage insurance
is obtained. Many of Broadway Federal's borrowers on one- to four-family
properties are older home owners who typically prefer to maintain lower than
the maximum permitted loan balances. However, subsequent declines in the
real estate values in Broadway Federal's primary market area have resulted in
increases in the loan-to-value ratios of Broadway Federal's existing one- to
four-family mortgage loans. Properties securing a loan are appraised by an
approved independent appraiser and title insurance is required on all loans.
Mortgage loans originated by Broadway Federal generally include due-on-sale
clauses which provide Broadway Federal with the contractual right to declare the
loan immediately due and payable in the event the borrower transfers
ownership of the property without Broadway Federal's consent. Due-on-sale
clauses are an important means of adjusting the rates on Broadway Federal's
fixed-rate mortgage loan portfolio.
MULTI-FAMILY LENDING. Broadway Federal originates multi-family mortgage
loans generally secured by five or more unit apartment buildings located in
Broadway Federal's primary market area. In reaching its decision on whether
to make a multi-family loan, Broadway Federal considers the qualifications of
the borrower as well as the underlying property securing the loan. The
factors considered include, among other things, the net operating income of
the mortgaged premises before debt service and depreciation, the debt service
coverage ratio (the ratio of net operating income to debt service), and the
ratio of loan amount to the lower of the selling price and the appraised
value. At December 31, 1997 multi-family lending represented 29.82% of the
Bank's gross loan portfolio, compared to 30.05% of the Bank's portfolio at
December 31, 1996.
Multi-family lending is part of the Company's strategic focus on less
competitive, higher yielding loan products. Broadway believes that the risks
associated with multi-family loans (see below) are mitigated by more
stringent underwriting requirements, which include lower loan-to-value ratios
and increased debt service coverage ratios. Under Broadway Federal's
underwriting policies, a multi-family ARM may only be made in an amount up to
70% of the lower of the selling price or appraised value of the underlying
property. Subsequent declines in the real estate values in Broadway
Federal's primary market area, however, have resulted in increases in the
loan-to-value ratios on Broadway Federal's existing multi-family mortgage
loans. Broadway Federal also generally requires minimum debt service ratios
that range from 120% to 135%, depending on the credit profile of the borrower
and the underlying collateral. Properties securing a loan are appraised by
an approved independent appraiser and title insurance is required on all
loans.
When evaluating the qualifications of the borrower for a multi-family loan,
Broadway Federal considers, among other things, the financial resources and
income level of the borrower, the borrower's experience in owning or managing
similar property, and Broadway Federal's lending experience with the
borrower. Broadway Federal's underwriting policies require that the borrower
be able to demonstrate strong management skills and the ability to maintain
the property from current rental income. The borrower is required to present
evidence of the ability to repay the mortgage and a history of making
mortgage payments on a timely basis. In making its assessment of the
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creditworthiness of the borrower, Broadway Federal generally reviews the
financial statements, employment and credit history of the borrower, as well
as other related documentation.
Broadway Federal's largest multi-family loan at December 31, 1997 was a
participation loan of which, Broadway Federal's portion totaled $670,000.
The loan is secured by a forty-unit property located in the Los Angeles
metropolitan area. This loan is currently performing according to its terms.
Broadway Federal's second largest multi-family loan at that date was secured
by a twenty-eight unit property located in Los Angeles. At December 31,
1997, this loan had an outstanding balance of $659,000 and is currently
performing according to its terms.
Multi-family loans are generally viewed as exposing the lender to a greater
risk of loss than one- to four-family residential loans and typically involve
higher loan principal amounts than loans secured by one- to four-family
residential real estate. Repayment of multi-family loans generally is
dependent, in large part, on sufficient income from the property to cover
operating expenses and debt service. As a result, adverse economic
conditions such as those experienced in recent years in Southern California,
which have had especially severe effects in Broadway Federal's primary market
areas in mid-city and in South Central Los Angeles, have resulted in declines
in real estate values of multi-family properties that are more pronounced
than for single family residential properties. Broadway Federal attempts to
offset the risks associated with multi-family lending through careful
application of its underwriting standards and procedures, and by generally
making such loans with lower loan-to-value ratios than the maximum ratios
permitted for one- to four-family loans. Economic events and government
regulations, which are outside the control of the borrower or lender, could
impact the value of the security for the loan or the future cash flow of the
affected properties.
NONRESIDENTIAL REAL ESTATE LENDING. Broadway Federal originates
nonresidential real estate loans that are generally secured by properties
used for churches or for business purposes such as small office buildings,
health care facilities and retail facilities located in Broadway Federal's
primary market area. Broadway Federal has limited the origination of
nonresidential real estate loans in recent years. Of the $16.3 million in
Broadway Federal's nonresidential real estate loan portfolio at December 31,
1997, $11.2 million were originated prior to 1993.
Broadway Federal's nonresidential real estate loans are generally made in
amounts up to 65% of the lower of the selling price or the appraised value of
the property. Subsequent declines in the real estate values in Broadway
Federal's primary market area have resulted in increases in the loan-to-value
ratios on Broadway Federal's existing nonresidential mortgage loans. These
loans may be made with amortizations and maturity dates of up to 30 years and
are indexed to the COFI. Broadway Federal's underwriting standards and
procedures are similar to those applicable to its multi-family loans.
Broadway Federal considers, among other things, the net operating income of
the property and the borrower's management expertise, credit history and
profitability. Broadway Federal has generally required that the properties
securing nonresidential real estate loans have debt service coverage ratios
of at least 135%. The underwriting standards for nonresidential loans
secured by church properties are slightly different than for non-church
nonresidential real estate in that the ratios used in evaluating the loan are
based upon the repayment source from church member contributions rather than
income generated by rents or leases. The largest nonresidential real estate
loan in Broadway Federal's portfolio was originated in 1987. It is secured
by church property located in Inglewood, California, and had an outstanding
balance at December 31, 1997 of $801,000. This loan is currently performing
according to its terms. The second largest nonresidential real estate loan
in Broadway Federal's portfolio is also secured by a church property, located
in Los Angeles, California, and had an outstanding balance at December 31,
1997 of $684,000. This loan is also performing according to its terms.
Originating loans secured by church properties is a market niche in which
Broadway Federal has been active since its inception. Although Broadway
Federal does experience delinquencies on some of these loans and has made
additions to its allowance for loan losses as a result thereof, this product
has produced higher yields than the residential loan portfolio and Broadway
Federal has incurred no losses from foreclosures of these loans to date.
Management of Broadway Federal believes that the importance of church
organizations in the social and economic structure of the communities it
serves makes church lending an important aspect of its community orientation.
Management further believes that the importance of churches in the lives of
the individual members of the respective congregations encourages donations
even in difficult economic times, thereby providing somewhat greater
assurance of financial resources to repay loans than for residential or
other types of nonresidential properties. Nonetheless, adverse economic
conditions can result in risks to loan repayment that are similar to those
encountered in other types of nonresidential lending and such lending is
subject to other risks not necessarily directly related to economic factors
such as the stability, quality and popularity of church leadership. Church
loans included in Broadway Federal's portfolio totaled $11.6 million and
$11.8 million at December 31, 1997 and 1996, respectively.
9
<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 is typically dependent
on the successful operation or management of the properties and is thus
subject, to a greater extent than single family loans, to adverse conditions
in the real estate market or the economy. Additionally, the declines in real
estate values over the last few years in the Southern California regional
economy have been more pronounced with respect to nonresidential real estate.
Broadway Federal seeks to minimize these risks by originating such loans on a
selective basis and currently restricts such loans to its primary lending
area.
CONSUMER LENDING. Broadway Federal's consumer loans primarily consist of
loans secured by savings accounts. At December 31, 1997, loans secured by
savings accounts represented $1.9 million, or 1.76%, of Broadway Federal's
total loan portfolio. Loans secured by depositors' accounts are generally
made up to 90% of the current value of the pledged account, at an interest
rate at least 2% above the rate paid on the account and for a term expiring
the earlier of one year from origination or upon the maturity of the account.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors establishes
the lending policies of Broadway Federal. The Loan Committee, which is
comprised of the Senior Vice President-Chief Loan Officer and at least three
members of the Board of Directors, one of whom is the President and Chief
Executive Officer, is primarily responsible for developing, implementing and
monitoring the lending policies of Broadway Federal and reviewing properties
offered as security. The Board of Directors has authorized the following
loan approval limits as of January 1998, based upon the amount of Broadway
Federal's total loans to each borrower: if the total of the borrower's
existing loans and the loan under consideration is below $227,150, the new
loan may be approved by either the Senior Vice President-Chief Loan Officer
or the President; if the total of the borrower's existing loans and the loan
under consideration is from $227,150 to $500,000, the new loan must be
approved by two Loan Committee members, which may include the Senior Vice
President-Chief Loan Officer and the President; if the total of the
borrower's existing loans and the loan under consideration is from $500,000
up to $900,000, the new loan must be approved by three Loan Committee
members; and if the total of existing loans and the loan under consideration
is $900,000 or more, the full Board of Directors must approve the new loan.
In addition, it is the practice of Broadway Federal that all loans approved
by one or two Management Loan Committee members be reviewed the following
month by the two outside directors on the Loan Committee.
For all loans originated by Broadway Federal, upon receipt of a loan
application from a prospective borrower, a credit report is ordered and
certain other information is verified by an independent credit agency and, if
necessary, additional financial information is requested. An appraisal of
the real estate intended to secure the proposed loan is required, which
appraisal is performed by either the staff appraiser of Broadway Federal or
by an independent licensed or certified appraiser designated and approved by
Broadway Federal. The Board annually approves the independent appraisers
used by Broadway Federal and approves Broadway Federal's appraisal policy.
It is Broadway Federal's policy to obtain title insurance on all real estate
loans. Borrowers must also obtain hazard insurance prior to loan closing.
If the original loan amount exceeds 80% on a sale or refinance of a first
trust deed loan, private mortgage insurance is typically required and the
borrower is required to make payments to a mortgage impound account from
which Broadway Federal makes disbursements for private mortgage insurance,
taxes and hazard and flood insurance as required.
DELINQUENCIES AND CLASSIFIED ASSETS. Management and the Board of Directors
perform a monthly review of all delinquent loans. The procedures followed by
Broadway Federal with respect to delinquencies vary depending on the nature
of the loan and the period of delinquency. When a borrower fails to make a
required payment on a loan, Broadway Federal takes a number of steps to
induce the borrower to cure the delinquency and restore the loan to current
status. In the case of residential mortgage loans, Broadway Federal
generally sends the borrower a written notice of nonpayment promptly after
the loan becomes past-due. In the event payment is not received promptly
thereafter, additional letters and telephone calls are made. If the loan is
still not brought current and it becomes necessary for Broadway Federal to
take legal action, Broadway Federal generally commences foreclosure
proceedings against all real property that secures the loan.
Broadway Federal ceases to accrue interest on all loans that are 90 days
past-due. When a loan first becomes 90 days past due, all previously accrued
but unpaid interest is deducted from interest income. In the event a
non-accrual loan subsequently becomes current, which would require that the
borrower pay all past due payments, late charges and any other delinquent
fees owed, all income is recognized by Broadway Federal and the loan is
returned to accrual status.
10
<PAGE>
In the case of nonresidential real estate loans, Broadway Federal generally
contacts the borrower by telephone and sends a written notice of non-payment
upon expiration of the grace period. Decisions as to when to commence
foreclosure actions for nonresidential real estate loans are made on a
case-by-case basis. Broadway Federal may consider loan work-out arrangements
with these types of borrowers in certain circumstances.
If a foreclosure action is instituted and the loan is not brought current,
paid in full, or refinanced before the foreclosure sale, the real property
securing the loan is sold at foreclosure by the trustee named in the deed of
trust. Property foreclosed upon and not purchased by a third party at the
foreclosure sale is held by Broadway Federal as real estate acquired through
foreclosure ("REO") and is carried in Broadway Federal's consolidated
financial statements at its estimated fair value less the costs estimated to
be necessary to sell the property.
Federal regulations and Broadway Federal's internal policies require that
Broadway Federal utilize an asset classification system as a means of
monitoring and reporting problem and potential problem assets. Broadway
Federal has incorporated asset classifications as a part of its credit
monitoring system and thus classifies problem assets and potential problem
assets as "Substandard," "Doubtful" or "Loss" assets. An asset is considered
"Substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct
possibility" that the insured institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "Doubtful" have all of
the weaknesses inherent in those classified "Substandard" with the added
characteristic that the weaknesses make "collection or liquidation in full,"
on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "Loss" are those
considered "uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss allowance is not
warranted. Assets which do not currently expose Broadway Federal to
sufficient risk to warrant classification in one of the aforementioned
categories, but that are considered to possess some weaknesses, are
designated "Special Mention."
When a federally insured institution classifies one or more assets, or
portions thereof, as "Substandard" or "Doubtful," it is required to establish
an allowance for loan losses in an amount deemed prudent by management.
General valuation allowances, which is a regulatory term, represent loss
allowances that have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When a federally
insured institution classifies one or more assets, or portions thereof, as
"Loss," it is required either to establish a specific allowance for losses
equal to 100% of the amount of the asset so classified or to charge off such
amount.
A financial institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which can order the establishment of additional loss allowances. The
OTS, in conjunction with the other federal banking agencies, has adopted an
interagency policy statement on the allowance for loan and lease losses. The
policy statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of valuation guidelines. Generally, the policy
statement recommends that financial institutions have effective systems and
controls to identify, monitor and address asset quality problems, that
management analyze all significant factors that affect the collectibility of
the portfolio in a reasonable manner and that management establish acceptable
allowance evaluation processes that meet the objectives set forth in the
policy statement. Although management believes that adequate loan loss
allowances have been established, actual losses are dependent upon future
events and, as such, further material additions to the level of loan loss
allowances may become necessary. In addition, while Broadway Federal believes
that it has established an adequate allowance for loan losses at December 31,
1997, there can be no assurance that the OTS or the FDIC, in reviewing
Broadway Federal's loan portfolio, will not request Broadway Federal to
materially increase its allowance for loan losses based on such agencies'
evaluation of the facts available to the OTS or the FDIC at that time,
thereby negatively affecting Broadway Federal's financial condition and
earnings. However, as of the most recent OTS examination no adjustments to
the allowance were recommended.
At December 31, 1997, Broadway Federal had $2.3 million of loans classified
as Substandard, of which the largest loan so classified had a principal
balance of $315,000 and was secured by a multi-family residential property.
At December 31, 1997 there were $119,000 in loans classified as Doubtful and
$175,000 of loans classified as Loss. As of December 31, 1997, loans
designated as Special Mention included 22 loans totaling $3.7 million, which
were so
11
<PAGE>
designated due to delinquencies or other identifiable weaknesses. At
December 31, 1997, the largest loan designated as "Special Mention" had a
principal balance of $538,000 and was secured by a nonresidential property.
Broadway Federal obtains appraisals on REO properties on an annual basis.
Broadway Federal generally conducts external inspections of REO properties
(excluding land) on at least a quarterly basis.
The following table sets forth delinquencies in Broadway Federal's loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------------
1997 1996
----------------------------------------------- -----------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
---------------------- ---------------------- ---------------------- ----------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER OF BALANCE OF NUMBER OF BALANCE OF NUMBER OF BALANCE OF NUMBER OF BALANCE OF
LOANS LOANS LOANS LOANS LOANS LOANS LOANS LOANS
--------- ---------- --------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family 7 $ 183 8 $ 606 7 $ 10 9 $ 971
Multi-family - - 1 214 - - 3 638
Construction and land - - - - - - - -
Other loans - - 1 101 - - 2 247
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Total 7 $ 183 10 $ 921 7 $ 10 14 $1,856
--------- ---------- --------- ---------- --------- ---------- --------- ----------
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Delinquent loans to total
gross loans 0.17% .87% 0.01% 1.89%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
NON-ACCRUAL LOANS AND REO. Nonperforming assets, consisting of non-accrual
loans and REO, decreased from $2.8 million at December 31, 1996 to $2.1
million at December 31, 1997. The $742,000 decrease resulted from a
$953,000 decrease in non-accrual loans, offset by a $211,000 increase in REO.
As a percentage of total assets, nonperforming assets were 1.65% at December
31, 1997, as compared to 2.39% at December 31, 1996. The allowance for loan
losses was 114.44% of nonperforming loans at December 31, 1997, as compared
to 62.65% at December 31, 1996.
Included in the following table is information regarding Broadway Federal's
non-accrual loans and REO at the dates indicated. For the years ended
December 31, 1997 and 1996, the amount of interest income that would have
been recognized on non-accrual loans if such loans had continued to perform
in accordance with their contractual terms was $71,000 and $147,000,
respectively, as compared with the respective amounts actually received on
non-accrual loans of $28,000 and $68,000. Broadway Federal had no commitments
to lend additional funds to borrowers whose loans are non-accrual at December
31, 1997. There were no accruing loans contractually past due 90 days or more
at December 31, 1997.
12
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual loans:
Residential real estate:
One- to four-family $ 606 $ 987
Construction and Land - -
Other loans
315 887
-------- --------
Total non-performing loans 921 1,874
REO 1,144 933
-------- --------
Total non-performing assets $2,065 $2,807
-------- --------
-------- --------
Allowance for loan losses as a percentage
of total loans 1.00% 1.19%
Allowance for loan losses as a percentage
of total non-performing loans 114.44 62.65
Allowance for losses as a percentage of
total non-performing assets (1) 57.16 47.95
Non-performing loans as a percentage of
total loans 0.87 1.90
Non-performing assets as a percentage of
total assets 1.65 2.39
Net charge-offs to average loans 0.38 0.33
Impaired loans as a percentage of total
loans 1.70 2.03
</TABLE>
- ------------------------------------
(1) Allowance for losses includes valuation allowances on loans and REO.
At December 31, 1997, the total recorded investment in impaired loans (a loan
is impaired when it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement) was
$1.8 million. Of this amount, $443,000 had a related impairment allowance
totaling $239,000 at December 31, 1997. All such provisions for losses and
any related recoveries are recorded as part of the provision for loan losses
in the accompanying consolidated statements of operations. During the year
ended December 31, 1997, Broadway Federal's average investment in impaired
loans was $1.4 million, and interest income recorded on impaired loans during
this period totaled $150,000. Impaired loans which are performing under
their contractual terms are reported as performing loans and cash payments
are allocated to principal and interest in accordance with the terms of the
loan.
ALLOWANCE FOR LOAN LOSSES
Broadway Federal's allowance for loan losses is established through
provisions for loan losses charged against income in amounts that are based
on Management's evaluation of the risks inherent in the loan portfolio and
the general economy. The allowance for loan losses is maintained at an amount
that Management considers adequate to cover losses in loans receivable which
are deemed probable and estimable. The Board of Directors of Broadway
Federal reviews the level and reasonableness of the monthly provision for
loan losses, as well as the matrix which supports the adequacy of the
allowance for loan losses. The allowance is based upon a number of factors,
including current
13
<PAGE>
economic conditions, actual loss experience, industry trends, asset
classifications, levels of impaired loans, geographic concentrations,
estimated collateral values, Management's assessment of the credit risk
inherent in the portfolio, historical loan loss experience and Broadway
Federal's underwriting policies. To determine the overall allowance,
Management periodically reviews all loans by loan category (i.e., one- to
four-family, multi-family, nonresidential real estate, etc.). Adjustments to
the loan loss allowance are made by Broadway Federal based upon Management's
analysis of each category of loans and of the potential risk factors within
each category. The provision for loan losses may fluctuate on a monthly
basis as changes occur within the loan categories as a result of numerous
factors, including new loan originations, loan repayments, prepayments and
changes in asset classifications. Loan loss provisions may be recaptured for
a particular loan category if Management determines that the factors which
existed and required higher provisions are no longer present. Loan loss
provisions may be increased if Management becomes aware of factors elevating
the risk in that loan category.
As of December 31, 1997, Broadway Federal's allowance for loan losses was
1.00% of total loans, as compared to 1.19% as of December 31, 1996.
Broadway Federal had non-accrual loans $921,000 and $1.9 million at
December 31, 1997 and 1996, respectively. Broadway Federal seeks to
anticipate problems and take appropriate steps to resolve them through its
internal asset review procedures. Such procedures include a review of all
loans on which full collectibility may not be reasonably assured, and
consideration of, among other factors, debt service coverage ratios, vacancy
rates, the estimated value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance. Broadway Federal monitors and
modifies its allowance for loan losses as conditions dictate. Although
Broadway Federal maintains its allowance at a level which it considers
adequate to provide for potential losses, there can be no assurance that
losses will not exceed the estimated amounts. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review Broadway Federal's allowance for loan losses. Such agencies may
require Broadway Federal to make additional provisions for estimated loan
losses based upon judgments of the information available to them at the time
of the examination.
For loans transferred to REO, any excess of cost or recorded investment over
the estimated fair value of the asset at foreclosure is classified as a loss
and is charged off against the general loan loss allowance previously
established for those loans. REO is initially recorded at the estimated fair
value of the related assets at the date of foreclosure, less estimated costs
to sell. Thereafter, if there is further deterioration in value, Broadway
Federal either writes down the REO directly or provides a valuation allowance
and charges operations for the diminution in value. At December 31, 1997,
Broadway Federal had $1.1 million of REO, net of valuation allowances,
compared to $933,000 in 1996.
14
<PAGE>
The following table sets forth Broadway Federal's allowances for loan and
real estate losses at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Allowance for loan losses:
Balance at beginning of year $1,174 $896
Charge-offs, net:
One- to four-family 139 285
Multi-family 247 23
Construction and Land - -
Other - -
--------- ----------
Total Charge-offs, net (1) 386 308
Provision charged to income 266 586
--------- ----------
Balance at end of year 1,054 1,174
--------- ----------
Allowance for REO
Balance at beginning of year 181 218
Provision for losses 60 283
Charge-offs (114) (320)
--------- ----------
Balance at end of year 127 181
--------- ----------
Total $1,181 $1,355
--------- ----------
--------- ----------
</TABLE>
- ------------------------
(1) There were recoveries during the years ended December 31, 1997 and 1996
totaling $1,000 and $5,000, respectively.
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 in each of the
categories listed to total loans.
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31,
---------------------------------------------------------------------------------
1997 1996
---------------------------------------- --------------------------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
PERCENTAGE OF LOANS IN EACH ALLOWANCE TO LOANS IN EACH
ALLOWANCE TO CATEGORY TO TOTAL CATEGORY TO
AMOUNT TOTAL ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
------ --------------- ------------- ------ ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to Four-family $ 338 32.07% 51.84% $ 272 23.17% 51.48%
Multi-family 254 24.10 29.82 342 29.13 30.05
Nonresidential 217 20.59 15.44 199 16.95 16.71
Construction and Land 10 0.95 0.72 2 0.17 0.23
Other 54 5.12 2.18 24 2.04 1.53
Unallocated 181 17.17 - 335 28.54 -
------ --------------- ------------- ------ ------------- -------------
Total valuation allowance $1,054 100.00% 100.00% $1,174 100.00% 100.00%
------ --------------- ------------- ------ ------------- -------------
------ --------------- ------------- ------ ------------- -------------
</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 believes to be
adequate to support its normal daily activities.
The investment policy of the Company attempts to provide and maintain
liquidity, generate a favorable return on investments without incurring undue
interest-rate and credit risk, and complement the Bank's lending activities.
The Company's investment policy generally limits investments to government
and federal agency backed securities and other non-government guaranteed
securities, including certificates of deposit, mortgage-backed securities
issued by the FHLMC, the FNMA, the Government National Mortgage Association
("GNMA"), and municipal obligations that have a rating which exceeds or is
the equivalent of an "A" rating as determined by Standard and Poor's Ratings
Group or Moody's Investors Service. Bankers acceptances from any one issuer
are limited to 10% of the Company's capital and commercial paper is limited
to 1% of the Company's assets. The Company's policies provide the authority
to invest in marketable equity securities meeting the Company's guidelines
and further provide that all such investments be ratified by the Board of
Directors on a quarterly basis. At December 31, 1997 and 1996, the Company
had investment securities in the aggregate amount of $9.2 million and $10.3
million, respectively, with fair values of $9.2 and $10.3 million,
respectively. All investment securities were categorized as held-to-maturity
and none were categorized as available-for-sale.
17
<PAGE>
The following table sets forth information regarding the carrying and fair
values of the Company's cash, federal funds sold and other short-term
investments and investment securities at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------
1997 1996
---------------------------- ----------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and Cash Equivalents:
Cash on hand and in banks $ 3,731 $ 3,731 $ 1,530 $ 1,530
Federal funds sold 1,100 1,100 3,650 3,650
-------- -------- -------- --------
Total cash and cash equivalents $ 4,831 $ 4,831 $ 5,180 $ 5,180
-------- -------- -------- --------
-------- -------- -------- --------
Investment securities:
Held to maturity:
Mortgage-Backed Securities $ 3,208 $ 3,237 $ 425 $ 417
U.S. Government and Federal
agency obligations 5,999 5,983 $ 9,946 $ 9,924
-------- -------- -------- --------
Total investment securities $ 9,207 $ 9,220 $ 10,371 $ 10,341
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Company's federal
funds sold and other short-term investments and investment securities as of
December 31, 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-----------------------------------------------------------------------------------------------
LESS THAN ONE YEAR ONE TO FIVE YEARS FIVE TO TEN YEARS TOTAL
-------------------- -------------------- -------------------- --------------------
(Dollars in Thousands)
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 1,100 5.25% - - - - $ 1,100 5.25%
Investment securities:
Held to maturity:
Mortgage-Backed Securities - - $ 347 5.40% $2,861 6.83% 3,208 6.68
U.S. Government and
Federal Agency obligations 999 5.69 5,000 6.16 - - 5,999 6.08
-------- -------- -------- -------- -------- -------- -------- --------
Total investment securities $ 2,099 5.46% $ 5,347 6.11% $2,861 6.83% $10,307 6.18%
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposits are a primary source of Broadway Federal's funds used for
lending and other investment activities and general business purposes. In
addition to deposits, Broadway Federal derives funds from loan
-18
<PAGE>
repayments and prepayments, proceeds from sales of loans and investment
securities, maturities of investment securities, cash flows generated from
operations and, to a lesser extent, FHLB advances.
DEPOSITS. Broadway Federal offers a variety of deposit accounts with a range
of interest rates and terms. Broadway Federal's deposits principally consist
of passbook savings accounts, non-interest bearing checking accounts, NOW and
other demand accounts, money market accounts, and fixed-term certificates of
deposit. The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. Broadway Federal's deposits are obtained predominately from the
areas in which its branch offices are located. Broadway Federal relies
primarily on customer service and long-standing relationships with customers
to attract and retain these deposits. The Bank emphasizes its retail "core"
deposit relationships, consisting of passbook accounts, checking accounts and
non-interest bearing demand accounts, which Management believes tend to be
more stable and available at a lower cost than other, longer term types of
deposits. However, market interest rates, including rates offered by
competing financial institutions, significantly affect Broadway Federal's
ability to attract and retain deposits. Certificate accounts in excess of
$100,000 and out-of-state deposits are not actively solicited by the Bank.
As of December 31, 1997 out-of-state deposits totaled $5.6 million or 5.10%
of Broadway Federal's total deposit portfolio. Further, Broadway Federal
generally has not solicited deposit accounts by increasing the rates of
interest paid as quickly as some of its competitors nor has it emphasized
offering high dollar amount deposit accounts with higher yields to replace
deposit account runoff.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Deposits $197,544 $171,545
Withdrawals 192,707 182,074
-------- --------
Net Deposits (Withdrawals) 4,837 (10,529)
Interest credited on deposits 3,036 2,803
-------- --------
Total Increase (Decrease) in deposits $ 7,873 $ (7,726)
-------- --------
-------- --------
</TABLE>
-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,
-----------------------------------------------------------------
1997 1996
------------------------------- -------------------------------
WEIGHTED WEIGHTED
AVERAGE PERCENTAGE AVERAGE AVERAGE PERCENTAGE AVERAGE
BALANCE OF TOTAL RATE BALANCE OF TOTAL RATE
------- ---------- -------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Money market deposits $ 4,396 4.09% 2.23% $ 4,264 4.27% 2.24%
Passbook deposits 29,974 27.87 2.00 32,258 32.31 2.00
NOW and other demand deposits 11,099 10.32 0.62 10,782 10.80 0.56
-------- ------- ------- -------
Total 45,469 42.28 47,307 47.38
-------- ------- ------- -------
Certificate Accounts:
Three months or less - - - 1,817 1.81 3.75
Over three months
through six months 11,464 10.66 4.67 10,123 10.14 4.77
Over six through
twelve months 13,728 12.77 5.30 14,019 14.04 5.24
Over one to three years 19,508 18.14 5.51 11,459 11.48 5.56
Over three to five years 3,736 3.47 5.77 3,147 3.15 5.76
Over five to ten years 1,444 1.34 6.08 1,473 1.48 6.58
Certificates over $100,000 12,193 11.34 4.78 10,507 10.52 5.10
-------- ------- ------- -------
Total certificates 62,073 57.72 52,545 52.62
-------- ------- ------- -------
Total deposits $107,542 100.00% $99,852 100.00%
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
-20-
<PAGE>
The following table presents, by various rate categories, the amounts of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1997 and
1996.
<TABLE>
<CAPTION>
PERIOD TO MATURITY AT DECEMBER 31, 1997
-----------------------------------------------------------------------
LESS THAN ONE TO TWO TO AT DECEMBER 31,
ONE YEAR TWO YEARS THREE YEARS THEREAFTER TOTAL 1996
--------- --------- ----------- ---------- ------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Certificate Accounts:
0 to 4.00% $ 2,117 $ 1,578 $ - $ - $ 3,695 $ 3,767
4.01 to 5.00% 11,686 880 129 - 12,695 15,680
5.01 to 6.00% 35,604 4,980 419 1,037 42,040 33,085
6.01 to 7.00% 540 3,411 1,234 950 6,135 4,137
7.01 to 8.00% - - - - - 269
8.01 to 9.00% - - - - - 252
Over 9.00% - - - - - -
-------- -------- ------- ------- ------- -------
Total $ 49,947 $10,849 $ 1,782 $ 1,987 $64,565 $57,190
-------- -------- ------- ------- ------- -------
-------- -------- ------- ------- ------- -------
</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, 1997 and 1996,
Broadway Federal had no advances outstanding from the FHLB and no other
borrowings.
The following table sets forth certain information regarding Broadway
Federal's borrowed funds at or for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
------------------------
1997 1996
----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
FHLB advances:
Average balance outstanding $ 542 $ 83
Maximum amount outstanding
at any month-end period 3,500 1,000
Balance outstanding at
end of period - -
Weighted average interest rate
during the period 6.20% 5.67%
Weighted average interest rate
at end of period - -
</TABLE>
-21
<PAGE>
SUBSIDIARY ACTIVITIES
BSC provides trustee services for Broadway Federal and receives commissions
from the sale of mortgage, life and fire insurance. In the past, BSC has
been involved in real estate development projects. Broadway Federal does not
currently intend to engage in any future real estate development projects
through BSC or otherwise. As of December 31, 1997, and for the twelve months
then ended, BSC had total assets of $184,000 and net earnings of $11,000.
PERSONNEL
At December 31, 1997, Broadway Federal had 46 full-time employees and 13
part-time employees. Broadway Federal believes that it has good relations
with its employees and none are represented by a collective bargaining
group.
REGULATION
GENERAL
The Company is registered with the OTS as a savings and loan holding company
and is subject to regulation and examination as such by the OTS. Broadway
Federal is a federally chartered savings bank and, is a member of the FHLB
System. Its customer deposits are insured through the SAIF managed by the
FDIC. The Bank is subject to examination and regulation by the OTS with
respect to most of its business activities, including, among other things,
capital standards, general investment authority, deposit taking and borrowing
authority, mergers, establishment of branch offices, and permitted subsidiary
investments and activities. The OTS's operations, including examination
activities, are funded by assessments levied on its regulated institutions.
Broadway Federal is further subject to the regulations of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board")
concerning reserves required to be maintained against deposits, transactions
with affiliates, Truth in Lending and other consumer protection requirements
and certain other matters. Financial institutions, including Broadway
Federal, are also subject, under certain circumstances, to potential
liability under various statutes and regulations applicable to property
owners generally, including statutes and regulations relating to the
environmental condition of real property and liability for the remediation of
certain adverse environmental conditions thereof.
The descriptions of the statutes and regulations applicable to the Company
and its subsidiaries and the effects thereof set forth below and elsewhere
herein do not purport to be a complete description of such statutes and
regulations and their effects on the Company, Broadway Federal and the
Company's other subsidiaries. The descriptions also do not purport to
identify every statute and regulation that may apply to the Company,
Broadway Federal and the Company's other subsidiaries.
The OTS has primary enforcement authority over savings institutions and their
holding companies, such authority includes, among other things, the ability
to assess civil money penalties, to issue cease-and-desist orders and to
initiate injunctive actions and removal and prohibition orders against
officers, directors and certain other "institution affiliated parties." In
general, enforcement actions may be initiated for violations of specific laws
and regulations and for unsafe or unsound conditions or practices.
The FDIC has authority to recommend that the OTS take any authorized
enforcement action with respect to any federally insured savings institution.
If the OTS does not take the recommended action or provide an acceptable plan
for addressing the FDIC's concerns within 60 days after receipt of a
recommendation from the FDIC, the FDIC may take such action if the FDIC Board
of Directors determines that the institution is in an unsafe or unsound
condition or that failure to take such action will result in the continuation
of unsafe or unsound practices in conducting the business of the institution.
The FDIC may also take action prior to the expiration of the 60-day time
period in exigent circumstances after giving notice to the OTS.
-22-
<PAGE>
The FDIC may also terminate the deposit insurance of any insured depository
if the FDIC determines, after a hearing, that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law,
regulation or order or any condition imposed in writing by the FDIC. In
addition, FDIC regulations provide that any insured institution that falls
below a 2% minimum leverage ratio will be subject to FDIC deposit insurance
termination proceedings unless it has submitted, and is in compliance with, a
capital plan with its primary federal regulator and the FDIC. The FDIC may
also suspend deposit insurance temporarily during the hearing process if the
institution has no tangible capital.
DEPOSIT INSURANCE
The FDIC administers two separate deposit insurance funds. The SAIF is the
insurance fund responsible for insuring the deposits of savings institutions,
the deposits of which were formerly insured by the Federal Savings and Loan
Insurance Corporation ("FSLIC"). The Bank Insurance Fund (the "BIF") is the
insurance fund responsible for insuring the deposits of commercial banks and
certain other institutions. Broadway Federal is a member of the SAIF.
The FDIC has the authority to set the respective deposit insurance premiums
of the SAIF and of the BIF at levels it determines to be appropriate to
maintain the SAIF or BIF reserves or to fund the administration of the FDIC.
In addition, the Federal Deposit Insurance Corporation Improvement Act
("FDICIA") authorizes emergency special assessments applicable to BIF and
SAIF members. The OTS Director is also authorized to impose assessments on
savings institutions to fund certain of the costs of administration of the
OTS.
Since January 1, 1993, FDIC deposit insurance premiums have been assessed
pursuant to a "risk-based" system. Under this risk-based assessment system,
institutions are classified on the basis of capital ratios, supervisory
evaluations by the institution's primary federal regulatory agency and other
information determined by the FDIC to be relevant to the institution's
financial condition and the risk posed to the insurance funds. Each of the
nine resulting risk category subgroups of institutions is assigned a deposit
insurance premium assessment rate which until, the third quarter of 1996,
ranged from 0.23% to 0.31%, as compared with the uniform 0.23% rate that had
previously been in effect. During 1997 and 1996, Broadway Federal's
assessment rates were 0.03% and 0.26%, respeactively.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the "DIF
Act") was enacted which, among other things, recapitalized the SAIF through a
one-time special assessment for SAIF members, such as the Bank, at the rate
of $0.675 per $100 of estimated SAIF-deposits as of March 31, 1995.
Beginning January 1, 1997, the same risk-based assessment schedule applies to
both SAIF members and BIF members - $0.00 to $0.27 per $100 of deposits. The
DIF Act also provided for full pro rata sharing by all federally-insured
institutions by January 1, 2000 of the obligation, now borne entirely by
SAIF-insured institutions, to pay the interest on the bonds (commonly
referred to as the "FICO Bonds") that were issued by a specially created
federal corporation for the purpose of funding the resolution of failed
thrift institutions. From January 1, 1997 through January 1, 2000 (or
January 1, 1999 if the BIF and SAIF charters are then merged), FICO premiums
for BIF and SAIF insured deposits are $0.013 and $0.064 per $100 of deposits,
respectively. The DIF Act provides for the merger of the BIF and the SAIF on
January 1, 1999 into a newly created Deposit Insurance Fund, provided that
the bank and savings association charters are combined by that date. If the
charters have been merged and the Deposit Insurance Fund created, pro rata
FICO premium sharing will begin on January 1, 1999. While various legslative
proposals for this purpose have been introduced in Congress, none have been
enacted to date and no reliable prediction can be made as to whether or in
what form any such legislation may be enacted.
On a going forward basis, the DIF Act has resulted in a significant reduction
in the Bank's deposit insurance premiums. In addition, it is anticipated
that this reduction will diminish the competitive advantage that BIF-insured
institutions had prior to the passage of the Act due to their lower deposit
premium costs.
-23-
<PAGE>
CAPITAL REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the capital regulations of the OTS promulgated thereunder (the
"Capital Regulations") require savings institutions to meet three capital
requirements: a "leverage limit" (also referred to as the "core capital
requirement"), a "tangible capital requirement" and a "risk-based capital
requirement." In addition to the general standards, the OTS may establish, on
a case-by-case basis, individual minimum capital requirements for a savings
institution which vary from the requirements that would otherwise apply under
the Capital Regulations.
A savings institution that fails to meet one or more of the applicable
capital requirements is subject to various regulatory limitations and
sanctions, including a prohibition on growth and the issuance of a capital
directive by the OTS Director requiring one or more of the following: an
increase in capital; a reduction of rates paid on savings accounts; cessation
of or limitations on operational expenditures; an increase in liquidity; and
such other actions as may be deemed necessary or appropriate by the OTS
Director. In addition, a conservator or receiver may be appointed under
appropriate circumstances.
The core capital requirement currently requires a savings institution to
maintain "core capital" of not less than 3% of adjusted total assets. "Core
capital" includes common stockholders' equity (including retained earnings),
certain noncumulative perpetual preferred stock and any related surplus and
minority interests in the equity accounts of fully consolidated subsidiaries.
The amount of an institution's core capital is, in general, calculated in
accordance with generally accepted accounting principles ("GAAP"), with
certain exceptions. Among other exceptions, adjustments to an institution's
GAAP equity accounts that are required pursuant to Statement of Financial
Accounting Standards No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES," to reflect changes in the market value of certain
securities held by the institution that are categorized "available-for-sale"
are not included in the calculation of core capital for regulatory capital
purposes. Intangible assets must be deducted from core capital, with certain
exceptions and limitations, including purchased and originated mortgage
servicing rights and certain other intangibles, which may be included on a
limited basis. "Originated mortgage servicing rights" consist of the
servicing rights with respect to loans that are originated and then sold by
the institution or that are categorized by it as held for sale.
A savings institution is required to maintain "tangible capital" in an amount
not less than 1.5% of adjusted total assets. "Tangible capital" is defined for
this purpose to mean core capital less any intangible assets, plus purchased
and originated mortgage servicing rights, subject to certain limitations.
The risk-based capital requirements, among other things, provide that the
capital ratios applicable to various classes of assets are to be adjusted to
reflect the degree of risk associated with such classes of assets. In
addition, the asset base for computing a savings institution's capital
requirement includes off-balance sheet items, including assets sold with
recourse. Generally, the Capital Regulations require savings institutions to
maintain "total capital" equal to 8.00% of risk-weighted assets. "Total
capital" for these purposes consists of core capital and supplementary
capital. Supplementary capital includes, among other things, certain types of
preferred stock and subordinated debt and, subject to certain limitations,
loan and lease general valuation allowances. Such general valuation
allowances can generally be included up to 1.25% of risk-weighted assets. At
December 31, 1997 and 1996, Broadway Federal's general valuation allowance
included in supplementary capital was $879,000 and $905,000, respectively. A
savings institution's supplementary capital may be used to satisfy the
risk-based capital requirement only to the extent of that institution's core
capital.
The OTS, the FDIC and other federal banking agencies recently amended their
risk-based capital regulations to provide that an institution must hold
capital in excess of regulatory minimums to the extent that examiners find
either (i) significant exposure to concentration of credit risk such as risks
from higher interest rates, prepayments, significant off-balance sheet items
(especially standby letters of credit) or credit, or risks arising from
nontraditional activities, (ii) that the institution is not adequately
managing these risks, or (iii) significant exposure to market risk. For this
purpose, however, the agencies have stated that, in view of the statutory
requirements relating to permitted lending and investment activities of
savings institutions, the general concentration by such
-24-
<PAGE>
institutions, the general concentration by such institutions in real estate
lending activities would not, by itself, be deemed to constitute an exposure
to concentration of credit risk that would require greater capital levels.
The OTS has adopted a rule incorporating an interest rate risk ("IRR")
component into its risk-based capital rules. See
"Business--Regulation--Capital Requirements." Although this rule has been
adopted and published, it is not yet effective. Under the rule, an
institution with a greater than normal level of interest rate risk (as
determined by the OTS) will be subject to a deduction of its interest rate
component from total capital for purposes of calculating the institution's
risk-based capital requirement. An institution with a greater than normal
interest rate risk is defined as an institution that would suffer a loss of
net portfolio value ("NPV") exceeding 2% of the estimated market value of its
assets in the event of a 200 basis point parallel increase or decrease in
interest rates. NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet
contracts. A resulting change in NPV of more than 2% of the estimated market
value of its assets will require the institution to deduct 50% of that excess
change from its capital. The rule provides that the OTS will calculate the
IRR component quarterly for each institution. At December 31, 1997 there was
no decrease in the Bank's NPV as a percentage of the present value of assets
at the 200 basis point level.
Following is a reconciliation of Broadway Federal's equity capital to the
minimum Federal regulatory capital requirements as of December 31, 1997 and
December 31, 1996:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
-------------------------------- --------------------------------
TANGIBLE CORE RISK-BASED TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
-------- ------- ---------- -------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital $10,708 $10,708 $10,708 $10,299 $10,299 $10,299
Additional supplementary capital:
General valuation allowance - - 879 - - 905
------- ------- ------- ------- ------- -------
Regulatory capital amounts 10,708 10,708 11,587 10,299 10,299 11,204
Minimum requirement 1,861 3,722 6,266 1,720 3,440 5,791
------- ------- ------- ------- ------- -------
Excess over requirement $ 8,847 $ 6,986 $ 5,321 $ 8,579 $ 6,859 $ 5,413
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
The Federal Deposit Insurance Act contains prompt corrective action ("PCA")
provisions pursuant to which banks and savings institutions are to be
classified into one of five categories based primarily upon capital adequacy,
ranging from "well capitalized" to "critically undercapitalized" and which
require, subject to certain exceptions, the appropriate federal banking
agency to take prompt corrective action with respect to an institution which
becomes "undercapitalized" and to take additional actions if the institution
becomes "significantly undercapitalized" or "critically undercapitalized."
The PCA provisions expand the powers and duties of the OTS and the FDIC and
expressly authorize, or in many cases direct, regulatory intervention at an
earlier stage than was previously the case.
The OTS regulations implementing the PCA provisions define the five capital
categories as follows: (i) an institution is "well capitalized" if it has a
total risk-based capital ratio of 10.00% or greater, has a Tier 1 risk-based
capital ratio (Tier 1 capital to total risk-weighted assets) of 6.00% or
greater, has a core capital ratio of 5.00% or greater and is not subject to
any written capital order or directive to meet and maintain a specific
capital level or any capital measure; (ii) an institution is "adequately
capitalized" if it has a total risk-based capital ratio of 8.00% or greater,
has a Tier 1 risk-based capital ratio of 4.00% or greater and has a core
capital ratio of 4.00% or greater (3.00% for certain highly rated
institutions); (iii) an institution is "undercapitalized" if it has a total
risk-based capital ratio of less than 8.00% or has either a Tier 1 risk-based
or a core capital ratio that is less than 4.00%; (iv) an institution is
"significantly undercapitalized" if it has a total risk-based capital ratio
that is less than 6.00%, or has either a Tier 1 risk-based or core capital
ratio that is less than 3.00%; and (v) an institution is "critically
undercapitalized" if its "tangible equity" (defined in the PCA regulations to
mean core capital plus cumulative perpetual preferred stock) is equal to or
less than 2.00% of its total assets. The OTS also has authority, after an
opportunity for a hearing, to downgrade an institution from "well capitalized"
to "adequately capitalized," or to subject an "adequately capitalized" or
"undercapitalized" institution to the supervisory actions applicable to the
next lower category, for supervisory concerns. At December 31, 1997,
Broadway Federal was a well-capitalized institution.
The table below presents Broadway Federal's capital ratios at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
ACTUAL
--------------------------
(Dollars in Thousands) AMOUNT RATIO
--------------------------
<S> <C> <C>
Decemer 31, 1997:
Leverage/Tangible Ratio $ 10,708 8.63%
Tier I Risk-based ratio 10,708 13.67
Total Risk-based ratio 11,587 14.79
December 31, 1996:
Leverage/Tangible Ratio $ 10,299 9.06%
Tier I Risk-based ratio 10,299 14.23
Total Risk-based ratio 11,204 15.48
</TABLE>
-25-
<PAGE>
Under the PCA provisions, an institution that is deemed to be
undercapitalized is subject to mandatory restrictions on capital
distributions (including cash dividends) and management fees, increased
supervisory monitoring by the OTS, growth restrictions, restrictions on
certain expansion proposals and capital restoration plan submission
requirements. If an institution is deemed to be significantly
undercapitalized, all of the foregoing mandatory restrictions apply, as well
as a restriction on compensation paid to senior executive officers.
Furthermore, the OTS must take one or more of the following actions: (i)
require the institution to sell shares (including voting shares) or
obligations; (ii) require the institution to be acquired or merge (if one or
more grounds for the appointment of a conservator or receiver exist); (iii)
implement various restrictions on transactions with affiliates; (iv) restrict
interest rates on deposits; (v) impose further asset growth restrictions or
require asset reductions; (vi) require the institution or a subsidiary to
alter, reduce or terminate activities considered risky; (vii) order a new
election of directors; (viii) dismiss directors and/or officers who have held
office for more than 180 days before the institution became undercapitalized;
(ix) require the hiring of qualified executives; (x) prohibit correspondent
bank deposits; (xi) require the institution to divest or liquidate a
subsidiary in danger of insolvency or a controlling company to divest any
affiliate that poses a significant risk, or is likely to cause a significant
dissipation of assets or earnings; (xii) require a controlling company to
divest the institution if it improves the institution's financial prospects;
or (xiii) require any other action the OTS determines fulfills the purposes
of the PCA provisions. In addition, subject to a limited exception, the OTS
is required to appoint a receiver or conservator for an institution that is
critically undercapitalized.
LOANS TO ONE BORROWER
Savings institutions are generally subject to the same loans to one borrower
limitations that are applicable to national banks. With certain limited
exceptions, the maximum amount that a savings institution may lend to one
borrower (including certain related persons or entities of such borrower) is
an amount equal to 15% of the savings institution's unimpaired capital and
unimpaired surplus, plus an additional 10% for loans fully secured by readily
marketable collateral. Real estate is not included within the definition of
"readily marketable collateral" for this purpose. The term "unimpaired
capital and unimpaired surplus" is defined for this purpose by reference to
an institution's regulatory capital. In addition, the basic 15% of capital
lending limit includes as part of capital that portion of an institution's
general valuation allowances that is not includable in the institution's
regulatory capital for regulatory purposes. At December 31, 1997, the maximum
amount which Broadway Federal could lend to any one borrower (including
related persons and entities) under the current loans to one borrower limit
was $1.7 million. However, pursuant to Broadway Federal's loan to one
borrower policy, the maximum amount which Broadway Federal may lend to any
one borrower is $1,500,000. At December 31, 1997, the largest aggregate
amount of loans which Broadway Federal had outstanding to any one borrower
was $818,000.
FEDERAL HOME LOAN BANK SYSTEM
The FHLB system provides a central credit facility for member institutions.
As a member of the FHLB system, Broadway Federal is required to own capital
stock in its regional FHLB, the FHLB of San Francisco, in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations
at the end of each calendar year, or 5% of its outstanding FHLB advances
(borrowings).
26
<PAGE>
LIQUIDITY
Federal Law and regulations required savings institutions to maintain, for each
calendar month, an average daily balance of liquid assets (including cash,
certain time deposits, bankers' acceptances, and specified United States
Government, state or federal agency obligations) equal to at least a
specified percentage of the average daily balance of its net withdrawable
accounts plus short-term borrowings during the preceding calendar month. This
liquidity requirement may be changed from time to time by the OTS Director to
an amount within a range of 4% to 10% of such accounts and borrowings
depending upon economic conditions and the deposit flows of savings
institutions.
Effective November 24, 1997, revised regulations now allow savings
institutions to maintain an average daily balance of liquid assets in each
calendar quarter of not less than 4%, down from the previous requirement of
5%. In addition, the new regulation provides that an institution may
calculate its liquidity based on either: (i) the amount of its liquidity base
at the end of the preceding calendar quarter; or (ii) the average daily
balance of its liquidity base during the preceding quarter. The average daily
balance of either liquid assets or liquidity base in a quarter is calculated
by adding the respective balance as of the close of each business day in a
quarter, and for any non-business day, as of the close of the nearest
preceding business day, and dividing the total by the number of days in the
quarter. The new regulations also require that in addition to meeting the
minimum requirement above, each savings institution must maintain sufficient
liquidity to ensure its safe and sound operation and that the OTS can permit
an institution to reduce its liquid assets below the minimum under certain
conditions. Under the revised regulations Broadway Federal's liquidity ratio
at December 31, 1997 was 12.06%, which exceeded the new requirement.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act ("CRA") requires each savings institution, as
well as other lenders, to identify the communities served by the
institution's offices and to identify the types of credit the institution is
prepared to extend within such communities. The CRA also requires the OTS to
assess, as part of its examination of a savings institution, the performance
of the institution in meeting the credit needs of its communities and to take
such assessments into consideration in reviewing applications for mergers,
acquisitions and other transactions. An unsatisfactory CRA rating may be the
basis for denying such application. Community groups have successfully
protested applications on CRA grounds. In connection with the assessment of a
savings institution's CRA performance, the OTS will assign a rating of
"outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance." Broadway Federal was rated "outstanding" in its most recent
CRA exam.
QUALIFIED THRIFT LENDER TEST
Savings institutions regulated by the OTS are subject to a qualified thrift
lender ("QTL") test which requires such an institution to maintain on an
average basis at least 65% of its portfolio assets (as defined) in
"qualified thrift investments." Qualified thrift investments include, in
general, loans, securities and other investments that are related to housing,
shares of stock issued by any Federal Home Loan Bank, loans for educational
purposes, loans to small business, loans made through credit card or credit
card accounts and certain other permitted thrift investments. A savings
institution's failure to remain a QTL may result in conversion of the
institution to a bank charter or operation under certain restrictions
including: (i) limitations on new investments and activities; (ii)
imposition of branching restrictions; (iii) loss of FHLB borrowing
privileges; and (iv) limitations on the payment of dividends. At December 31,
1997, Broadway Federal was in compliance with its QTL test requirements.
27
<PAGE>
SAVINGS AND LOAN HOLDING COMPANY REGULATION
As a savings and loan holding company, the Company is subject to certain
restrictions with respect to its activities and investments. Among other
things, the Company is generally prohibited, either directly or indirectly,
from acquiring more than 5% of the voting shares of any savings association
or savings and loan holding company which is not a subsidiary of the Company.
Prior OTS approval is required for the Company to acquire an additional
savings association as a subsidiary.
Similarly, OTS approval must be obtained prior to any person acquiring
control of the Company or Broadway Federal. Control is conclusively presumed
to exist if, among other things, a person acquires more than 25% of any class
of voting stock of the institution or holding company or controls in any
manner the election of a majority of the directors of the insured institution
or the holding company.
The Company is considered an "affiliate" of Broadway Federal for regulatory
purposes. Savings institutions are subject to the rules relating to
transactions with affiliates and loans to insiders generally applicable to
commercial banks that are members of the Federal Reserve System and certain
additional limitations. In addition, savings institutions are generally
prohibited from extending credit to an affiliate, other than the
institution's subsidiaries, unless the affiliate is engaged only in
activities which the Federal Reserve Board has determined to be permissible
for bank holding companies and which the OTS has not disapproved.
A savings and loan holding company that controls only one savings institution
is exempt, if the institution meets its QTL test, from restrictions on the
conduct of unrelated business activities that are applicable to other savings
and loan holding companies and that are similar to the restrictions on the
conduct of unrelated business activities that are applicable to bank holding
companies under the Bank Holding Company Act.
SERVICE CORPORATIONS
Federal regulations permit federal savings institutions to invest in the
capital stock, obligations or other securities of certain types of
subsidiaries (referred to as "service corporations") that engage in certain
prescribed activities and to make loans to these corporations (and to
projects in which they participate) in an aggregate amount not to exceed 3%
of the institution's assets, as long as any investment over 2% serves
primarily community development or inner-city purposes. Additionally, federal
regulations permit an institution having regulatory capital in an amount at
least equal to the minimum requirements set forth in the applicable OTS
regulations to make additional loans to such subsidiaries in an aggregate
amount which, generally, may not exceed 100% of the regulatory capital in the
case of subsidiaries of which the institution owns or controls not more than
10% of the capital stock of certain limited partnership joint ventures and
50% of regulatory capital in the case of certain other subsidiaries or joint
ventures. Federal savings institutions are also permitted to invest in and
maintain so-called "operating subsidiaries" (generally, subsidiaries that are
engaged solely in activities the parent institution could conduct directly
and meeting certain other criteria) free of such investment limitations.
RESTRICTIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
Savings institution subsidiaries of holding companies generally are required
to provide advance notice to their OTS Regional Director of any proposed
declaration of a dividend on the institution's stock. Any dividend declared
within the notice period, or without giving the prescribed notice, is invalid.
Limitations are imposed under OTS regulations on "capital distributions" by
savings institutions, including cash dividends, payments to repurchase or
otherwise acquire an institution's shares, payments to stockholders of
another institution in a cash-out merger and other distributions charged
against capital. The regulations establish a tiered system of regulation with
the greatest flexibility being afforded to well-capitalized institutions.
An institution that meets its fully phased-in capital requirements is
permitted to make capital distributions, without prior OTS approval, during a
calendar year of up to the greater of (i) 100% of its net income during the
calendar year, plus the amount that would reduce by not more than one-half
its "surplus capital ratio" at the beginning of the calendar year (the amount
by which the institution's actual capital exceeded its fully phased-in
capital requirement at that date) and (ii) 75% of its net income over the
most recent four-quarter period. An institution that meets its current
minimum capital requirements but not its fully phased-in capital requirements
may make capital
28
<PAGE>
distributions, without prior OTS approval, of up to 75% of its net income
over the most recent four-quarter period, as reduced by the amounts of any
capital distributions previously made during such period. An institution that
does not meet its minimum regulatory capital requirements prior to, or on a
pro forma basis after giving effect to, a proposed capital distribution, or
that the OTS has notified as needing more than normal supervision, is not
authorized to make any capital distributions unless it receives prior written
approval from the OTS or the distributions are in accordance with the express
terms of an approved capital plan.
The OTS retains the authority to prohibit any capital distribution otherwise
authorized under its regulations if the OTS determines that the capital
distribution would constitute an unsafe or unsound practice. The regulations
also apply to direct and indirect distributions to affiliates, including
those occurring in connection with corporation reorganizations.
LENDING STANDARDS
The OTS and the other federal banking agencies have jointly adopted uniform
rules on real estate lending and related Interagency Guidelines for Real
Estate Lending Policies. The uniform rules require that institutions adopt
and maintain comprehensive written policies for real estate lending. The
policies must reflect consideration of the Interagency Guidelines and must
address relevant lending procedures, such as loan to value limitations, loan
administration procedures, portfolio diversification standards and
documentation, approval and reporting requirements. Although the uniform
rules do not impose specific maximum loan to value ratios, the related
Interagency Guidelines state that such ratio limits established by individual
institutions' boards of directors generally should not exceed levels set
forth in the Guidelines, which range from a maximum of 65% for loans secured
by unimproved land to 85% for improved property. No limit is set for single
family residence loans, but the Guidelines state that such loans exceeding a
90% loan to value ratio should have private mortgage insurance or some form
of credit enhancement. The Guidelines further permit a limited amount of
loans that do not conform to these criteria.
TAX MATTERS
FEDERAL INCOME TAX
GENERAL. The Company and Broadway Federal report their income on a calendar
year basis using the accrual method of accounting and are subject to federal
income taxation in the same manner as other corporations with certain
exceptions, including particularly Broadway Federal's tax reserve for bad
debts discussed below. The following discussion of tax matters is intended
only as a summary and does not purport to be a comprehensive description of
the tax rules applicable to Broadway Federal or the Company.
BAD DEBT RESERVE. In 1995 and prior years, Broadway Federal qualified under a
provision of the Code which allowed qualifying savings institutions to
establish reserves for bad debts, and make additions to such reserves, using
certain preferential methodologies. For 1996 and subsequent years, the Small
Business Job Protection Act of 1996 (the "Act") repealed the preferential bad
debt reserve methodologies previously allowed.
Pursuant to the 1996 Act, a small bank (a bank with $500 million or less of
assets) may continue to utilize a reserve method of accounting for bad debt,
under which additions to reserves are based on the institution's actual loss
experience. Broadway Federal qualifies as a small bank, and, in 1997,
utilized the reserve method of accounting for bad debts based on Broadway
Federal's actual loss experience.
The elimination of the preferential bad debt reserve methodologies allowed to
qualified savings institutions by the Small Business Job Protection Act of
1996 requires Broadway Federal to recapture into taxable income the amount
29
<PAGE>
of which its bad debt reserve as of December 31, 1995 (other than its
supplemental reserve) exceeds the reserve allowable using a computation based
upon actual experience, or its 1987 reserve balance, if larger. Such excess
reserves (approximately $264,000) are required to be recaptured into taxable
income over a period of 6-years.
The balance of Broadway Federal's bad debt reserves accumulated prior to 1988
(approximately $3.0 million) will, in future years, be subject to recapture
in whole or in part upon the occurrence of certain events, such as a
distribution to shareholders in excess of Broadway Federal's current and
accumulated earnings and profits, a redemption of shares, a partial or
complete liquidation of Broadway Federal or the failure of Broadway Federal
to qualify as a "bank" for federal income tax purposes. However, dividends
paid out of Broadway Federal's current or accumulated earnings and profits,
as computed for federal income tax purposes, will not cause recapture.
Broadway Federal does not intend to make distributions to shareholders that
would result in recapture of any portion of its bad debt reserves.
CALIFORNIA TAX
As a savings and loan holding company filing California franchise tax returns
on a combined basis with its subsidiaries, the Company is subject to
California franchise tax at the rate applicable to "financial corporations."
The applicable tax rate is the rate on general corporations plus 2%. The tax
rate applicable to the Company's 1996 taxable year was 11.3% (9.3% plus 2%).
For income tax years beginning on or after January 1, 1997, the tax rate on
general corporations has been reduced to 8.84%, and, accordingly, the
Company's tax rate has been reduced to 10.84% (8.84% plus 2%). Under
California regulations, bad debt deductions are available in computing
California franchise taxes using a three or six year average loss experience
method.
ITEM 2. DESCRIPTION OF PROPERTY
Broadway Federal conducts its business through four branch offices. Broadway
Federal's loan origination and service operations are also conducted from one
of its branch offices. Until March 1998, Broadway Federal's administrative
and corporate operations were conducted through temporary facilities in one
of the four branch offices. Such operations are now conducted in the
Company's new corporate facility, which also houses a fifth branch office.
Broadway Federal's administrative and corporate offices are located at 4800
Wilshire Boulevard, Los Angeles. Its former administrative and corporate
offices, which were destroyed during the 1992 civil disturbance, were located
at 4501 So. Broadway Boulevard, Los Angeles.
There are no mortgages, material liens or encumbrances against any of
Broadway Federal's owned properties. Management believes that all
properties are adequately covered by insurance, and that the carrying amount
of the properties approximates their fair values. Management also believes
that Broadway Federal's facilities are adequate to meet the present needs of
Broadway Federal and the Company, but that it may be necessary to lease or
construct other facilities to meet the longer term needs of Broadway Federal
and the Company.
30
<PAGE>
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY OR
ORIGINAL DATE LEASEHOLD
LEASED OR LEASED OR DATE OF LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1997
- -------- --------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
ADMINISTRATIVE/BRANCH OFFICE:
4800 Wilshire Blvd.(1)(7) Owned 1997 - $1,644,000
Los Angeles, CA
BRANCH OFFICE:
4429 South Broadway Blvd.(1)(11) Leased 1997 Monthly -
Los Angeles, CA
4835 West Venice Blvd.(1)(7)(10) Building 1965 2013 142,000
Los Angeles, CA Owned on
Leased Land
3555 West Slauson Blvd.(1)(9) Leased 1997 1998 2,250
BRANCH OFFICE/LOAN ORIGINATION
AND SERVICE CENTER:
170 N. Market Street(1)(5) Owned 1996 - 956,000
Inglewood, CA
APPRAISAL DEPARTMENT:
8467 South Van Ness Ave.(2)(8) Owned 1994 - 127,000
Inglewood, CA
4429 West Adams Blvd.(4) Owned 1993 - 196,000
Los Angeles, CA
4001 South Figueroa Street(6) Owned 1996 - 551,000
Los Angeles, CA
</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. This property was sold and leased
back from the purchasers in December of 1997. The lease payments are
$4,000 per month and the lease will continue on a month-to-month basis
until the completion of the new Broadway branch facility located at 4001
South Figueroa Street. The new facility is expected to be completed by
October of 1998.
(4) Broadway Federal acquired this property in 1993 in anticipation of
including it as part of a proposed new corporate facility. Adjacent
parcels, which were needed to begin construction on the corporate
facility, have not been acquired. This property will be sold at a
future date.
(5) In July 1996 the property located at 170 N. Market Street was
acquired in anticipation of relocating the former 110 S. La Brea
branch facility upon expiration of the lease on September 30, 1996.
The expired lease was not renewed and the branch was successfully
relocated to the new facility in January 1997. The cost of the
facility was $412,000 and Broadway Federal incurred renovation
costs of approximately $568,000.
(6) Broadway Federal acquired this property in December 1996. The
property is 19,200 square feet of unimproved real estate which will
be used to build the Bank's new branch facility. When complete,
the Bank's branch office currently housed in a modular facility,
located at 4429 South Broadway Blvd., will be relocated to this new
facility. The cost of the property was $415,000, and to date, the
cost of constructing
31
<PAGE>
the new branch has not been determined. The source of funds for
this acquisition were the insurance proceeds received for property
that was destroyed during the 1992 Los Angeles civil disturbance.
(7) In February of 1998, the corporate and administrative offices were
transferred from 4835 W. Venice Blvd. to the newly acquired
property located at 4800 Wilshire Blvd. The property was purchased
in August of 1997 for $1,603,000 and renovations of $41,000 were
performed during 1997.
(8) In March of 1998, Broadway Federal sold the property located at 8467
Van Ness Avenue, Inglewood, CA and relocated the appraisal
department to the new corporate administrative offices on Wilshire
Boulevard.
(9) In July of 1997, Broadway Federal leased 200 square feet of space
from Nix Check Cashing, Inc. at $500 per month, to be used as a
branch facility. Renovations costing $2,250 were performed and the
Slauson Business Center began operations is July of 1997.
(10) In June of 1997, Broadway Federal leased 590 square feet of space
to the Automobile Club of Southern California for a term
of five years at $1,750 per month in the Venice branch facility.
(11) This property was sold in December 1997. Currently, the Bank
leases a portion of the facility from the new owner. The lease is on a
month-to-month basis and will continue until construction is
completed on property located at 4001 South Figueroa Street, at which
time the savings branch will relocate its operations.
Broadway Federal's property located at 4501 S. Broadway Boulevard, Los
Angeles (this property is adjacent to the branch at 4429 S. Broadway
Boulevard) served as Broadway Federal's main office until it was destroyed by
fire in April of 1992. Since that time, the administrative operations of
Broadway Federal had been conducted from shared office space at Broadway
Federal's branch office located on Venice Boulevard in the City of Los
Angeles. Although insurance proceeds were sufficient to cover the damages
from the fire, Management determined that it would not be practical to
rebuild the main office building on the same site. Therefore the
administrative offices have been transferred to the newly acquired Wilshire
facility.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any significant pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business,
none of which Management believes, net of insurance claims, are material to the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded on the over-the-counter market and
is quoted by the National Association of Securities Dealers Automated
Quotation System-Small Cap ("NASDAQ-Small Cap") under the symbol "BYFC." The
Common Stock began trading on January 9, 1996. As of March 19, 1997, 863,447
shares of Common Stock were outstanding and held by approximately 441 holders
of record (not including the number of persons or entities holding stock in
nominee or street name through various brokerage firms). The following table
sets forth for the fiscal quarters indicated the range of high and low bid
prices per share of the Common Stock of the Company as reported on
NASDAQ-Small Cap.
<TABLE>
<CAPTION>
1997
-------
4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
- ----------------------------
High.................... $ 13 3/8 $ 11 1/2 $ 11 1/4 $ 11 1/2
Low.................... 11 1/8 10 1/2 10 3/4 9 1/2
Year Ended December 31, 1996
High.................... $ 10 1/2 $ 10 $ 11 $ 10 3/4
Low.................... 9 9 5/8 10 10
</TABLE>
32
<PAGE>
The Company's ability to pay dividends is limited by certain restrictions
generally imposed on Delaware corporations. In general, dividends may be paid
only out of a Delaware corporation's surplus, as defined in the Delaware
General Corporation Law, or net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year. "Surplus" is defined
for this purpose as the amount by which a corporations's net assets (total
assets minus total liabilities) exceed the amount designated by the Board of
Directors of the corporation in accordance with Delaware law as the
corporation's capital. The Company may pay dividends out of funds legally
available therefor at such times as the Board of Directors determines that
dividend payments are appropriate, after considering the Company's net
income, capital requirements, financial condition, alternate investment
options, prevailing economic conditions, industry practices and other factors
deemed to be relevant at the time. During 1997 and 1996 the Company paid
dividends to Common Stockholders at the rate of $0.05 per share, per
quarter. For the twelve months ended December 31, 1997 and 1996 dividends
paid totaled $171,000 and $178,000, respectively. The actual declaration and
payment of future dividends will be subject to determination by the Company's
Board of Directors, which will be based on and subject to the Board's
assessment of the Company's financial condition and results of operations,
along with other factors. There can be no assurance that dividends will in
fact be paid on Common Stock in the future.
Dividends from the Bank are a potential source of income for the Company. The
payment of dividends and other capital distributions by the Bank to the
Company is subject to regulation by the OTS. Currently, 30 days' prior notice
to the OTS is required before any capital distribution is made. The OTS has
promulgated a regulation that measures a savings institution's ability to
make a capital distribution according to the institution's capital position.
The rule established "safe-harbor" amounts of capital distributions that
institutions can make after providing notice to the OTS, but without needing
prior approval. Institutions can distribute amounts in excess of the safe
harbor only with the prior approval of the OTS. For institutions such as
Broadway Federal that meet their fully phased-in capital requirements the
safe harbor amount is the greater of (a) 75% of net income for the prior four
quarters, or (b) the sum of (1) net income to date during the current year
and (2) the amount that would reduce by one-half the Bank's surplus capital
ratio at the beginning of the current year.
The Bank's ability to pay dividends to the Company is also subject to
restriction arising from the existence of the liquidation account established
upon the conversion of the Bank from a mutual to stock form in January 1996.
The Bank is not permitted to pay dividends to the Company if its regulatory
capital would be reduced below the amount required for the liquidation
account. See "Business--Regulation--Restrictions on Dividends and other
Capital Distributions" for information with respect to current restrictions
on the Company's and Bank's ability to pay dividends.
In addition to Common Stock, the Company, as part of the Bank's mutual to
stock conversion in January 1996, issued 91,073 shares of Series A Preferred
Stock ("Preferred Stock"). The Preferred Stock has a par value of $0.01 per
share and a liquidation preference of $10.00 per share. The Preferred Stock
was not underwritten and the stock was not publicly offered. The Preferred
Stock was issued to holders of nonwithdrawable Pledged Deposits held by the
Bank prior to conversion. The holders of the Pledged Deposits were allowed to
purchase the maximum amount of Common Stock permitted under the Plan of
Conversion, with the remainder of the Pledged Deposits being used to purchase
Preferred Stock. The Preferred Stock is non-voting and non-cumulative and is
subordinate to all indebtedness of the Company, including customer accounts.
In December 1997 the Company issued 32,613 shares of its Common Stock from
its Common Shares held as treasury shares. The additional shares were issued
in exchange for 35,874 shares of the Company's Series A Preferred Stock,
which was retired. During 1997 and 1996 the Company paid dividends to
Preferred Stockholders at the rate of $0.125 per share, per quarter. For the
twelve months ended December 31, 1997 and 1996 dividends paid totaled $41,000
and $46,000, respectively. The actual declaration and payment of future
dividends will be subject to determination by the Company's Board of
Directors, which will be based on, and subject to, the Board's assessment of
the Company's financial condition and results of operations, along with other
factors. There can be no assurance that dividends will in fact be paid on
Preferred Stock in the future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Broadway Financial Corporation was incorporated under Delaware law on
September 25, 1995 for the purpose of acquiring and holding all of the
outstanding capital stock of the Bank as part of the Bank's conversion from a
federally chartered mutual savings association to a federally chartered stock
savings bank. The Conversion was completed, and the Bank became a
wholly-owned subsidiary of the Company, on January 8, 1996. See "Description
of Business--Broadway Financial Corporation."
33
<PAGE>
The Company's principal business is serving as the holding company for
Broadway Federal. Prior to the completion of the Conversion, the Company had
no assets or liabilities and did not conduct any business other than that of
an organizational nature.
The Company's and Broadway Federal's results of operations are dependent
primarily on its net interest income, which is the difference between the
interest income earned on its interest-earning assets, such as loans and
investments, and the interest expense on its interest-bearing liabilities,
such as deposits and borrowings. Broadway Federal also generates recurring
non-interest income such as transactional fees on its loan and deposit
portfolios. The Company's operating results are affected by the amount of the
Bank's general and administrative expenses, which consist principally of
employee compensation and benefits, occupancy expenses and federal deposit
insurance premiums and by its periodic provisions for loan losses. More
generally, the results of operations of thrift and banking institutions are
also affected by prevailing economic conditions, competition, and the
monetary and fiscal policies of governmental agencies.
For the years ended December 31, 1997 and 1996, the Company recorded net
earnings of $559,000 and a net loss of $277,000, respectively. At December
31, 1997 and 1996, respectively, the Company had total consolidated assets of
$125.1 million and $117.1 million; total deposits of $109.9 million and
$102.0 million; and stockholders' equity of $13.4 million and $13.6
million, representing 10.74% and 11.60% of assets. Each of the Bank's
regulatory capital ratios exceeded regulatory requirements at December 31,
1997 and 1996, with tangible and core capital each at 8.63% and 9.06% and
risk-based capital at 14.79% and 15.48%, respectively.
INTEREST RATE SENSITIVITY
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rate earned or paid on
them. Net interest income is also affected by the maturities and repricing
characteristics of interest-earning assets as compared with those of the
Company's interest-bearing liabilities. During a period of falling interest
rates, the net earnings of an institution whose interest rate sensitive
assets maturing or repricing during such period exceeds the amount of
interest rate sensitive liabilities maturing or repricing during such period
may, absent offsetting factors, be adversely affected due to its
interest-earning assets repricing to a greater extent than its
interest-bearing liabilities. Conversely, during a period of rising interest
rates, the net earnings of an institution may, also absent offsetting
factors, increase as it is able to invest in higher yielding interest-earning
assets at a more rapid rate than its interest-bearing liabilities reprice.
For extended time periods, however, an institution with a large portfolio of
ARMs may not be protected from increases in interest rates since ARMs
generally have periodic and lifetime interest rate caps. Additionally,
Broadway Federal's ARMs are predominantly tied to the COFI, which is a
"lagging market" index, whereas deposit costs are not. Rapid increases in
interest rates could therefore have a negative impact on Broadway Federal's
earnings. Declining interest rates have, in general, benefited Broadway
Federal primarily due to the effect of the lagging market index which has
resulted in the interest income earned on loans declining at a slower rate
than interest expense paid on deposits. This effect of the lagging index,
however, has been partially offset by the increase in refinancings of
portfolio loans to lower yielding loans.
The principal objective of the Company's interest rate risk management
function is to evaluate the interest rate risk included in certain balance
sheet accounts, determine the level of risk appropriate given the Company's
business focus, operating environment, capital and liquidity requirements and
performance objectives, establish prudent asset concentration guidelines and
manage the risk consistent with Board approved guidelines. Through such
management, the Company seeks to reduce the vulnerability of its operations
to changes in interest rates and to manage the ratio of interest rate
sensitive assets to interest rate sensitive liabilities within specified
maturities or repricing dates. The Company, through Broadway Federal,
achieves these objectives primarily by the marketing and funding of ARM's,
which are generally repriced at least semi-annually and indexed to the COFI.
The Company closely monitors its interest rate risk as such risk relates to
its operational strategies. The Company's Board of Directors has established
a Management level Asset/Liability Committee, which is responsible for
reviewing the Company's asset/liability policies and interest rate risk
position. The Committee generally meets weekly and reports to the Board of
Directors on interest rate risk and trends on a quarterly basis. There can be
no assurance that the
34
<PAGE>
Company will be able to maintain its desired interest rate risk position or
to implement other strategies to manage interest rate risk in the future.
Accordingly, the Company's net interest income will remain subject to the
movements of interest rates, up or down, and such movements could have a
negative impact on the earnings of the Company.
Neither the Company nor the Bank engage in the use of trading activities,
derivatives, synthetic instruments or hedging activities in controlling its
interest rate risk. Although such strategies could be permitted in the
future if recommended by the Asset/Liability Committee and approved by the
Board of Directors, the Company does not intend to engage in such practices
in the immediate future.
NET PORTFOLIO VALUE
The OTS has adopted a rule incorporating an interest rate risk (IRR)
component into its risk-based capital rules. See
"Business--Regulation--Capital Requirements." Although this rule has been
adopted and published, it is not yet effective. Under the rule, an
institution with a greater than normal level of interest rate risk (as
determined by the OTS) will be subject to a deduction of its interest rate
component from total capital for purposes of calculating the institution's
risk-based capital requirement. An institution with a greater than normal
interest rate risk is defined as an institution that would suffer a loss of
net portfolio value ("NPV") exceeding 2% of the estimated market value of its
assets in the event of a 200 basis point parallel increase or decrease in
interest rates. NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet
contracts. A resulting change in NPV of more than 2% of the estimated market
value of its assets will require the institution to deduct 50% of that excess
change from its capital. The rule provides that the OTS will calculate the
IRR component quarterly for each institution. At December 31, 1997 there was
no decrease in the Bank's NPV as a percentage of the present value of assets
at the 200 basis point level.
The following table presents Broadway Federal's NPV as of December 31, 1997
as calculated by the OTS for the foregoing purposes based on information
provided to the OTS by Broadway Federal. Such information is provided solely
to illustrate the current application of the above-described regulation to
Broadway Federal by the OTS. No representation is made as to the accuracy of
such information as an indication of interest rate risk or as to the
significance thereof in Broadway Federal's management of interest rate risk.
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE
- ----------------------------------------------------------------------------------------------------
CHANGE IN INTEREST CHANGE IN NPV AS %
RATES IN BASIS POINTS OF THE PRESENT VALUE
(RATE SHOCK) AMOUNT $CHANGE % CHANGE (a) OF ASSETS
- --------------------- -------- ------- ------------ ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
400 $16,364 (1,610) (9) (.93)
300 17,270 (704) (4) (.35)
200 17,927 (47) - .05
100 18,174 200 1 .18
Zero 17,974 - - -
(100) 17,825 (149) (1) .14
(200) 18,128 154 1 .01
(300) 18,584 610 3 .26
(400) 19,360 1,386 8 .71
</TABLE>
- ----------------
(a) Percentage changes less than 1% not shown.
The above table suggests that in the event of a 200 basis point change in
interest rates, Broadway Federal would experience minimal change in NPV in a
rising rate environment and a 1% increase in NPV in a declining rate
environment. In evaluating Broadway Federal's exposure to interest rate risk,
certain shortcomings inherent in the NPV method of analysis presented in the
foregoing table must be considered. These include the factors mentioned in
the discussion under "--Interest Rate Sensitivity" above, and the fact that
market interest rates are unlikely to adjust simultaneously.
35
<PAGE>
MARKET RISKS
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of December
31, 1997 based on the information and assumptions set forth in the notes to
the table. The Company had no derivative financial instruments or trading
portfolio, as of December 31, 1997. The expected maturity date values for
loans receivable, mortgage-backed securities, and investment securities were
calculated by adjusting the instrument's contractual maturity dates for
expectations of prepayments, as set forth in the notes. Similarly, expected
maturity date values for interest-bearing core deposits were calculated based
upon estimates of the period over which the deposits would be outstanding as
set forth in the notes to the table. With respect to the Company's
adjustable rate instruments, expected maturity date values were measured by
adjusting the instrument's contractual maturity date for expectations of
prepayments, as set forth in the notes. From a risk management perspective,
however, the Company believes that repricing dates, as opposed to expected
maturity dates, may be more relevant in analyzing the value of such
instruments. Similarly, substantially all of the Company's investment
securities portfolio is comprised of callable government agency securities.
36
<PAGE>
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 THEREAFTER TOTAL FAIR VALUE
------- ------ ------ ------ ------ ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans Receivable: (1)(2)(3)(4)
Fixed $ 6,366 $3,303 $2,531 $2,038 $1,655 $ 5,106 $ 20,999 $ 22,123
Average Interest Rate 8.81% 9.66% 9.64% 9.63% 9.62% 9.37% 9.32%
Adjustable $ 7,634 $5,746 $4,957 $4,333 $3,845 $56,255 $ 84,770 $ 86,589
Average Interest Rate 7.65% 7.67% 7.69% 7.72% 7.75% 7.88% 7.82%
Investment Securities (5) $ 5,999 $ 5,999 $ 5,983
Average Interest Rate 6.02% 6.02%
Mortgage Backed Securities (6)(7)
Fixed $ 568 $ 232 $ 171 $ 142 $ 122 $ 567 $ 1,802 $ 1,821
Average Interest Rate 6.78% 7.63% 7.83% 7.83% 7.83% 7.83% 7.47%
Adjustable $ 263 $ 215 $ 175 $ 143 $ 117 $ 493 $ 1,406 $ 1,416
Average Interest Rate 5.95% 5.95% 5.95% 5.95% 5.95% 5.95% 5.95%
FHLB Stock (8) $ 931 $ 931 $ 931
Average Interest Rate 6.26% 6.26%
Interest Bearing Deposits $ 1,662 $ 1,662 $ 1,662
Average Interest Rate 4.89% 4.89%
Total Interest Earning Assets $22,492 $9,496 $7,834 $6,656 $5,739 $65,352 $117,569 $120,525
Interest Bearing Liabilities:
Savings Accounts:
NOW Accounts (9) $ 1,255 $1,041 $ 864 $ 718 $3,500 $ 7,378 $ 7,378
Average Interest Rate 1.01% 1.01% 1.01% 1.01% 1.01% 1.01%
Passbook Accounts (10) $ 4,779 $3,922 $3,211 $2,621 $2,131 $11,454 $ 28,118 $ 29,648
Average Interest Rate 2.02% 2.02% 2.02% 2.02% 2.02% 2.02% 2.02%
Certificate Accounts (11) $51,634 $5,472 $5,472 $ 663 $ 662 $ 730 $ 64,633 $ 64,884
Average Interest Rate 5.11% 5.75% 5.75% 6.18% 6.18% 6.18% 5.25%
Money Market Funds (12) $ 1,402 $ 939 $1,881 $ 4,222 $ 4,222
Average Interest Rate 2.25% 2.25% 2.25% 2.25%
Non Interest Bearing Checking (13) $ 1,963 $1,277 $ 830 $ 555 $ 336 $ 555 $ 5,516 $ 5,516
Average Interest Rate
Other Interest Bearing Liabilities $ 571 $ 571 $ 571
Average Interest Rate 0.63% 0.63%
Total Interest Bearing Liabilities $61,033 $12,651 $12,258 $5,128 $6,629 $12,739 $110,438 $159,843
</TABLE>
-37-
<PAGE>
Footnotes:
(1) Loans receivable are net of undisbursed loan proceeds and
exclude net deferred loan fees and the allowance for loan losses.
(2) For single family residential loans, assumes contractual annual
amortization and balloon maturities as appropriate. Assumes a
prepayment rate of 17.52% for adjustable rate loans, and 7% to
27% for fixed rate loans.
(3) Approximately 92% of the Company's adjustable rate loans reprice on an
average of six months or less. These loans change with the 11th District
Cost of Funds Index. The remaining adjustable rate loans primarily reprice
using a current market index such as the one year constant maturity
Treasury Index. All loans are subject to various market based annual and
lifetime rate caps and floors.
(4) Non-performing loans, totaling $921,000, are categorized as maturing in
1998.
(5) As of December 31, 1997, $4.0 million of the securities have maturities
ranging from 1999 through 2001. However, they are subject to call given
their current above market yields.
(6) Mortgage-backed securities with single family residential loan collateral
are based on contractual annual amortization and balloon maturity
assumptions adjustd for prepayment rates on fixed rate securities are
assumed to range from 7% to 16%.
(7) The Company's adjustable mortgage-backed securities reprice on
an annual basis based upon changes in the one year constant maturity
Treasury index. Various annual and lifetime market based caps and fllors
exist. The schedule uses an assumed prepayment rate of 17.52%.
(8) FHLB Stock does not have a market. Its fair value is therfore unknown.
However, historically the stock could be sold to the Federal Home Loan
Bank at par.
(9) For NOW accounts, it is assumed that the decay rate is 17% for five years,
with the remaining balance maturing at the end of that time.
(10) For regular passbook accounts, it is assumed that the decay rate is 17%
for seven years, with the remaining balance maturing at the end of that
time.
(11) Certificate accounts have been shown based upon stated maturities.
(12) For Money Market accounts, it is assumed that the decay rate is 33%, with
the balance maturing in the third year.
(13) Non-interest bearing checking accounts have been shown based upon a 33%
decay rate for seven years, with the remaining balance maturing at the
end of that time.
YEAR 2000 COMPLIANCE
Until recently computer programs were written to store only two digits of
date-related information in order to more efficiently handle and store data.
Thus the programs were unable to properly distinguish between the year 1900
and the year 2000. This is frequently referred to as the "Year 2000
Problem." During 1997, the Company initiated an organization-wide Year 2000
Project to address this issue. Utilizing both internal and external
resources, the Company is in the process of defining, assessing and
converting, or replacing various programs, equipment and instrumentation
systems to make them Year 2000 compatible. The Company's Year 2000 project
is comprised of two components: business applications and equipment. The
business applications component consists of the Company's business computer
systems, as well as the computer systems of third-party suppliers or
customers whose Year 2000 problems could potentially impact the Company.
Equipment exposures consist of the micro-processors with the power of small
computers that are embedded within operating equipment such as pumps,
compressors, elevators and furnaces.
To initiate its Year 2000 program in 1997 the Company began to diligently
assess its systems needs for the Year 2000 and beyond. This assessment
included an analysis of the benefits and limitations of the existing systems.
Based upon this analysis and upon the fact that the Company's outside
service bureau has stated that they are not planning to make Year 2000
programming changes , the Company determined that it will convert its entire
deposit, loan and general ledger systems to a new service bureau as part of
its Year 2000 Action Plan. In addition, as part of the complete conversion
the Company will replace most of its internal personal computer equipment and
software. The new service bureau, software and equipment, which represents
approximately 98% of the Company's business computer programs and equipment,
will be Year 2000 compliant, and is anticipated to cost approximately
$170,000. The remaining 2% of business application programs and equipment
will be made compliant through the Year 2000 project, and all non compliant
programs and equipment will be retired. It is anticipated that this project
will be completed by December 1998. The Company is also identifying and
prioritizing critical suppliers and customers and will follow up with them
concerning their plans and progress in addressing the Year 2000 Problem.
This portion of the Year 2000 project is expected to cost approximately
$40,000 and is being expensed as incurred.
The Company is also currently evaluating the Year 2000 readiness of its other
equipment, such as security, heating and air-conditioning systems, with a
comprehensive inventory of all monitoring and control devices. Work plans
detailing the tasks and resources required to insure equipment Year 2000
readiness by the end of 1998 are expected to be in place by the end of the
second quarter of 1998. Costs associated with other equipment upgrades have
not yet been quantified but will be expensed as incurred.
The Company has ascertained that failure to alleviate the Year 2000 Problem
with its application systems and equipment could result in possible system
failure or miscalculations causing disruptions of operations, including among
other things, a temporary inability to process transactions, send invoices,
or engage in similar normal business activities. These problems could be
substantially alleviated with manual processing. However, this would cause
delays, possible lost production days, reduced customer service and increased
expense.
The cost of the Year 2000 modifications and the date of completion will be
closely monitored and are based on management's best estimates. Actual
results, could differ from those estimates.
-38-
<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, 1997 and 1996. The
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods shown except
where noted otherwise. Average balances are derived from average month-end
balances. Management does not believe that the use of average monthly
balances instead of average daily balances has caused any material
differences in the information presented. The yields and costs include fees
which are considered adjustments to yields.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996
--------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
-------- -------- ---------- -------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS:
Interest-earning deposits $ 197 $ 9 4.57% $ 569 $ 13 2.28%
Federal Funds sold and other
short-term investments 2,938 164 5.58 3,965 215 5.42
Investment securities, (1) 7,827 396 5.06 7,471 438 5.86
Loans receivable(2)(3) 97,503 8,354 8.57 91,189 7,878 8.64
Mortgage-backed securities, (1) 2,218 140 6.31 2,627 153 5.82
FHLB Stock 904 57 6.31 852 50 5.87
-------- ------ -------- ------
TOTAL INTEREST-EARNING ASSETS 111,587 $9,120 8.17 106,673 $8,747 8.20
------ ------
------ ------
NONINTEREST-EARNING ASSETS 8,834 6,975
-------- --------
TOTAL ASSETS $120,421 $113,648
-------- --------
-------- --------
LIABILITIES AND RETAINED EARNINGS
INTEREST-BEARING LIABILITIES:
Money market deposits $ 4,394 $ 88 2.23% $ 4,239 $ 94 2.22%
Passbook deposits 28,515 567 1.99 30,485 615 2.02
NOW and other demand deposits 10,818 67 0.62 10,683 61 0.57
Certificate accounts 61,295 3,244 5.29 52,278 2,706 5.18
-------- ------ -------- ------
TOTAL SAVINGS DEPOSITS 105,022 3,966 3.78 97,685 3,476 3.56
FHLB advances 541 19 3.45 83 5 6.02
-------- ------ -------- ------
TOTAL INTEREST-BEARING LIABILITIES 105,563 $3,985 3.77 97,768 $3,481 3.56
-------- ------ -------- ------
------ ------
Noninterest-bearing liabilities 1,733 2,185
Retained earnings 13,125 13,695
TOTAL LIABILITIES AND
RETAINED EARNINGS $120,421 $113,648
-------- --------
-------- --------
NET INTEREST RATE SPREAD(4) $5,135 4.40% $5,266 4.64%
Net Interest Margin(5) 4.60% 4.94%
</TABLE>
-39-
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996
--------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
-------- -------- ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Ratio of interest-earning assets to
interest-bearing liabilities 105.71% 109.11%
Return on average assets 0.46% (0.24%)
Return on average equity 0.43% (0.20%)
Average equity to average assets ratio 10.90% 12.05%
</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.
(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, 1997 YEAR ENDED DECEMBER 31, 1996
COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------- ----------------------------
INCREASE (DECREASE) IN NET INCREASE (DECREASE) IN NET
INTEREST INCOME INTEREST INCOME
---------------------------- ----------------------------
DUE TO DUE TO DUE TO DUE TO
VOLUME RATE NET VOLUME RATE NET
---------------------------- ----------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-earning deposits $ 8 $ (13) $ (5) $ (1) $ - $ (1)
Federal funds sold and
other short term investments (57) 6 (51) 25 30 55
Investment securities, net 21 (60) (39) 102 (55) 47
Loans receivable, net 544 (66) 478 358 355 713
Mortgage backed securities,
net (28) 14 (14) 153 - 153
FHLB stock 3 - 3 2 8 10
----- ----- ----- ----- ---- ----
TOTAL INTEREST-EARNING
ASSETS 491 (119) 372 639 338 977
----- ----- ----- ----- ---- ----
INTEREST-BEARING LIABILITIES:
Money market deposits 3 (9) (6) (5) 6 1
Passbook deposits (39) (9) (48) (72) 53 (19)
NOW and other demand deposits - 5 5 9 3 12
Certificate accounts 467 58 525 215 101 316
FHLB advances 27 (2) 25 5 - 5
----- ----- ----- ----- ---- ----
TOTAL INTEREST-BEARING
LIABILITIES 458 43 501 152 163 315
----- ----- ----- ----- ---- ----
Change In Net Interest
Income $ 33 $(162) $(129) $ 487 $175 $662
----- ----- ----- ----- ---- ----
----- ----- ----- ----- ---- ----
</TABLE>
-40-
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997
AND DECEMBER 31, 1996
GENERAL
The $559,000 in net earnings recorded by the Company for the year ended
December 31, 1997, compares to a $277,000 net loss recorded for the year
ended December 31, 1996. This $836,000 increase in net earnings for the year
was impacted by several factors occurring in both the current and prior
years, including a $272,000 gain on the sale of an office property sold
during the fourth quarter of 1997, and lower expenses and write-downs related
to the operation and sale of REO during 1997. The net loss for the year ended
December 31, 1996 was significantly impacted by the payment of a one-time
SAIF recapitalization assessment fee of $614,000 (see "Regulation"). The net
earnings increase for 1997 also resulted from a number of other offsetting
factors which included higher interest income, higher interest expense, a
lower provision for loan losses, higher noninterest income, lower noninterest
expense and higher income taxes.
INTEREST INCOME
Interest income increased by $373,000, or 4.26%, from $8.7 million in 1996 to
$9.1 million in 1997. This increase was primarily the result of an increase
in average interest-earning assets of $4.9 million, to $111.6 million for the
year ended December 31, 1997 from $106.7 million for the same period a year
ago. The increase in average interest-earning assets resulted from Broadway
Federal's focus on increasing its loan portfolio.
The effect of the increase in average interest-earning assets was partially
offset by a decrease in the average yield on such assets from 8.20% during
the year ended December 31, 1996 to 8.17% during the year ended December 31,
1997. Interest income from loans, which accounted for approximately 91.60% of
total interest income in 1997, increased by $476,000, or 6.04%, due to a $6.3
million, or 6.92%, increase in the average balance of loans, offset by an
7-basis point decrease in the average yield on loans from 8.64% for 1996 to
8.57% for 1997. This decrease in average yield resulted from a decreasing
interest rate environment during most of 1997. Interest income from
investment securities decreased $100,000, or 15.02%, from $666,000 in 1996 to
$566,000 in 1997, primarily due to a 80 basis point decrease in the average
yield on investment securities to 5.06% during 1997 from 5.86% during 1996,
offset by a $356,000, or 4.77% increase in the average balance of investment
securities to $7.8 million during 1997, from $7.4 million during 1996.
INTEREST EXPENSE
Interest expense includes interest on savings deposits and on borrowings.
Interest expense increased $504,000, or 14.48%, for the year ended December
31, 1997, to $4.0 million, from $3.5 million for the same period a year ago.
This increase was primarily the result of an increase in average
interest-bearing liabilities of $7.8 million, to $105.6 million for the year
ended December 31, 1997 from $97.7 million for the same period a year ago.
Interest on savings deposits, which accounted for approximately 99.52% of
interest expense in 1997, increased by $490,000 or 14.10%, due to a $7.3
million, or 7.51%, increase in the average balance of savings deposits and a
22 basis point increase in the average cost of deposits from 3.56% for 1996
to 3.78% for 1997. The increase in the average cost of savings deposits also
reflects the more competitive interest rate environment in which deposits
were gathered during 1997 and a shift in the Bank's deposit portfolo mix,
resulting in a decrease in core deposits from $30.0 million at December 31,
1996 to $28.1 million for 1997.
Net interest spread ("NIS"), which represents the difference between the
yield on average interest-earning assets and the cost of average interest
bearing liabilities, decreased from 4.64% at December 31, 1996 to 4.40% at
December 31, 1997. This 24 basis point or $131,000 decrease in NIS primarily
results from the increased cost of deposits between 1996 and 1997. The
effect of this decrease is a reduction in the Company's core earnings.
Management has taken several steps in an attempt to stabilize core earnings,
which include (i) increasing loan originations, specifically multi-family
originations, which have higher yields and larger margins over the stated
index; (ii) increasing the level of non-interest bearing checking deposits;
and (iii) attempting to hold deposit rates on jumbo and other certificate
accounts to levels which are less than or equal to related FHLB borrowing
rates. In addition , Management continues to take steps designed to reduce
non-interest expenses, including reducing the number of full-time employees.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased by $320,000, or 54.61%, from $586,000
for the year ended December 31, 1996 to $266,000 for the year ended December
31, 1997. The decrease in the provision for loan losses was due primarily to
improved asset quality and the improving Southern California real estate
market.
Total non-performing assets, consisting of non-accrual loans and REO,
decreased by $742,000, from $2.8 million at December 31, 1996 to $2.1 million
at December 31, 1997. Of the $742,000 decrease, $953,000 represented a
decrease in non-accrual loans, offset by a $211,000 increase in REO. As a
percentage of total assets, nonperforming assets were 1.65% at December 31,
1997, compared to 2.39% at December 31, 1996. The allowance for loan losses
was 114.44% of nonperforming loans at December 31, 1997, compared to 62.65%
at December 31, 1996. Non-accrual loans at December 31, 1997 included eight
loans totaling $606,000 secured by one- to four-unit properties, one loan
totaling $214,000 secured by a multi-family property, one loan totaling
$99,000 secured by nonresidential property and a $2,000 non-mortgage loan.
REO at December 31, 1997 included six one- to four-unit properties of
$627,000, two multi-family properties totaling $378,000 and one parcel of
land having a book value of $139,000. At December 31, 1997 three
41
<PAGE>
of the one- to four-unit REO properties and one multi-family REO property
were in escrow. All sales closed escrow after year end. At February
28, 1998 total REO had been reduced to $682,000.
NONINTEREST INCOME
Noninterest income increased by $492,000, or 134.06%, to $859,000 for the
year ended December 31, 1997, from $367,000 for the same period a year ago.
The increase is due to a number of offsetting factors. Service charges
increased by $113,000, to $414,000 during 1997, as compared the same period a
year ago. The increase resulted primarily from an increase in fees relating to
lending operations, an increase in fees charged on various savings products
and a greater number of checking accounts at December 31, 1997 as compared to
December 31, 1996, resulting in more fees earned. Gain on sale of mortgage
loans increased $95,000, from $28,000 in 1996 to $123,000 in 1997 due to an
increase in loans sold during the year. Gain on sale of office properties
and equipment totaled $272,000 during 1997, as compared to zero during the
same period in 1996. This gain resulted from the sale of property previously
used as Broadway Federal's corporate office and main savings branch, which
was destroyed during the 1992 Los Angeles civil disturbance.
NONINTEREST EXPENSE
Noninterest expense decreased by $737,000, or 13.39%, to $4.8 million for the
year ended December 31, 1997, from $5.5 million for the same period a year
ago. The decrease in noninterest expense was primarily due to decreases in
federal insurance premiums, write-downs, expenses and write-offs related to
the operation and sale of REO, a decrease in loss on the sale of
mortgage-backed securities and a decrease in operational losses, offset by
increases in compensation and benefits and occupancy expense. Federal deposit
insurance premiums decreased by $788,000 due to an insurance rate reduction
and a one-time assessment fee imposed by the FDIC in 1996. Write-downs,
expenses and write-offs related to the operation and sale of REO decreased
$244,000, from $374,000 in 1996 to $130,000 for the same period in 1997. The
higher 1996 loss was the result of a direct write-off to reduce the carrying
amount of REO to the fair market value of the real estate. During 1996 the
Company incurred an $84,000 loss on the sale of mortgage-backed securities.
No Securities were sold in 1997.
Compensation and benefits increased by $325,000 for the year ended December
31, 1997, as compared to the same period a year ago. The increase results
from general salary increases during the year and an increase in the number
of staff. Occupancy expense, including depreciation and repair and
maintenance costs on fixed assets, increased by $52,000, to $955,000 for the
year ended December 31, 1997, as compared to the same period a year ago. The
increases were primarily due to increases in computer expenses, repair and
maintenance costs, equipment rental expenses and property taxes on office
buildings. Operational expense, which includes bad debt write-offs and the
portion of savings losses in excess of insurance proceeds, decreased $21,000,
to $100,000 for the year ended December 31, 1997, as compared to the same
period a year ago. The decrease primarily resulted from higher losses
incurred in 1996 from checking account overdrafts.
INCOME TAXES
Income taxes increased from an income tax benefit of $179,000 for the year
ended December 31, 1996, to an expense of $403,000 for 1997. The increase in
income taxes was the result of higher earnings before income taxes during
1997, as compared to a loss before income taxes in 1996.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Total assets at December 31, 1997 were $125.1 million compared to $117.1
million at December 31, 1996, an increase of $8.0 million, or 6.84%. Net
loans receivable increased $7.4 million to $103.7 million at the year ended
December 31, 1997, as compared to $96.3 million at December 31, 1996. The
increase in net loans resulted from $14.1 million in loan originations and
$7.9 million in loan purchases, offset primarily by $9.2 million in principal
repayments, $1.7 million in loans transferred to foreclosure and $3.8 million
in loans sold during the year. Loans held for sale at December 31, 1997
totaled $222,000, and no loans were classified as held for sale at December
31, 1996. Office properties and equipment increased from $2.0 million at
December 31, 1996 to $4.0 million at December 31, 1997, primarily as a result
of the purchase of a $1.6 million office building located at 4800 Wilshire
Boulevard, Los Angeles, and renovation costs incurred at the Bank's branch
and loan facility located in the City of Inglewood. The new Wilshire
Boulevard facility, which includes a new savings branch,
42
<PAGE>
was acquired to replace the Bank's administrative office lost by fire in 1992
during the civil disturbance in Los Angeles. The Company began
to occupy the new facility in March 1998.
Total liabilities at December 31, 1997 were $111.7 million compared to $103.5
million at December 31, 1996. The $8.2 million increase is primarily
attributable to a $7.9 million increase in savings deposits which were used
to fund the increase in total assets.
Total capital at December 31, 1997 was $13.4 million as compared to $13.6
million at December 31, 1996, representing a decrease of $205,000. Capital
decreased due to a $318,000 increase in Treasury stock, the retirement of
$359,000 in Preferred stock and the payment of $212,000 in dividends during
the year. This decrease was offset by increases of $559,000 in net earnings
for the year and a $121,000 Employee Stock Ownership plan ("ESOP") repayment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are Bank deposits, principal and
interest payments on loans and, to a lesser extent, proceeds from the sale of
loans and advances from the FHLB. While maturities and scheduled amortization
of Bank loans are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions, and competition. Broadway Federal's average liquidity ratios were
14.40% and 14.18% for the years ended December 31, 1997 and 1996,
respectively. The realitively high liquidity ratio results from the fact that
Conversion proceeds, which the Company has not yet invested into Bank loans,
are held as investments in treasury securities and federal agency
obligations, which are included in the liquidity ratio under OTS regulations.
Management is currently attempting to reduce the liquidity ratio to a range
of 10% to 12% as part of the Company's strategy to invest excess liquidity
in Bank loans or other higher yielding interest-earning assets.
The Company has other sources of liquidity in the event that a need for
additional funds arises, including FHLB advances to the Bank. At December
31, 1997 and 1996 there were no advances outstanding from the FHLB. During
the years ended December 31, 1997 and 1996 Broadway Federal had borrowed from
the FHLB to meet its short-term loan funding needs. These advances were
repaid prior to year end, since such borrowings were more costly to Broadway
Federal than its primary sources of liquidity. Other sources of liquidity
include investment securities maturing within one year.
The Company's cash flows are comprised of three primary classifications: cash
flows from operating activities, investing activities and financing
activities. Cash flows provided by operating activities were $1.2 million and
$475,000 for the years ended December 31, 1997 and 1996, respectively. Loans
originated for sale, net of refinances, totaled $3.9 million and $2.7 million
for the years ended December 31, 1997 and 1996, respectively. Proceeds from
the sale of loans receivable held for sale totaled $3.8 million and $2.7
million for the years ended December 31, 1997 and 1996, respectively. Net
cash used in investing activities consists primarily of disbursements for
loan originations and purchases of loans and investments, offset by principal
collections on loans and proceeds from the sale, maturity or redemption of
investments. Disbursements on loans originated and purchased were $18.3
million and $16.6 million for the years ended December 31, 1997 and 1996,
respectively. Proceeds from the sale, maturity or redemption and principal
payments of mortgage-backed and investment securities were $6.0 million and
$7.3 million for the years ended December 31, 1997 and 1996, respectively.
Capital expenditures for office properties and equipment for the years ended
December 31, 1997 and 1996 totaled $2.3 million and $1.2 million, respectively.
Net cash provided by financing activities includes 1996 proceeds from the
sale of Common Stock and an increase or decrease in deposit accounts. The net
increase in savings deposits for the year totaled $7.9 million, or 7.72%.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Company and Notes thereto
presented herein have been prepared in accordance with generally accepted
accounting principles ("GAAP") which require the measurement of financial
43
<PAGE>
position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased cost
of the Company's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Company and Broadway Federal are monetary in
nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as
the price of goods and services.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS No. 123"). SFAS No.
123 provides a choice of accounting methods and requires additional
disclosures for stock-based employee compensation plans. SFAS No. 123 defines
a fair value-based method of accounting for an employee stock option or
similar equity instrument. However, it also allows the continued use of the
intrinsic value-based method of accounting as prescribed by Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees". Regardless of the method used to account for stock-based
compensation, SFAS No. 123 requires all financial statements to include the
fair value of such compensation and certain other disclosures. The fair
value disclosures required by SFAS No. 123 must be adopted for fiscal years
beginning after December 15, 1995. In connection with the Conversion of the
Company's principal subsidiary from mutual-to-stock form, the Board of
Directors of the Company has adopted certain stock-based compensation plans.
Stockholder approval of the plans was obtained at the Company's Annual
Meeting held on July 3, 1996. The Company will account for such plans under
APB Opinion 25 and make the appropriate disclosures required under SFAS No.
123. The Company does not believe that such adoption and accounting has any
adverse impact on its financial condition or results of operations.
On January 1, 1997, the Company adopted the Statement of Financial Accounting
Standards No. 125, "Accounting For Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities and establishes guidelines
to distinguish transfers of financial assets that are sales from transfers
that are secured borrowings.
SFAS No. 125 requires that servicing assets and liabilities be recorded at
fair value at the time loans are sold or securitized. The Statement also
requires that servicing assets be evaluated for impairment by risk
characteristics and be carried at the lower of capitalized cost or fair
value. Adoption of SFAS NO. 125 had no material effect on the Company's
financial position at December 31, 1997 or results of operations or cash
flows for the year then ended.
EARNINGS PER SHARE - In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("SFAS No. 128"). SFAS No. 128 establishes standards for computing
and presenting earnings per share (EPS) and applies to entities with publicly
held common stock. SFAS No. 128 simplifies the standards for computing
earnings per share previously found in Accounting Principals Board Opinion
No. 15 and makes them comparable to international EPS standards. It replaces
the presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
statement of earnings for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, earlier application is not permitted. The Company
adopted SFAS No. 128 effective December 31, 1997. Adoption had no impact on
the basic EPS computation. The EPS-assuming dilution computation was
impacted only by stock-based employee compensation. All EPS amounts for all
periods presented, where appropriate, restated, to conform to the SFAS No. 128
requirements.
Comprehensive Income - In June 1997, the Financial Accounting Standards Board
issued Statement No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
SFAS No. 130 establishes new rules for reporting and displaying comprehensive
income and its components in a full set of general purpose financial
statements. SFAS No. 130 requires companies to (a) display items of other
comprehensive income either below the total for net income in the income
statement, or in a statement of changes in equity, and (b) disclose the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the equity section of the balance
sheet. Other comprehensive income includes unrealized gains and losses on
available-for-sale securities and foreign currency translation adjustments.
SFAS No. 130 is effective for fiscal years beginning after December 15,
1997, although earlier application is permitted. Reclassification of
financial statements for earlier periods provided for comparative purposes is
required. Disclosure of total comprehensive income is required in interim
period financial statements. The Company does not believe that such adoption
has any adverse impact on its financial condition or results of operations.
ITEM 7. FINANCIAL STATEMENTS OF BROADWAY FINANCIAL CORPORATION
44
<PAGE>
See Index to Financial Statements of Broadway Financial Corporation on Page
53 and the Consolidated Financial Statements of Broadway Financial
Corporation beginning on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
45
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this Item is incorporated herein by reference to
the definitive Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Company's 1998 Annual Meeting of
Shareholders (the "Company's 1998 Proxy Statement")
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the Company's 1998 Proxy Statement.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information requied by this Item is incorporated herin by reference to
the Company's 1998 Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
Item 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
2.1 Plan of Conversion (including Certificate of Incorporation and
Bylaws of the Company and Federal Stock Charter and Bylaws of
Broadway Federal) (Exhibit 2.1 to Amendment No. 2 to Registration
Statement on Form S-1, No. 33-96814, filed by the Registrant on
November 13, 1995)
3.1 Form of Certificate of Incorporation of the Company (contained in Exhibit 2.1)
3.2 Form of Bylaws of the Company (contained in Exhibit 2.1)
3.3 Form of Federal Stock Charter of Broadway Federal (contained in Exhibit 2.1 hereto)
3.4 Form of Bylaws of Broadway Federal (contained in Exhibit 2.1 hereto)
4.1 Form of Common Stock Certificate (Exhibit 4.1 to Registration
Statement on Form S-1, No. 33-96814, filed by the Registrant on
September 12, 1995)
4.2 Form of Series A Preferred Stock Certificate (Exhibit 4.2 to
Amendment No. 1 to Registration Statement on Form S-1, No.
33-96814, filed by the Registrant on November 6, 1995)
4.3 Form of Certificate of Designation for the Series A Preferred Stock
(contained in Exhibit C to the Plan of Conversion in Exhibit 2.1
hereto)
10.1 Form of Broadway Federal Bank Employee Stock Ownership Plan
(Exhibit 4.1 to Registration Statement on Form S-1, No. 33-96814,
filed by the Registrant on September 12, 1995)
10.2 Form of ESOP Loan Commitment Letter and ESOP Loan and Security
Agreement (Exhibit 4.1 to Registration Statement on Form S-1, No.
33-96814, filed by the Registrant on September 12, 1995)
10.3 Form of Severance Agreement among the Company, Broadway Federal and
certain executive officers (Exhibit 10.7 to Amendment No. 2 to
Registration Statement on Form S-1, No. 33-96814, filed by the
Registrant on November 13, 1995)
10.4 Broadway Financial Corporation Recognition and Retention Plan for
Outside Directors
10.5 Broadway Financial Corporation Performance Equity Program for
Officers and Directors
10.6 Broadway Financial Corporation Stock Option Plan for Outside
Directors
10.7 Broadway Financial Corporation Long Term Incentive Plan
21.1 Subsidiaries of the Company (Exhibit 21.1 to Amendment No. 1 to
Registration Statement on Form S-1, No. 33-96814, filed by the
Registrant on November 6, 1995)
23.0 Consent of Ernst & Young, LLP
27.1 Financial Data Schedule
</TABLE>
- -------------------------------------
* Exhibits followed by a parenthetical reference are incorporated by
reference herein from the document described therein.
46
<PAGE>
(b) REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed for the three months ended December
31, 1997. Form 8-K was filed on January 8, 1998 disclosing in Item 5, "Other
Events", that on December 30, 1997, the Registrant issued 32,613 of its
common shares in exchange for a portion of its Series A Preferred Stock.
47
<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, 1998
In accordance with the Exchange Act, this report has been signed below by the
following persons in the capacities and on the date indicated.
/s/ Paul C. Hudson Date: March 29, 1998
- ----------------------------------
Paul C. Hudson
Chief Executive Officer, President
and Director
(Principal Executive Officer)
/s/ Bob Adkins Date: March 29, 1998
- ----------------------------------
Bob Adkins
Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ Elbert T. Hudson Date: March 29, 1998
- ----------------------------------
Elbert T. Hudson
Chairman of the Board
/s/ Kellogg Chan Date: March 29, 1998
- ----------------------------------
Kellogg Chan
Director
/s/ Dr. Willis K. Duffy Date: March 29, 1998
- ----------------------------------
Dr. Willis K. Duffy
Director
48
<PAGE>
/s/ Rosa M. Hill Date: March 29, 1998
- ----------------------------------
Rosa M. Hill
Director
/s/ A. Odell Maddox Date: March 29, 1998
- ----------------------------------
A. Odell Maddox
Director
/s/ Lyle A. Marshall Date: March 29, 1998
- ----------------------------------
Lyle A. Marshall
Director
/s/ Larkin Teasley Date: March 29, 1998
- ----------------------------------
Larkin Teasley
Director
/s/ Daniel A. Medina Date: March 29, 1998
- ----------------------------------
Daniel A. Medina
Director
49
<PAGE>
INDEX TO FINANCIAL STATEMENTS
OF BROADWAY FINANCIAL CORPORATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors ............................................................. F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996................................ F-2
Consolidated Statements of Operations for years ended December 31, 1997 and 1996............ F-3
Consolidated Statements of Stockholders' Equity for years ended December 31, 1997 and 1996.. F-4
Consolidated Statements of Cash Flows for years ended December 31, 1997 and 1996............ F-5
Notes to Consolidated Financial Statements.................................................. F-7
</TABLE>
50
<PAGE>
Consolidated Financial Statements
Broadway Financial Corporation
and Subsidiary
YEARS ENDED DECEMBER 31, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Report of Independent Auditors
The Shareholders and Board of Directors
Broadway Financial Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of Broadway
Financial Corporation and Subsidiary (the Company) as of December 31, 1997
and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Broadway
Financial Corporation and Subsidiary as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The consolidating
information included in Note 20 is presented for purposes of additional
analysis of the consolidated financial statements rather than to present the
financial position and results of operations of the individual companies. The
consolidating information has been subjected to the auditing procedures
applied in the audits of the consolidated financial statements and, in our
opinion, is fairly presented, in all material respects, in relation to the
consolidated financial statements taken as a whole.
March 11, 1998
Los Angeles, California
F-1
<PAGE>
Broadway Financial Corporation and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,831,000 $ 5,180,000
Investment securities held to maturity 9,207,000 10,371,000
Loans receivable, net 103,689,000 96,260,000
Loans receivable held for sale, at lower of cost or
fair value 222,000 -
Accrued interest receivable 834,000 733,000
Real estate acquired through foreclosure, net 1,144,000 933,000
Investment in capital stock of Federal Home
Loan Bank, at cost 931,000 876,000
Office properties and equipment, net 3,995,000 2,052,000
Income tax receivable - 426,000
Other assets 263,000 265,000
-------------------------------
$ 125,116,000 $ 117,096,000
-------------------------------
-------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 109,867,000 $ 101,994,000
Advance payments by borrowers for taxes and insurance 199,000 161,000
Deferred income taxes 463,000 452,000
Other liabilities 1,148,000 845,000
-------------------------------
Total liabilities 111,677,000 103,452,000
Commitments and contingent liabilities - -
Stockholders' equity:
Preferred nonconvertible, noncumulative, and
nonvoting stock, $.01 par value, authorized
1,000,000 shares; issued and outstanding 55,199
and 91,073 shares at December 31, 1997 and 1996,
respectively 1,000 1,000
Common stock, $.01 par value, authorized 3,000,000
shares; issued and outstanding 863,447 and 892,688
shares at December 31, 1997 and 1996, respectively 9,000 9,000
Additional paid-in capital 8,820,000 9,117,000
Retained earnings - substantially restricted 5,427,000 5,080,000
Treasury stock - 29,241 shares, at cost (318,000) -
Unearned ESOP shares (500,000) (563,000)
-------------------------------
Total stockholders' equity 13,439,000 13,644,000
-------------------------------
Total liabilities and stockholders' equity $ 125,116,000 $ 117,096,000
-------------------------------
-------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
Broadway Financial Corporation and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
Interest on loans receivable $ 8,354,000 $ 7,878,000
Interest on investment securities 566,000 666,000
Interest on mortgage-backed securities 141,000 153,000
Other interest income 59,000 50,000
-----------------------------
Total interest income 9,120,000 8,747,000
Interest on savings and interest bearing demand
deposits 3,966,000 3,476,000
Interest on borrowings 19,000 5,000
-----------------------------
Total interest expense 3,985,000 3,481,000
Net interest income 5,135,000 5,266,000
Provision for loan losses 266,000 586,000
-----------------------------
Net interest income after provision for loan losses 4,869,000 4,680,000
Noninterest income:
Service charges 414,000 301,000
Gain on sale of mortgage loans 123,000 28,000
Gain on sale of office properties and equipment 272,000 -
Other noninterest income 50,000 38,000
-----------------------------
859,000 367,000
-----------------------------
Noninterest expense:
Compensation and benefits 2,474,000 2,149,000
Occupancy expense, net 955,000 903,000
Advertising and promotional expense 163,000 185,000
Professional services 64,000 48,000
Federal insurance premiums 86,000 874,000
Insurance bond premiums 98,000 105,000
Real estate operations, net 130,000 374,000
Loss on sale of mortgage-backed securities
available for sale - 84,000
Contracted security services 128,000 94,000
Net operational losses 100,000 121,000
Other noninterest expense 568,000 566,000
-----------------------------
4,766,000 5,503,000
-----------------------------
Earnings (loss) before income taxes 962,000 (456,000)
Income taxes (benefit) 403,000 (179,000)
-----------------------------
Net earnings (loss) $ 559,000 $ (277,000)
-----------------------------
-----------------------------
Earnings (loss) per share $ 0.61 $ (0.36)
-----------------------------
-----------------------------
Earnings (loss) per share - assuming dilution $ 0.60 $ (0.36)
-----------------------------
-----------------------------
</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 Treasury Stockholders'
Stock Stock Capital Earnings ESOP Stock Equity
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ - $ - $ - $ 5,581,000 $ - $ $ 5,581,000
Preferred stock issuance 1,000 - 910,000 - - - 911,000
Common stock issuance - 9,000 8,157,000 - - - 8,166,000
Dividends paid - 5% preferred stock;
2% common stock - - - (224,000) - - (224,000)
Net loss for the year ended December 31,
1996 - - - (277,000) - - (277,000)
Unearned Employee Stock Ownership Plan - - - - (625,000) - (625,000)
Employee Stock Ownership Plan payments - - 50,000 - 62,000 - 112,000
------------------------------------------------------------------------------
Balance, at December 31, 1996 1,000 9,000 9,117,000 5,080,000 (563,000) - 13,644,000
Treasury stock acquired for Stock
programs and preferred stock exchange - - - - - (673,000) (673,000)
Preferred stock exchanged for common stock - - (355,000) - - 355,000 -
Dividends paid - 5% preferred stock;
2% common stock - - - (212,000) - - (212,000)
Net earnings for the year ended December 31,
1997 - - - 559,000 - - 559,000
Employee Stock Ownership Plan payments - - 58,000 - 63,000 - 121,000
------------------------------------------------------------------------------
Balance at December 31, 1997 $ 1,000 $ 9,000 $ 8,820,000 $ 5,427,000 $ (500,000) $ (318,000) $ 13,439,000
------------------------------------------------------------------------------
------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Broadway Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ 559,000 $ (277,000)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 164,000 226,000
Amortization of net deferred loan origination fees (42,000) 48,000
Amortization of discounts and premiums on securities 170,000 (7,000)
Federal Home Loan Bank stock dividends (55,000) (49,000)
Provision for loan losses 266,000 586,000
Provision for write-downs and losses on real estate 60,000 283,000
Gain on sale of office properties and equipment (272,000) -
Gain on sale of real estate owned (18,000) (40,000)
Gain on sale of loans receivable held for sale (123,000) (28,000)
Loans originated for sale, net of refinances (3,912,000) (2,726,000)
Proceeds from sale of loans receivable held for sale 3,813,000 2,698,000
Loss on sale of mortgage-backed securities - 84,000
Gain on sale of mortgage-backed securities - (7,000)
Changes in operating assets and liabilities:
Accrued interest receivable (101,000) (59,000)
Income tax receivable 426,000 (335,000)
Deferred income tax liability 11,000 (187,000)
Other assets 2,000 252,000
Other liabilities 235,000 14,000
Other - (1,000)
------------------------------
Total adjustments 624,000 752,000
------------------------------
Net cash provided by operating activities 1,183,000 475,000
INVESTING ACTIVITIES
Loans originated, net of refinances (10,372,000) (14,573,000)
Loans purchased (7,923,000) (2,001,000)
Principal repayment on loans 9,224,000 8,123,000
Principal repayment on mortgage-backed securities - 383,000
Proceeds from sale of mortgage-backed securities - 3,933,000
Purchases of investment securities held to maturity (5,004,000) (7,946,000)
Proceeds from sale of office properties and
equipment 456,000 -
Purchase of mortgage-backed securities available
for sale - (4,315,000)
Proceeds from maturities of investment securities
held to maturity 5,998,000 3,000,000
Capital expenditures for office properties and
equipment (2,291,000) (1,176,000)
Proceeds from sale of real estate acquired
through foreclosure 1,233,000 1,728,000
------------------------------
Net cash used in investing activities (8,679,000) (12,844,000)
</TABLE>
F-5
<PAGE>
Broadway Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
------------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 7,873,000 $ (8,510,000)
Preferred stock issued - 911,000
Common stock subscribed - 8,166,000
Dividends declared (212,000) (224,000)
Unearned Employee Stock Ownership Plan - (625,000)
Employee Stock Ownership Plan payments 121,000 112,000
Treasury stock acquired (673,000) -
Increase (decrease) in advances by borrowers
for taxes and insurance 38,000 (42,000)
------------------------------
Net cash provided by (used in) financing activities 7,147,000 (212,000)
------------------------------
Net decrease in cash and cash equivalents (349,000) (12,581,000)
Cash and cash equivalents at beginning of year 5,180,000 17,761,000
------------------------------
Cash and cash equivalents at end of year $ 4,831,000 $ 5,180,000
------------------------------
------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 4,000,000 $ 3,543,000
------------------------------
------------------------------
Cash paid for income taxes $ 2,500 $ 371,000
------------------------------
------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Additions to real estate acquired through
foreclosure $ 1,710,000 $ 1,163,000
Loans to facilitate the sale of real estate
acquired through foreclosure - 1,000,000
Common stock exchanged for preferred stock (359,000) -
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 1997
1. CONVERSION
Broadway Financial Corporation (the Company) is a Delaware corporation
organized for the purpose of acquiring all the capital stock of Broadway
Federal Bank, f.s.b. (Broadway Federal or the Bank) in connection with a
mutual to stock charter conversion effective November 13, 1995. At the
completion of the plan of conversion and the capitalization of the Company,
Broadway Federal became a wholly owned subsidiary of the Company on January
8, 1996. Prior to the completion of the conversion, the Company had no assets
or liabilities and did not conduct any business other than that of an
organizational nature (see Note 16 - Conversion to Capital Stock Form of
Ownership).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Broadway Federal's business is that of a financial intermediary and consists
primarily of attracting deposits from the general public and using such
deposits, together with borrowings and other funds, to make mortgage loans
secured by residential real estate located in Southern California. At
December 31, 1997, Broadway Federal operated four retail banking offices,
including a loan center, in Southern California. Broadway Federal is subject
to significant competition from other financial institutions, and is also
subject to regulation by certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The following accounting policies, together with those disclosed elsewhere in
the consolidated financial statements, represent a summary of the Company's
and Broadway Federal's significant accounting policies.
F-7
<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 1997 presentation.
ASSETS HELD TO MATURITY
Investment securities and loans, excluding those held as available for sale,
are carried at amortized historical cost, adjusted for amortization of
premiums and discounts. The carrying value of these assets is not adjusted
for temporary declines in fair value since the Company intends, and has the
ability, to hold them to their maturities.
Premiums and discounts on investment securities and loans are amortized
utilizing the interest method over the contractual terms of the assets.
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable are recorded in the consolidated balance sheets at the
unpaid principal, adjusted for the allowance for loan losses, loans in
process and net deferred loan fees or costs. Interest on loans receivable is
accrued monthly as earned, except for loans delinquent for 90 days or more
which are placed on nonaccrual status. Whenever the accrual of interest is
stopped, previously accrued but uncollected interest income is reversed.
Loans are returned to accrual status when all contractual principal and
interest amounts are reasonably assured of repayment.
The allowance for loan losses is maintained at an amount management considers
adequate to cover estimable and probable losses on loans receivable. The
allowance is reviewed and adjusted based upon a number of factors, including
current economic trends, industry experience, historical loss experience, the
borrowers' ability to repay and repayment performance, probability of
foreclosure, estimated collateral values and management's assessment of
credit risk inherent in the portfolio. Loans which are deemed uncollectible
are charged off against the allowance for loan losses. The provision for loan
losses and
F-8
<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)
recoveries on loans previously charged off are added to the allowance. The
allowance for loan losses is subjective and may be adjusted in the future
depending on economic conditions.
A loan is considered impaired when, based on current circumstances and
events, it is probable that Broadway Federal will be unable to collect all
amounts due (i.e., both principal and interest) according to the contractual
terms of the loan agreement. Loans are evaluated for impairment as part of
the Bank's normal internal asset review process. Measurement of impairment
may be based on (1) the present value of the expected future cash flows of
the impaired loan discounted at the loan's original effective interest rate,
(2) an observed market price of the impaired loan or (3) the fair value of
the collateral of a collateral-dependent loan. The amount by which the
recorded investment in the loan exceeds the measurement of the impaired loan is
recognized by recording a valuation allowance with a corresponding charge to
the provision for loan losses. While the measurement method may be selected
on a loan-by-loan basis, Broadway Federal measures impairment for all
collateral dependent loans at the fair value of the collateral.
LOANS HELD FOR SALE
Broadway Federal identifies those loans for which, at the time of origination
or acquisition, it does not have the positive intent or ability to hold to
maturity. Loans that are to be held for indefinite periods of time or not
intended to be held to maturity are classified as held for sale. Loans held
for sale are carried at the lower of aggregate amortized cost or fair value.
Fair value is based on prevailing market rates of similar loans. Loans held for
indefinite periods of time include assets that management intends to use as
part of its asset/liability management strategy and that may be sold in
response to changes in interest rates, resultant prepayment risk and other
factors.
LOAN SALES AND SERVICING
Broadway Federal from time to time sells mortgage loans and loan
participations from current originations or portfolios previously identified
as held for sale for cash proceeds equal to the principal amount of loans or
participations with yield rates to the investor based upon the current market
rate. Typically, Broadway Federal will retain the servicing rights associated
with loans sold. Gain or loss is recognized and premium or discount is
F-9
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOAN SALES AND SERVICING (CONTINUED)
recorded at the time of sale measured by the present value of the difference
between the effective loan interest rate to Broadway Federal and the net
yield to the investor, excluding a normal servicing fee to be earned over the
estimated remaining lives of the loans sold. The resulting premium or
discount is amortized or accreted to interest income using the interest
method, adjusted for prepayments.
On January 1, 1997, the Company adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 125 (SFAS No. 125),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities and establishes guidelines to distinguish
transfers of financial assets that are sales from transfers that are secured
borrowings.
SFAS No. 125 requires that servicing assets and liabilities be recorded at
fair value at the time loans are sold or securitized. The Statement also
requires that servicing assets be evaluated for impairment by risk
characteristics and be carried at the lower of capitalized cost or fair
value. Adoption of SFAS No. 125 had no material impact on the Company's
financial position at December 31, 1997 or results of operations or cash
flows for the year then ended.
LOAN ORIGINATION AND COMMITMENT FEES AND RELATED COSTS
Loan fees and certain direct loan origination costs are deferred, and the net
fee or cost is recognized in income using the interest method over the
contractual life of the loans adjusted for prepayments. Accretion of
discounts and deferred loan fees is discontinued when loans are placed on
nonaccrual status.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure represents real estate received in
satisfaction of real estate and commercial loans and is recorded at the lower
of carrying value or estimated fair value of the real estate, less costs of
disposition. An allowance for loss is provided when any subsequent decline in
value occurs. Income recognition on the sale of
F-10
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
real estate acquired through foreclosure is dependent upon the terms of the
sale. Any subsequent operating expenses or income, reduction in estimated
values, and gains or losses on disposition of such properties are recorded in
current operations.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at historical cost, less
accumulated depreciation. Depreciation and amortization of property and
equipment is provided on a straight-line basis over the estimated useful
lives of the related assets. Leasehold improvements are amortized over the
lease term or the estimated useful life of the asset, whichever is shorter.
INCOME TAXES
Deferred income tax expense (benefit) is derived by establishing deferred tax
assets and liabilities as of the reporting date for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are
expected to be realized or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
CASH AND CASH EQUIVALENTS
For purposes of presentation in the consolidated statements of cash flows,
cash and cash equivalents include cash on hand, due from banks, and federal
funds sold. Generally, federal funds are sold for one-day periods.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No.
128), which establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock. SFAS No.
128 simplifies the standards for computing earnings per share previously
found in Accounting Principles Board Opinion No. 15 and makes them comparable
to international EPS standards.
F-11
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE (CONTINUED)
It replaces the presentation of primary EPS with a presentation of basic EPS.
It also requires dual presentation of basic and diluted EPS (or EPS -
assuming dilution) on the face of the statement of operations for all
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997. The
Company adopted SFAS No. 128 effective December 31, 1997. Adoption had no
impact on the basic EPS computation. The EPS - assuming dilution computation
was impacted only by stock-based employee compensation. All EPS amounts for
all periods have been presented, and where appropriate, restated, to conform
to the SFAS No. 128 requirements.
RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
The credit risk of a financial instrument is the possibility that a loss may
result from the failure of another party to perform in accordance with the
terms of the contract. The most significant credit risk associated with
Broadway Federal's financial instruments is concentrated in its loan
portfolio. Broadway Federal has established a system for monitoring the level
of credit risk in its loan portfolio.
The market risk of a financial instrument is the possibility that changes in
market prices may reduce the value of a financial instrument or increase the
contractual obligations of Broadway Federal. Broadway Federal's market risk
is concentrated in its portfolios of loans and real estate acquired through
foreclosure. When a borrower fails to meet the contractual requirements of
the loan agreement, Broadway Federal is subject to the market risk of the
collateral securing the loan. Likewise, Broadway Federal is subject to the
volatility of real estate prices with respect to real estate acquired through
foreclosure.
INTEREST RATE RISK
Broadway Federal is subject to interest rate risk to the degree that its
interest-earning assets reprice on a different frequency or schedule than its
interest-bearing liabilities. The majority of Broadway Federal's loans reprice
based on the Eleventh District Cost of Funds Index (COFI). The repricing of
COFI tends to lag market interest rates. Broadway Federal closely monitors
the pricing sensitivity of its financial instruments.
F-12
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk exist for groups of borrowers when they have
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or
other conditions. The ability of Broadway Federal's borrowers to repay their
commitments is contingent on several factors, including the economic
conditions in the borrowers' geographic area and the individual financial
condition of the borrowers. Broadway Federal's lending activities are
concentrated in Southern California. Broadway Federal currently focuses on
the origination of residential mortgage loans and loans to community churches
secured by church properties.
EMPLOYEE STOCK OWNERSHIP PLAN
In 1993, the American Institute of Certified Public Accountants issued
Statement of Position 93-6, "Employers' Accounting to Employee Stock
Ownership Plans" (SOP 93-6). SOP 93-6 provides guidance for accounting for
these plans. SOP 93-6 requires that the issuance or sale of treasury shares
to the ESOP be reported when the issuance or sale occurs and that
compensation expense be recognized for shares committed to be released to
directly compensate employees equal to the fair value of the shares
committed. In addition, SOP 93-6 requires that a leveraged ESOP, funded with
an employer loan, be reflected as a reduction to equity and that the related
interest income and expense not be recorded. The application of SOP 93-6
results in fluctuations in compensation expense as a result of changes in the
fair value of the Company's common stock; however, any such compensation
expense fluctuations would result in an offsetting adjustment to paid-in
capital. During 1997 and 1996, the changes in the fair value of the Company's
common stock did not result in material fluctuations in compensation expense
and paid-in capital.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130
establishes new rules for reporting and displaying comprehensive income and
its components in a full set of general purpose financial statements. SFAS
No. 130 requires companies to (a) display items of other comprehensive income
either below the total for net income in the income statement, or in a
statement of changes in equity, and (b) disclose the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in-capital in the equity
F-13
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME (CONTINUED)
section of the balance sheet. Other comprehensive income includes unrealized
gains and losses on available-for-sale securities and foreign currency
translation adjustments. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. Disclosure of total
comprehensive income is required in interim period financial statements. The
Company expects its adoption of SFAS No. 130 to have no material impact on
its financial statement presentation.
3. INVESTMENT SECURITIES
At December 31, 1997 and 1996, all of the Company's securities are classified
as held to maturity based on the Bank's intent and ability to hold the
securities to maturity. At December 31, 1997 and 1996, the Company held
investment securities with a carrying value of $9,207,000 and $10,371,000,
respectively.
The following table provides a summary of investment securities held to
maturity with a comparison of carrying and fair values:
<TABLE>
<CAPTION>
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAIN LOSS VALUE
---------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1997:
Mortgage-backed securities $ 3,208,000 $ 29,000 $ - $ 3,237,000
FHLMC debenture 1,000,000 - - 1,000,000
FHLB debentures 4,000,000 - 16,000 3,984,000
U.S. Treasury notes 999,000 - - 999,000
---------------------------------------------------------
$ 9,207,000 $ 29,000 $ 16,000 $ 9,220,000
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
F-14
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT SECURITIES (CONTINUED)
<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
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
The remaining contractual principal maturities for investment securities at
December 31, 1997, 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, 1997:
Mortgage-backed securities $ - $ 347,000 $ 2,861,000 $ 3,208,000
FHLMC debenture - 1,000,000 - 1,000,000
FHLB debentures - 4,000,000 - 4,000,000
U.S. Treasury notes 999,000 - - 999,000
-------------------------------------------------------
$ 999,000 $ 5,347,000 $ 2,861,000 $ 9,207,000
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
At December 31, 1997 and 1996, the Company had accrued interest receivable on
investment securities of $139,000 and $117,000, respectively, which is
included in accrued interest receivable in the accompanying consolidated
balance sheets.
During the years ended December 31, 1997 and 1996, the Company sold no held
to maturity investment securities.
F-15
<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
1997 1996
----------------------------
<S> <C> <C>
Held to maturity:
Real estate:
Residential:
One to four units $ 54,680,000 $ 50,671,000
Five or more units 31,588,000 29,573,000
Construction loans 446,000 226,000
Nonresidential 16,671,000 16,449,000
Loans secured by deposit accounts 1,862,000 1,428,000
Other 445,000 83,000
----------------------------
105,692,000 98,430,000
Plus:
Premium on loans purchased 71,000 -
Less:
Loans in process 143,000 130,000
Allowance for loan losses 1,054,000 1,174,000
Deferred loan fees, net 820,000 812,000
Unamortized discounts 57,000 54,000
----------------------------
Loans receivable held to maturity, net 103,689,000 96,260,000
Held for sale - residential real estate,
one to four units 222,000 -
----------------------------
$ 103,911,000 $ 96,260,000
----------------------------
----------------------------
Weighted average interest rate 8.13% 8.21%
----------------------------
----------------------------
</TABLE>
F-16
<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:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------------------------
<S> <C> <C>
Balance at beginning of year $ 1,174,000 $ 896,000
Provision for loan losses 266,000 586,000
Charge-offs (386,000) (308,000)
----------------------------
Balance at end of year $ 1,054,000 $ 1,174,000
----------------------------
----------------------------
</TABLE>
Broadway Federal's loan portfolio yielded a weighted average interest rate of
8.13% and 8.21% at December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, Broadway Federal had accrued interest receivable
on loans of $695,000 and $616,000, respectively, which is included in accrued
interest receivable in the accompanying consolidated balance sheets.
Broadway Federal serviced loans for others totaling $8.2 million and
$7.5 million at December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, Broadway Federal had loans to senior officers
and directors amounting to $224,000 and $229,000, respectively.
The following is a summary of Broadway Federal's nonaccrual loans at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Residential real estate $ 919,000 $ 1,848,000
Other 2,000 26,000
----------------------------
Total nonaccrual loans $ 921,000 $ 1,874,000
----------------------------
----------------------------
</TABLE>
The Bank had no accruing loans which are contractually past due 90 days or more
or restructured loans at December 31, 1997 and 1996.
F-17
<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, 1997 and 1996, if nonaccrual loans had been current
in accordance with their original terms, was $71,000 and $147,000,
respectively. For the years ended December 31, 1997 and 1996, $28,000 and
$68,000, respectively, was actually received on nonaccrual loans and is
included in interest income on loans in the accompanying consolidated
statements of operations. Broadway Federal had no commitments to lend
additional funds to borrowers whose loans are on nonaccrual at December 31,
1997 and 1996.
At December 31, 1997 and 1996, the total recorded investment in impaired
loans was approximately $1.8 million and $2.0 million, respectively. Of these
amounts, $443,000 and $770,000 had a related impairment allowance totaling
$239,000 and $97,000 at December 31, 1997 and 1996, respectively. Provisions
for losses and any related recoveries related to impaired loans are recorded
as part of the allowance for loan losses. During the years ended December 31,
1997 and 1996, Broadway Federal's average investment in impaired loans was
$1.4 million and $2.1 million, respectively, and interest income recorded on
impaired loans during these periods totaled $150,000 and $176,000
respectively, none of which was recorded utilizing the accrual basis method
of accounting. At December 31, 1997, all impaired loans were measured using
the fair value of the loans' collateral.
The table below identifies Broadway Federal's impaired loans by loan type at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
One to four units $ 230,000 $ 474,000
Five or more units 1,531,000 1,519,000
----------------------------
$ 1,761,000 $ 1,993,000
----------------------------
----------------------------
</TABLE>
CREDIT RISK AND CONCENTRATION
Substantially all of Broadway Federal's real estate loans are secured by
properties located in Southern California. At December 31, 1997 and 1996,
approximately 82% of the real estate portfolio consisted of loans secured by
residential real estate. In addition, approximately 16% of the loan portfolio
at December 31, 1997 and 1996, was secured by
F-18
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. LOANS RECEIVABLE, NET (CONTINUED)
CREDIT RISK AND CONCENTRATION (CONTINUED)
nonresidential real estate. Loans secured by church real estate represented
70% and 71% of nonresidential real estate loans at December 31, 1997 and
1996, respectively.
5. REAL ESTATE ACQUIRED THROUGH FORECLOSURE, NET
The following is a summary of real estate acquired through foreclosure, net:
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Real estate acquired through foreclosure $ 1,271,000 $ 1,114,000
Less: valuation allowance 127,000 181,000
----------------------------
Real estate acquired through foreclosure, net $ 1,144,000 $ 933,000
----------------------------
----------------------------
</TABLE>
Activity in the allowance for losses on real estate acquired through
foreclosure during the years ended December 31, 1997 and 1996, is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Balance at beginning of year $ 181,000 $ 218,000
Provision for losses 60,000 283,000
Charge-offs (114,000) (320,000)
----------------------------
Balance at end of year $ 127,000 $ 181,000
----------------------------
----------------------------
</TABLE>
Real estate operations, net, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Net loss from operations of foreclosed
real estate $ (99,000) $ (144,000)
Net gain on sales of foreclosed real estate 29,000 53,000
----------------------------
(70,000) (91,000)
Provision for losses (60,000) (283,000)
----------------------------
Real estate operations, net $ (130,000) $ (374,000)
----------------------------
----------------------------
</TABLE>
F-19
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. INVESTMENT IN CAPITAL STOCK OF THE FHLB
As a member of the Federal Home Loan Bank (FHLB) System, Broadway Federal is
required to own capital stock in FHLB in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the end of
each year, or 5% of its outstanding borrowings from the FHLB. Broadway
Federal was in compliance with this requirement with an investment in FHLB
stock at December 31, 1997 and 1996, of $931,000 and $876,000, respectively.
7. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Land $ 1,918,000 $ 877,000
Office buildings and improvements 1,923,000 1,000,000
Furniture, fixtures and equipment 1,402,000 1,295,000
----------------------------
5,243,000 3,172,000
Less accumulated depreciation (1,248,000) (1,120,000)
----------------------------
Office properties and equipment, net $ 3,995,000 $ 2,052,000
----------------------------
----------------------------
</TABLE>
F-20
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. SAVINGS DEPOSITS
A summary of deposits by type of account and interest rate at December 31 is as
follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------
RATE* AMOUNT RATE* AMOUNT
--------------------------------------------------------
<S> <C> <C> <C> <C>
Balance by account type:
NOW account and other demand deposits .58% $ 12,894,000 .62% $ 11,325,000
Passbook 2.00 28,118,000 2.00 30,024,000
Variable-rate time deposits:
3 months 3.79% 2,093,000 3.75 1,448,000
18 months 5.00 988,000 5.20 1,039,000
Fixed index 5.35 44,785,000 5.32 45,104,000
Negotiable time deposits ($100,000 or more) 5.12 16,767,000 4.66 9,599,000
Money market deposits 2.24 4,222,000 2.24 3,455,000
-------------- ---------------
$ 109,867,000 $ 101,994,000
-------------- ---------------
-------------- ---------------
</TABLE>
*Weighted average interest rate.
The overall weighted average interest rate on deposits was 3.74% and 3.60% at
December 31, 1997 and 1996, respectively.
Savings deposit maturities at December 31, 1997, are summarized as follows:
<TABLE>
<CAPTION>
MATURITY AMOUNT
-------- --------------
<S> <C>
No stated maturity $ 45,301,000
1998 49,947,000
1999 10,850,000
2000 1,782,000
2001 1,006,000
Thereafter 981,000
--------------
$ 109,867,000
--------------
--------------
</TABLE>
F-21
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. SAVINGS DEPOSITS (CONTINUED)
A tabulation of interest expense on deposits at December 31, 1997 and 1996, is
as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
NOW accounts and other demand deposits $ 634,000 $ 676,000
Money market deposits 88,000 94,000
Time deposits 3,273,000 2,748,000
Penalty for early withdrawals (29,000) (42,000)
----------------------------
$ 3,966,000 $ 3,476,000
----------------------------
----------------------------
</TABLE>
At December 31, 1997 and 1996, the Company had accrued interest payable on
deposits of $69,000 and $53,000, respectively, which is included in deposits in
the accompanying consolidated balance sheets.
The Company had $1,215,000 in brokered deposits at December 31, 1997 and
$247,000 at December 31, 1996.
9. FHLB ADVANCES
Pursuant to collateral agreements with the FHLB, advances are secured by 290
loans and 134 loans, representing $18.8 million and $9.2 million as of
December 31, 1997 and 1996, respectively. The borrowing capacity with the FHLB
approximates $16.3 million and $7.3 million as of December 31, 1997 and 1996,
respectively. There were no borrowings outstanding with the FHLB as of
December 31, 1997 and 1996.
F-22
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES
The following is a summary of the provision for income tax expense (benefit):
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Current taxes:
Federal income $ 319,000 $ -
State franchise 3,000 3,000
----------------------------
322,000 3,000
----------------------------
Deferred taxes:
Federal income 37,000 (67,000)
State franchise 44,000 (115,000)
----------------------------
81,000 (182,000)
----------------------------
$ 403,000 $ (179,000)
----------------------------
----------------------------
</TABLE>
A reconciliation of income taxes and the amounts computed by applying the
statutory federal income tax rates to earnings before income taxes follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Computed expected federal taxes $ 327,000 $ (155,000)
Increases (reductions) to taxes resulting from:
California franchise tax (benefit), net of
federal income tax (benefit) 71,000 (34,000)
Other 5,000 10,000
----------------------------
$ 403,000 $ (179,000)
----------------------------
----------------------------
</TABLE>
In prior years, Broadway Federal had qualified under the provision of the
Internal Revenue Code which allowed it to deduct, within limitations, a bad
debt deduction computed as a percentage of taxable income before such
deductions. Alternatively, Broadway Federal could deduct from taxable income
as allowance for bad debts based upon the experience method. Under provisions
of the Small Provision Job Protection Act of 1996, Broadway Federal lost the
use of the method of calculating a bad debt deduction based on a percentage
of taxable income. However, Broadway Federal may continue to maintain an
allowance for bad debts based on the experience method, and its tax allowance
for bad debts has been maintained under such method.
F-23
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
Retained earnings at December 31, 1997 and 1996, is substantially restricted
for tax purposes and includes $3,013,000 in all periods, for which no
provision for federal income tax has been made. If, in the future, this tax
bad debt reserve is used for any purpose other than to absorb bad debt
losses, federal income taxes may be imposed at the then applicable rates.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996, are presented below:
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
Deferred tax assets:
Loan valuation allowances deferred for tax $ 402,000 $ 504,000
Allowance for loss 151,000 120,000
State franchise tax liability - 41,000
REO 116,000 -
Other 91,000 71,000
----------------------------
Net deferred tax assets 760,000 736,000
----------------------------
Deferred tax liabilities:
Basis difference on fixed assets 454,000 456,000
Deferred loan fees 366,000 334,000
FHLB stock dividend 384,000 363,000
Other 19,000 35,000
----------------------------
Total gross deferred tax liabilities 1,223,000 1,188,000
----------------------------
Net deferred tax liability $ 463,000 $ 452,000
----------------------------
----------------------------
</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
F-24
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
benefits include (i) taxable income in the current year or prior years that
is available through carrybacks, (ii) future taxable income that will result
from the reversal of existing taxable temporary differences, and (iii) future
taxable income generated by future operations. Based on an evaluation of its
realizability of its gross deferred tax assets, management believes that it
is more likely than not that Broadway Federal will realize the tax benefit
related to these assets.
11. EMPLOYEE BENEFIT PLANS
BROADWAY FEDERAL 401(k) PLAN
In 1995, Broadway Federal established a 401(k) Plan in which employees may
elect to enroll each January 1 or July 1 of every year provided that they are
at least 21-years of age and have been employed for a least one year prior to
the semiannual enrollment date. Employees may contribute up to 15 percent of
their pretax annual salary with the Company matching up to 100 percent of the
employee's contribution, not to exceed three percent of that employee's base
salary. In 1997 and 1996, Broadway Federal's contribution amounted to $50,600
and $14,000, respectively.
STOCK PROGRAMS
In 1996, the stockholders of the Company ratified two stock programs, the
Broadway Federal Bank, f.s.b. 1996 Performance Equity Program for Officers
and Employees (the PEP) of Broadway Federal and its subsidiary and the
Recognition and Retention Plan for Outside Directors (the RRP, and together
with the PEP, the Stock Programs). During 1997, the names of the Stock
Programs were amended to Broadway Financial Corporation Performance Equity
Program for Officers and Employees, and Broadway Financial Corporation
Recognition and Retention Plan for Outside Directors. The effective date of
the Stock Programs was changed from December 1, 1995 to August 1, 1997. The
Stock Programs are designed to encourage recipients of share awards to remain
with the Company and to promote the Company's growth and profitability.
F-25
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK PROGRAMS (CONTINUED)
The RRP is designed to recognize outside directors of experience and ability
by providing such persons with a proprietary interest in the Company as
compensation for their contributions to the Company and its affiliates and as
an incentive to make such contributions. Under the RRP each Outside Director
serving in such capacity as of the date of Conversion (February 9, 1996), is
granted a "Fixed Award" of shares and a "Fixed Service Award" of shares. The
shares awarded under the RRP will become vested at the rate of twenty percent
(20%) annually commencing one year from the date of grant. For the RRP, an
aggregate of 8,034 shares of common stock were acquired during 1997 for award
pursuant to the plan and on September 17, 1997, the grant date, a total of
4,872 shares were granted to Outside Directors for the first time. At
December 31, 1997, none of the shares granted are exercisable.
The PEP is designed to retain officers and employees of experience and
ability by providing such persons with a proprietary interest in the Company
as an additional incentive to perform in a superior manner. Under the PEP,
all employees of the Company and its affiliates are eligible to receive both
base and predetermined performance grants of shares. Performance grants are
based upon achievement of specified performance goals. Base and performance
grants awarded will become vested at the rate of twenty percent (20%)
annually commencing one year from the date of grant. For the PEP, an
aggregate of 18,747 shares of common stock were acquired during 1997 for
award pursuant to the plan and on September 17, 1997, the grant date, a total
of 15,998 shares were granted for the first time. As of December 31, 1997,
none of the shares granted are exercisable.
F-26
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK PROGRAMS (CONTINUED)
<TABLE>
<CAPTION>
STOCK PROGRAMS
----------------------------------------------------------------------------------
PEP RPP TOTAL
----------------------------------------------------------------------------------
SHARES PRICE* SHARES PRICE* SHARES PRICE
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 1997 - - - - - -
Granted 15,998 $ 11 4,872 $ 11 20,870 $ 11
Exercised - - - - - -
Expired or canceled - - - - - -
----------------------------------------------------------------------------------
Outstanding at December 31, 1997 15,998 $ 11 4,872 $ 11 20,870 $ 11
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>
*At date of grant.
EMPLOYEE STOCK OWNERSHIP PLAN
As part of the conversion, an Employee Stock Ownership Plan (ESOP) was
established for all employees who attain a certain age and have completed one
year of service during which they served a minimum of 1,000 hours. The ESOP
is internally leveraged, with a $625,000 note from the Company. The ESOP
purchased 62,488 shares of the common stock of Broadway Financial Corporation
issued in the Conversion. The loan will be repaid principally from the
Broadway Federal's discretionary contributions to the ESOP, net of dividends
paid, over a period of 10 years. At December 31, 1997 and 1996, the
outstanding balance of the loan was $500,000 and $563,000, respectively,
which is shown as Unearned ESOP in the equity section of the balance sheets.
Shares purchased with the loan proceeds are held in a suspense account for
allocation among participants as the loan is repaid. Contributions to the
ESOP and shares released from the suspense account are allocated among
participants on the basis of compensation, as described in the plan, in the
year of allocation. Benefits generally become 100% vested after seven years
of credited service, with 20% of the shares vesting each year commencing with
the participant's completion of the third year of credited service under the
ESOP. Prior to the completion of seven years of credited service, a
participant who terminates employment for reasons other than death,
retirement, disability, or a change in control of Broadway Federal or the
Company, will not receive any benefit if such termination is prior to the
participant's completion of three years of credited service. Forfeitures will
be reallocated among the remaining participating employees in the same
F-27
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
proportion as contributions. Participants will become fully vested in the
shares allocated to their accounts upon a change in control of Broadway
Federal or the Company. Benefits are payable upon retirement, death or
disability of the participant.
Since the quarterly contributions are discretionary, the benefits payable
under the ESOP cannot be estimated. Broadway Federal's contributions related
to the ESOP totaled $111,000 and $112,000 for the years ended December 31,
1997 and 1996, respectively, which is net of dividends of approximately
$15,600 and $9,400, respectively.
Of the 62,488 ESOP shares purchased during the years ended December 31, 1997
and 1996, 8,102 and 6,249 shares, respectively, were allocated, leaving an
unallocated balance of 48,137 and 56,239 shares at December 31, 1997 and
1996, respectively. The fair value of unallocated ESOP shares totaled
$721,000 and $520,000 at December 31, 1997 and 1996, respectively.
STOCK OPTION PLANS
In 1996, the stockholders of the Company ratified two stock option plans, the
Company's Long-Term Incentive Plan (the LTIP) and the 1996 Stock Option Plan
for Outside Directors (the Stock Option Plan, and together with the LTIP,
Stock Option Plans). During 1997, the effective date of the Stock Option Plan
was changed from December 1, 1995 to August 1, 1997.
The LTIP is a nonqualified stock option plan, designed to attract and retain
qualified personnel in key positions to provide officers and key employees
with a proprietary interest in the Company as an incentive to contribute to
the success of the Company and to reward key employees for outstanding
performance. Options granted under the LTIP will entitle the recipients to
purchase specified numbers of shares of the Company's common stock at a fixed
price and are exercisable for up to 10 years from the date of grant. Such
options will become vested and exercisable at the rate of twenty percent
(20%) annually commencing one year from the date of grant. No options were
granted under the LTIP during the year ended December 31, 1996. An aggregate
of 62,488 options are available for issuance under the plan. On September 17,
1997, options to purchase 43,909 shares were granted. As of December 31,
1997, none of these options are exercisable.
F-28
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The purpose of the Stock Option Plan is to promote the growth and
profitability of the Company and Broadway Federal by providing Outside
Directors with an incentive to achieve long-term objectives of the Company.
This plan is also intended to assist in retaining and attracting nonemployee
directors of outstanding competence by providing such outside directors with
an opportunity to acquire an equity interest in the Company. Options granted
under the Stock Option Plan become vested and exercisable at the rate of
twenty percent (20%) annually commencing one year from the date of grant and
are exercisable for up to 10 years from the date of grant . No options were
granted under the Stock Option Plan during the year ended December 31, 1996.
An aggregate of 26,781 options are available for issuance under the plan. On
September 17, 1997, options to purchase 17,264 shares were granted. As of
December 31, 1997, none of these options are exercisable.
<TABLE>
<CAPTION>
STOCK OPTION PLANS
----------------------------------------------------------------------------
LTIP STOCK OPTION PLAN TOTAL
----------------------------------------------------------------------------
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 1997 - $ - - $ - - $ -
Granted 43,909 11 17,264 11 61,173 11
Exercised - - - - - -
Expired or canceled - - - - - -
----------------------------------------------------------------------------
Outstanding at December 31, 1997 43,909 $ 11 17,264 $ 11 61,173 $ 11
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
Effective January 1, 1997 the Company adopted Statement of Financial
Accounting Standards No. 123 (SFAS No.123,) "Accounting for Stock-Based
Compensation." SFAS No. 123 provides for companies to recognize compensation
expense associated with stock-based compensation plans over the anticipated
service period on the fair value of the award on the date of grant. However,
SFAS No. 123 allows companies to continue to measure compensation costs
prescribed by APB opinion No. 25, "Accounting for Stock Issued to Employees."
Companies electing to continue accounting for stock-based compensation plans
under APB opinion No. 25 must make pro forma disclosure of net income and
earnings per share as if SFAS No. 123 has been adopted if the fair value of
the options has material impact on earnings. The Company has elected to
account for stock-based compensation plans under APB opinion No. 25.
F-29
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The Black-Scholes Option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing model does not necessarily provide a
reliable single measure of the fair value of its employee stock options.
The fair value of options granted by the Company in 1997 was estimated at the
date of grant using a Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<S> <C>
Risk free interest rate 6.50%
Expected volatility 30.10%
Expected dividend yield 2.00%
Expected option life 10 years
Approximate fair value of options granted $ 3.44
</TABLE>
The impact of applying SFAS No. 123 in 1997 is immaterial to the financial
statements of the Company at December 31, 1997.
F-30
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
12. COMMITMENTS AND CONTINGENT LIABILITIES
The Company, through Broadway Federal, leases certain premises and equipment
on a long-term basis. Some of these leases require that Broadway Federal pay
property taxes and insurance. Lease expense was approximately $82,000 in 1997
and $140,000 in 1996. Annual minimum lease commitments attributable to
long-term leases at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
PREMISES EQUIPMENT TOTAL
--------------------------------------------
<S> <C> <C> <C>
Year ending December 31:
1998 $ 41,000 $ 46,000 $ 87,000
1999 41,000 35,000 76,000
2000 41,000 16,000 57,000
2001 41,000 41,000
2002 41,000 41,000
Thereafter through 2013 401,000 401,000
--------------------------------------------
$ 606,000 $ 97,000 $ 703,000
--------------------------------------------
--------------------------------------------
</TABLE>
Broadway Federal had commitments to originate loans of approximately $1.0
million and $1.7 million, respectively, at December 31, 1997 and 1996.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since certain commitments are
expected to expire without being drawn, the total commitment amounts do not
necessarily represent future cash requirements. Broadway Federal minimizes
its exposure to loss under these commitments by requiring that customers meet
certain conditions prior to disbursing funds. The amount of collateral
obtained, if any, is based on a credit evaluation of the borrower and
generally involves residential real estate.
Broadway Federal had commitments to sell $222,000 of loans and no commitments
to purchase loans at December 31, 1997. At December 31, 1996, there were no
commitments to sell or purchase loans.
In the ordinary course of business, the Company and Broadway Federal become
involved in litigation. In the opinion of management, and based in part upon
opinions of legal counsel, the disposition of any suits pending against the
Company and Broadway Federal would not have a material adverse effect on the
Company's financial position at December 31, 1997 or results of operations
for the year then ended.
F-31
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
13. YEAR 2000 (UNAUDITED)
Until recently computer programs were written to store only two digits of
date-related information in order to more efficiently handle and store data.
Thus, programs were unable to properly distinguish between the year 1900 and
the year 2000. This is frequently referred to as the "Year 2000 Problem."
During 1997, the Company initiated an organization-wide Year 2000 Project to
address this issue. Utilizing both internal and external resources, the
Company is in the process of defining, assessing and converting, or replacing
various programs, equipment and instrumentation systems to make them Year
2000 compatible. The Company's Year 2000 project is comprised of two
components-business applications and equipment. The business applications
component consists of the Company's business computer systems, as well as the
computer systems of third-party suppliers or customers whose Year 2000
problems could potentially impact the Company. Equipment exposures consist of
the micro-processors with the power of small computers that are embedded
within operating equipment such as pumps, compressors, elevators and furnaces.
BUSINESS APPLICATIONS AND EQUIPMENT
In 1997 the Company began to diligently assess its systems needs for the Year
2000 and beyond. This assessment included an analysis of the benefits and
limitations of the existing systems. Based upon this analysis and upon the
fact that the Company's outside service bureau has stated that they are not
planning to make Year 2000 programming changes, the Company determined that
it will convert its entire deposit, loan and general ledger systems to a new
service bureau as part of its Year 2000 Action Plan. In addition, as part of
the complete conversion, the Company will replace most of its internal
personal computer equipment and software. The new service bureau, software
and equipment which represents approximately 98% of the Company's business
computer programs and equipment, will be Year 2000 compliant, and is
anticipated to cost approximately $170,000. The remaining 2% of business
application programs and equipment will be made compliant through the Year
2000 project, and all noncompliant programs and equipment will be retired. It
is anticipated that this project will be completed by December 1998. The
Company is also identifying and prioritizing critical suppliers and customers
and will follow up with them concerning their plans and progress in
addressing the Year 2000 Problem. This portion of the Year 2000 project is
expected to cost approximately $40,000 and is being expensed as incurred.
F-32
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
13. YEAR 2000 (UNAUDITED, CONTINUED)
BUSINESS APPLICATIONS AND EQUIPMENT (CONTINUED)
The Company is also currently evaluating the Year 2000 readiness of its other
equipment, such as security, heating and air-conditioning systems, with a
comprehensive inventory of all monitoring and control devices. Work plans
detailing the tasks and resources required to insure equipment Year 2000
readiness by the end of 1998 are expected to be in place by the end of the
second quarter of 1998. Costs associated with other equipment upgrades have
not yet been quantified but will be expensed as incurred.
The Company has ascertained that failure to alleviate the Year 2000 Problem
with its application systems and equipment could result in possible system
failure or miscalculations causing disruptions of operations, including among
other things, a temporary inability to process transactions, send invoices,
or engage in similar normal business activities. These problems could be
substantially alleviated with manual processing. However, this would cause
delays and possible lost production days.
The costs of the Year 2000 modifications and the date of completion will be
closely monitored and are based on management's best estimates. Actual
results, however, could differ from those estimates.
14. REGULATORY CAPITAL
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
(FIRREA) and the capital regulations of the Office of Thrift Supervision
(OTS) promulgated thereunder (Capital Regulations) established three capital
requirements - a "leveraged limit," a "tangible capital requirement" and a
"risk-based capital requirement." These capital standards set forth in the
Capital Regulations must generally be no less stringent than the capital
standards applicable to national banks. The OTS may also establish, on a
case-by-case basis, individual minimum capital requirements for a savings
institution which vary from the requirements that would otherwise apply under
the Capital Regulations. The OTS has not established such individual minimum
capital requirements for Broadway Federal. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on Broadway Federal's financial statements. At
December 31, 1997 and 1996, Broadway Federal was in compliance with such
capital requirements.
F-33
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
14. REGULATORY CAPITAL (CONTINUED)
The leverage limit adopted by the OTS Director under the Capital Regulations
requires a savings institution to maintain "core capital" of not less than 3%
of adjusted total assets, which is the minimum amount required by FIRREA.
"Core capital" generally includes common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and any related
surplus and minority interests in the equity accounts of fully consolidated
subsidiaries.
The tangible capital requirement adopted by the OTS Director requires a
savings institution to maintain "tangible capital" in an amount not less than
1.5% of adjusted total assets, which is the minimum amount required by
FIRREA. "Tangible capital" means core capital less any intangible assets
(including supervisory goodwill), plus purchased mortgage servicing rights,
valued at the lower of the maximum percentage established by the FDIC or the
amount includable in core capital as defined under the Capital Regulations.
The risk-based capital requirements provide, among other things that the
capital ratio applicable to an asset will be adjusted to reflect the degree
of defined credit risk associated with such asset. In addition, the asset
base for computing a savings institution's risk-based capital requirement
includes off-balance sheet items, including loans and other assets sold with
subordination or recourse. Generally, the Capital Regulations require savings
institutions to maintain "total capital" equal to 8% of risk weighted assets.
"Total capital" for these purposes consists of core capital and supplementary
capital. Supplementary capital includes among other things certain types of
preferred stock and subordinated debt and, subject to certain limitations,
general valuation allowances.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
contains "prompt corrective action" provisions pursuant to which banks and
savings institutions are to be classified into one of the five categories
based primarily upon capital adequacy. The OTS regulations implementing the
"prompt corrective action" provisions of FDICIA define the five capital
categories as follows: (i) an institution is "well capitalized" if it has a
total risk-based capital ratio of 10.00% or greater, has a Tier 1 risk-based
capital ratio (Tier 1 capital to total risk-weighted assets) of 6.00% or
greater, has a core capital ratio of 5.00% or greater is not subject to any
written capital order or directive to meet and maintain a specific capital
level or any capital measure; (ii) an institution is "adequately
F-34
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
14. REGULATORY CAPITAL (CONTINUED)
capitalized" if it has a total risk-based capital ratio of 8.00% or greater,
has a Tier 1 risk-based capital ratio of 4.00% or greater and has a core
capital ratio of 4.00% or greater (3% for certain highly rated institutions);
(iii) an institution is "undercapitalized" if it has a total risk-based
capital ratio of less than 8.00% or has either a Tier 1 risk-based or a core
capital ratio that is less than 4.00%; (iv) an institution is "significantly
undercapitalized" if it has a total risk-based capital ratio that is less
than 7.00%, or has either a Tier 1 risk-based or a core capital ratio that is
less than 3.00%; and (v) an institution is "critically undercapitalized" if
its "tangible equity" (defined in the prompt corrective action regulations to
mean core capital plus cumulative perpetual preferred stock) is equal to or
less than 2.00% of its total assets. The OTS also has authority, after an
opportunity for a hearing, to downgrade an institution from "well
capitalized" to "adequately capitalized," or to subject an "adequately
capitalized" or "undercapitalized" institution to the supervisory actions
applicable to the next lower category, for supervisory concerns. At December
31, 1997 and 1996, Broadway Federal's regulatory capital was in excess of the
amount necessary to be "well capitalized." Management believes there have
been no conditions or events since the last notification by the OTS that
would change the institution's category.
The table below presents Broadway Federal's capital ratios as compared to the
requirements under FIRREA and FDICIA at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
FOR CAPITAL AMOUNT
ADEQUACY REQUIRED TO BE
ACTUAL PURPOSES WELL CAPITALIZED
-------------------------------------------------------------------------------
(Dollars in Thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997:
Leverage/Tangible Ratio $ 10,708 8.63% $ 4,963 4.0% $ 6,204 5.0%
Tier I Risk-based ratio 10,708 13.67 3,133 4.0 4,699 6.0
Total Risk-based ratio 11,587 14.79 6,266 8.0 7,832 10.0
December 31, 1996:
Leverage/Tangible Ratio $ 10,299 9.06% $ 4,587 4.0% $ 5,682 5.0%
Tier I Risk-based ratio 10,299 14.23 2,896 4.0 4,343 6.0
Total Risk-based ratio 11,204 15.48 5,790 8.0 7,239 10.0
</TABLE>
F-35
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
15. FAIR VALUES OF FINANCIAL INSTRUMENTS
Pursuant to the requirements of Statement of Financial Accounting Standards
No. 107 (SFAS No. 107,) "Disclosure about Fair Value of Financial
Instruments," as amended by Statement of Financial Accounting Standards No.
119 (SFAS No. 119,) "Disclosure about Derivative Financial Instruments," the
Company has included the following information about the fair values of its
financial instruments, whether or not such instruments are recognized in the
accompanying consolidated balance sheets. In cases where quoted market prices
are not available, fair values are estimated based upon discounted cash
flows. Those techniques are significantly affected by the assumptions
utilized, including the assumed discount rates and estimates of future cash
flows. In this regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in an immediate sale or other disposition of the instrument.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. All components of accrued
interest receivable and payable are presumed to have approximately equal book
and fair values because the periods over which such amounts are realized are
relatively short. As a result of the assumptions utilized, the aggregate fair
value estimates presented herein do not necessarily represent the Company's
aggregate underlying fair value.
The fair values of investment securities are generally obtained from market
bids for similar or identical securities, or are obtained from quotes from
independent security brokers or dealers.
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as one to four units,
multifamily, nonresidential real estate and other. Each loan category is
further segmented into fixed and adjustable rate interest terms and by
performing and nonperforming categories.
The fair value of performing loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount
rates that reflect the credit and interest rate risk inherent in the loan.
The estimate of maturity is based on the contractual term of the loans to
maturity, adjusted for estimated prepayments.
The fair value of nonperforming loans is based on discounting cash flows.
Estimated cash flows are discounted using a rate commensurate with the risk
associated with the estimated cash flows. Assumptions regarding credit risk,
cash flows and discount rates
F-36
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
15. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
are judgmentally determined using available market information and specific
borrower information.
The fair values of deposits are estimated based upon the type of deposit
product. Demand and money market deposits are presumed to have equal book and
fair values. The estimated fair values of time deposits are determined by
discounting the cash flows of segments of deposits having similar maturities
and rates, utilizing a yield curve that approximates the rates offered as of
the reporting date.
The fair values of commitments to extend credit are based on rates for
similar transactions as of the reporting date.
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1997.
<TABLE>
<CAPTION>
CARRYING
OR NOTIONAL FAIR
VALUE VALUE
-----------------------------
<S> <C> <C>
Assets:
Cash and federal funds sold $ 4,831,000 $ 4,831,000
Investment securities 9,207,000 9,220,000
Loans receivable 103,911,000 108,713,000
Federal Home Loan Bank stock 931,000 931,000
Liabilities:
Savings deposits 109,867,000 110,186,000
Off-balance sheet:
Commitments to extend credit $ 1,004,000 $ 1,004,000
</TABLE>
F-37
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
16. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
The Company was incorporated under Delaware law on September 25, 1995, for
the purpose of acquiring and holding all of the outstanding capital stock of
Broadway Federal as part of Broadway Federal's Conversion from a federally
chartered mutual savings association to a federally chartered stock savings
bank, effective November 13, 1995. The Conversion was completed and Broadway
Federal became a wholly owned subsidiary of the Company on January 8, 1996.
In connection with the Conversion, the Company issued and sold to the public
892,688 shares of its common stock (par value $.01 per share) at a price of
$10.00 per share. In addition, the Company issued 91,073 shares of its
noncumulative perpetual preferred stock (par value $.01 per share) also at
$10.00 per share. The proceeds, net of approximately $760,000 in conversion
costs received by the Company from the Conversion (before deduction of
$893,000 to fund employee stock plans), amounted to $9,077,000. The Company
retained 50% of the net common stock proceeds and used the remaining net
common stock proceeds and all of the preferred stock proceeds to purchase the
capital stock of Broadway Federal. Prior to the completion of the Conversion,
the Company had no assets or liabilities and did not conduct any business
other than of an organizational nature.
Prior to the Conversion, in the event of a complete liquidation of Broadway
Federal, each holder of a deposit account in Broadway Federal would receive a
pro rata share of any assets of Broadway Federal remaining after payment of
the valid claims of all creditors having greater priority, including the
claims of all depositors to the withdrawal value of their accounts, which
includes accrued interest. Such holder's pro rata share of such remaining
assets, if any, would be in the same proportion of such assets as the value
of such holder's deposit account was to the total value of all deposit
accounts in Broadway Federal at the time of liquidation. Pursuant to the
"depositor preference" rights of federal law, the claims of depositors of
federally insured institutions to the withdrawal value of their accounts is
given a priority over the claims of most other unsecured creditors.
The Plan of Conversion provided that, upon completion of the Conversion, a
"Liquidation Account" will be established on Broadway Federal's books for the
benefit of Eligible Account Holders and Supplemental Eligible Account
Holders. The amount of the Liquidation Account will be equal to the
regulatory capital (retained earnings) of Broadway Federal as of the date of
its latest statement of financial condition contained in the final prospectus
relating to the sale of shares of common stock in the Conversion.
F-38
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
16. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP (CONTINUED)
At the time of the Conversion, Broadway Federal established a liquidation
account in the amount of $5.3 million which was equal to its total retained
earnings as of June 30, 1995. The liquidation account will be maintained for
the benefit of eligible account holders who continue to maintain their
accounts at Broadway Federal after the Conversion. The liquidation account
will be reduced periodically to the extent that eligible account holders have
reduced their qualifying deposits. At December 31, 1997, the liquidation
account had been reduced to approximately $4.2 million. Subsequent increases
in deposit accounts will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each
eligible account holder will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held.
Broadway Federal may not declare or pay cash dividends on or repurchase any
of its shares of common stock, if the effect would cause stockholder's equity
to be reduced below applicable regulatory capital maintenance requirements or
if such declaration and payment would otherwise violate regulatory
requirements.
17. STOCK REPURCHASE PROGRAM
During 1997, the Company acquired 61,854 shares of common stock in the open
market to fund stock-based management recognition programs and redeem Series
A Preferred stock. The purchased shares represented approximately 6.929% of
the outstanding common stock before the purchase, of which 3.929% (35,073
shares) were for the redemption of Series A Preferred stock and 3.000%
(26,781 shares) were for the awards under the Company's stock programs. The
repurchase prices during the year ranged from $10.75 to $11.00 per share with
an average stock repurchase price of approximately $10.87 per share. During
the year ended December 31, 1997, 35,874 shares of preferred stock were
converted to 32,613 shares of common stock through exchange.
F-39
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
18. EARNINGS PER SHARE
Under its stock-based compensation plans (see Note 11 - Employee Benefit
Plans), no options were granted by the Company for the year ended December
31, 1996. Stock options and shares were granted on September 17, 1997, by
resolution of the board of directors. The grants had no impact on the basic
EPS computations as all the necessary conditions for the issuance of shares
under the Stock Programs and Stock Option Plans have not been satisfied at
December 31, 1997. For the year ended December 31, 1996, basic earnings per
share are computed on earnings for the period beginning January 8, 1996 , the
date of Conversion to stock form, to December 31, 1996, and are based on the
weighted average number of shares outstanding during that period. Similarly,
basic earnings per share for the year ended December 31, 1997, are computed
based on earnings for 1997 and the weighted average number of shares
outstanding during that year.
The Company's stock-based compensation awards were considered outstanding as
of the grant date for purposes of computing EPS - assuming dilution in
accordance with SFAS No. 128 at December 31, 1997. The dilutive effect of
stock awards and options is calculated under the treasury stock method using
the average market price during the period these shares and options were
outstanding. The following table sets forth the computation of earnings per
share and earnings per share - assuming dilution:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
------------------------------------------------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net earnings (loss) $ 558,526 - - $ (277,129) - -
Less: Preferred stock dividends (41,052) - - (45,537) - -
------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Income available to common stockholders $ 517,474 852,007 $ 0.61 $ (322,666) 893,688 $ (0.36)
EFFECT OF DILUTIVE SECURITIES
Stock Programs - 7,203 - - - -
Stock Option Programs - 1,432 - - - -
------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE-ASSUMING DILUTION
Income available to common stockholders
plus assumed conversions $ 517,474 860,642 $ 0.60 $ (322,666) 893,688 $ (0.36)
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
F-40
<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>
1997
Interest income $ 2,216 $ 2,289 $ 2,281 $ 2,334 $ 9,120
Interest expense 935 981 1,009 1,060 3,985
Net interest income 1,281 1,308 1,272 1,274 5,135
Provision for loan losses 30 47 75 114 266
Net earnings 63 145 102 249 559
Earnings per share of common stock (1) .07 .16 .11 .29 .61
Earnings per share - assuming diluted (1) .07 .16 .11 .29 .60
Market range:
High bid 11.25 11.25 11.50 13.38 13.38
Low bid 10.25 10.75 10.75 13.00 10.25
1996
Interest income $ 2,148 $ 2,161 $ 2,225 $ 2,213 $ 8,747
Interest expense 864 865 864 888 3,481
Net interest income 1,284 1,296 1,361 1,325 5,266
Provision for loan losses 55 188 255 88 586
Net earnings 114 (54) (378) 41 (277)
Earnings (loss) per share of common stock (1) 0.12 (0.07) (0.44) 0.03 (0.36)
Earnings per share - assuming diluted (1) 0.12 (0.07) (0.44) 0.03 (0.36)
Market range:
High bid 10.75 10.00 10.00 9.75 10.75
Low bid 10.25 10.00 9.63 9.13 9.13
</TABLE>
(1) The sum of the quarterly earnings per share amounts may not equal the
amount for the year because per share amounts are computed independently
for each quarter and the full year based upon respective weighted average
shares of common stock outstanding. For earnings per share-assuming
diluted, the weighted average shares of common stock are adjusted for the
contingently issuable shares under the Company's stock-based compensation
plans for the fourth quarter of 1997, and year-to-date 1997.
F-41
<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 16 - Conversion
to Capital Stock Form of Ownership).
Statements of Financial Condition
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-------------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash $ 1,530 $ 784
Investment securities held to maturity 1,000 2,488
Accrued interest 22 23
Investment in subsidiaries
10,901 10,300
Other assets 3 117
-------------------------
$ 13,456 $ 13,712
-------------------------
-------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 17 $ 68
Stockholders' equity (including $4.2 million
at December 31, 1997 and $5.3 million at
December 31, 1996 representing remaining restricted
retained earnings from conversion
balance retained earnings-See Note 16) 13,439 13,644
-------------------------
$ 13,456 $ 13,712
-------------------------
-------------------------
</TABLE>
F-42
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
20. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
-------------------------
(IN THOUSANDS)
<S> <C> <C>
Interest income $ 98 $ 159
Interest expense - 6
Other income 12 -
Other expense 182 147
Income taxes (benefit) (29) 7
-------------------------
Earnings before equity in earnings (loss)
of subsidiaries (43) (1)
Equity in earnings (loss) of subsidiaries 602 (276)
-------------------------
Net earnings (loss) $ 559 $ (277)
-------------------------
-------------------------
</TABLE>
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
-------------------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ 559 $ (277)
Adjustments to reconcile net earnings (loss)
to cash provided by operating activities:
Equity in (earnings) loss of subsidiaries (602) 276
Decrease (increase) in interest receivable 1 (16)
Decrease (increase) in other assets 114 (117)
Decrease in other liabilities (51) (309)
Amortization and others 1 12
Loss on sale of investment securities - 50
-------------------------
Total adjustments (537) (104)
-------------------------
Net cash provided by (used in) operating activities 22 (381)
</TABLE>
F-43
<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>
1997 1996
-------------------------
(IN THOUSANDS)
<S> <C> <C>
INVESTING ACTIVITIES
Purchases of investment securities held to maturity - (2,488)
Proceeds from maturity of investment securities
held to maturity 1,488 170
Purchases of investment securities available for sale - (1,982)
Sale of investment securities available for sale - 1,762
Purchase of outstanding stock of subsidiaries - (7)
-------------------------
Net cash provided by (used in) investing activities 1,488 (2,545)
FINANCING ACTIVITIES
ESOP payments 121 112
Dividends declared (212) (224)
Decrease in accounts payable - stock issuance - (5,897)
Decrease in stock subscription receivable - 2,505
Treasury stock acquired (673) -
Unearned ESOP - (625)
-------------------------
Net cash used in financing activities (764) (4,129)
-------------------------
Net increase (decrease) in cash and cash equivalents 746 (7,055)
Cash and cash equivalents, beginning of year 784 7,839
-------------------------
Cash and cash equivalents, end of year $ 1,530 $ 784
-------------------------
-------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Common stock exchanged for preferred stock $ (359) $ -
</TABLE>
F-44
<PAGE>
BROADWAY FINANCIAL CORPORATION
RECOGNITION AND RETENTION PLAN
FOR OUTSIDE DIRECTORS
ARTICLE I
ESTABLISHMENT OF PLAN
I.1 Broadway Financial Corporation, a Delaware corporation (the
"COMPANY"), hereby establishes this Recognition and Retention Plan ("PLAN") upon
the terms and conditions hereinafter stated in this Plan.
ARTICLE II
PURPOSE OF PLAN
II.1 The purpose of this Plan is to recognize Outside Directors (as defined
herein) 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, including the Bank, (each as defined herein) and as an
incentive to make such contributions and to promote the Company's growth and
profitability in the future.
ARTICLE III
DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meanings set forth below. Whenever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural.
III.1 "AFFILIATE" means (i) a member of a controlled group of
corporations of which the Company is a member or (ii) an unincorporated trade or
business which is under common control with the Company as determined in
accordance with Section 414(c) of the Internal Revenue Code of 1986, as amended
(the "CODE"), and the regulations issued thereunder. For purposes hereof, a
"controlled group of corporations" shall mean a controlled group of corporations
as defined in Section 1563(a) of the Code determined without regard to Section
1563(a)(4) and (e)(3)(C).
III.2 "BANK" means Broadway Federal Bank, f.s.b.
1
<PAGE>
III.3 "BENEFICIARY" means the person or persons designated by a
Recipient to receive any benefits payable under this Plan in the event of such
Recipient's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or if none, his or her estate.
III.4 "BOARD" means the Board of Directors of the Company.
III.5 "Change in Control" of the Bank or the Company means an event of
a nature that: (i) would be required to be reported in response to Item 1(a) of
a current report filed on Form 8-K pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") as in effect on
the Effective Date of this Plan; or (ii) results in any person acquiring control
of the Bank or the Company within the meaning of the Home Owner's Loan Act of
1933, as amended, and the rules and regulations promulgated by the Office of
Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the
Effective Date of this Plan (provided, that in applying the definition of change
in control as set forth under the rules and regulations of the OTS, the Board
shall substitute its judgment for that of the OTS); and, without limitation,
such a Change in Control shall be deemed to have occurred at such time as
(A) any "person" (as that term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act and the regulations of the SEC thereunder, each as in
effect on the date of the adoption of this Plan by the Board, directly or
indirectly, of securities of the Bank or the Company representing 20% or more of
the combined voting power of the Bank's or the Company's outstanding securities
except for any securities of the Bank purchased by the Company in connection
with the conversion of the Bank to stock form and any securities purchased by
any tax qualified employee benefit plans of the Bank or the Company; or
(B) individuals who constitute the Board of Directors of the Company on the date
of the adoption of this Plan by the Board (the "INCUMBENT BOARD") cease for any
reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least three-quarters of the directors then comprising the Incumbent
Board, or whose nomination for election by the Company's stockholders was
approved by the same nominating committee serving under an Incumbent Board,
shall be, for purposes of this clause (B), considered as though he or she were a
member of the Incumbent Board; or (C) a plan of liquidation, reorganization,
2
<PAGE>
merger, consolidation, sale of all or substantially all the assets of the Bank
or the Company or similar transaction has been approved by the Board and the
stockholders, or otherwise occurs in which the Bank or Company is not the
resulting entity; or (d) a proxy statement soliciting proxies from stockholders
of the Company, by someone other than the current management of the Company,
seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Company or the Bank or similar transaction with one or more
corporations as a result of which the outstanding shares of the class of
securities then subject to the plan or transaction are exchanged for or
converted into cash or property, or securities not issued by the Bank or the
Company shall be distributed; or (E) a tender offer is made for 20% or more of
the voting securities of the Bank or the Company.
III.6 "COMMITTEE" means the committee of the Board administering this
Plan, which shall be comprised of members of the Board who are "disinterested
directors" as that term is defined under Rule 16b-3 under the Exchange Act, as
promulgated by the Securities and Exchange Commission.
III.7 "COMMON STOCK" means shares of the common stock, $.01 par value
per share, of the Company.
III.8 "COMPANY" means Broadway Financial Corporation, the parent
holding company of the Bank.
III.9 "CONVERSION" shall mean the conversion of the Bank from the
mutual to stock form of organization and the acquisition of the Bank by the
Company.
III.10 "DISABILITY" means the permanent and total inability by reason of
mental or physical inability, or both, of a Recipient to perform his or her
responsibilities as an Outside Director. A medical doctor selected or approved
by the Board of Directors must advise the Committee that it is either not
possible to determine when such Disability will terminate or that it appears
probable that such Disability will be permanent during the remainder of such
Recipient's lifetime.
III.11 "EFFECTIVE DATE" means August 1, 1997.
III.12 "EMPLOYEE" means any person who is currently employed on a full
time basis by the Company or an Affiliate, including officers, but such term
shall not include Outside Directors or Directors Emeriti.
III.13 "OUTSIDE DIRECTOR" means a member of the Board of
3
<PAGE>
Directors of the Company or an Affiliate, who is not also an Employee.
III.14 "PLAN SHARES" means shares of Common Stock held in the Trust and
issued or issuable to a Recipient pursuant to this Plan.
III.15 "PLAN SHARE AWARD" means a right granted under this Plan to earn
Plan Shares.
III.16 "PLAN SHARE RESERVE" means the shares of Common Stock held by the
Trustee pursuant to Sections 5.2 and 5.3.
III.17 "RECIPIENT" means an Outside Director who receives a Plan Share
Award under this Plan.
III.18 "RETIREMENT" means the termination of service from the Board of
Directors of the Company and/or an Affiliate Company following written notice to
the Board as a whole of such Outside Director's intention to retire or
retirement in accordance with the Company's bylaws or applicable Board policy,
or after reaching age 65, except that a Recipient shall not be deemed to have
retired for purposes of this Plan in the event he or she continues to serve as a
consultant to the Board or as an advisory director.
III.19 "TRUST" means the trust created by the trust agreement between
the Trustee and the Company established to hold Plan assets.
III.20 "TRUSTEE" means that person or persons and entity or entities
approved by the Board to hold legal title to any Plan assets for the purposes
set forth herein.
ARTICLE IV
ADMINISTRATION OF THE PLAN
IV.1 ROLE OF THE BOARD AND THE COMMITTEE. The Trustee and the members of
the Committee provided for in this Plan shall each be appointed or approved by,
and shall serve at the pleasure of, the Board. The Committee shall have
authority to interpret and administer the provisions of this Plan and shall have
the other powers allocated to it in this and other sections of this Plan.
IV.2 LIMITATION ON LIABILITY. No member of the Board or the Committee or
any Trustee(s) shall be liable for any determination made in good faith with
respect to this Plan or any Plan Shares or Plan Share Awards granted under it.
If a member of the Board
4
<PAGE>
or the Committee is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of anything done or not
done by him or her in such capacity under or with respect to this Plan, the Bank
shall indemnify such member against any expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him or her in connection with such action, suit or proceeding if he or she
acted in good faith and in a manner he or she reasonably believed to be in the
best interests of the Bank and its Affiliates and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his or her conduct was
unlawful.
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
V.1 AMOUNT AND TIMING OF CONTRIBUTIONS. At the Effective Date and
thereafter as necessary, the Bank shall contribute to the Trust an amount
sufficient to purchase up to 8,034 shares of Common Stock. No contributions by
Outside Directors shall be permitted. The Trustee may hold and commingle
contributions to this Plan and earnings thereon with the assets of any other
Recognition and Retention Plan maintained by the Company.
V.2 INVESTMENT OF TRUST ASSETS; CREATION OF PLAN SHARE RESERVE. The
Trustee shall invest all of the Trust's assets exclusively in Common Stock
except as otherwise provided below; PROVIDED, HOWEVER, that the Trust shall not
invest in more than 8,034 shares of Common Stock, which shares shall constitute
the initial "Plan Share Reserve." The Trustee, in accordance with applicable
rules and regulations, shall purchase shares of Common Stock in the open market
or, in the alternative, shall purchase authorized but unissued shares of Common
Stock from the Company, sufficient to fund the Plan Share Reserve. Any earnings
received with respect to Common Stock held in the Plan Share Reserve shall be
held in an interest-bearing account. Any earnings received with respect to
Common Stock subject to a Plan Share Award shall be held in an interest-bearing
account on behalf of the individual Recipient.
V.3 EFFECT OF ALLOCATIONS, RETURNS AND FORFEITURES UPON PLAN SHARE
RESERVES. Upon the allocation of Plan Share Awards under Section 6.2, or the
decision of the Committee to return Plan Shares to the Company, the Plan Share
Reserve shall be reduced by the number of Plan Shares subject to the Plan Share
Awards so allocated or returned. Any Plan Shares subject to a Plan Share Award
which may not be earned because of a forfeiture
5
<PAGE>
by the Recipient pursuant to Section 7.1 shall be returned (added) to the Plan
Share Reserve for future Plan Share Awards.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
VI.1 ELIGIBILITY. Outside Directors of the Company and its Affiliates are
eligible to receive Plan Share Awards.
VI.2 ALLOCATIONS.
(a) Each Outside Director serving in such capacity as of the date of the
Conversion and who is continuing to serve in such capacity at the Effective Date
shall be deemed to be granted a Plan Share Award of 402 Plan Shares (the "FIXED
AWARD"). Each such Outside Director shall also be deemed to be granted
additional Plan Share Awards (the "FIXED SERVICE AWARDS") based on years of
service with the Company, including service with the Bank, which amounts shall
be earned on a non-cumulative basis in accordance with the following schedule:
<TABLE>
<CAPTION>
YEARS OF SERVICE FIXED SERVICE AWARDS
---------------- --------------------
<S> <C>
3 150 Plan Shares
15 300 Plan Shares
17 402 Plan Shares
</TABLE>
(b) Each individual who is first elected as an Outside Director subsequent
to the date of the Conversion ("SUBSEQUENT OUTSIDE DIRECTORS") shall be deemed
to be granted a Plan Share Award of 402 Plan Shares (also referred to herein as
a "FIXED AWARD"), as of the effective date of such election. Upon completion of
3, 15 and 17 years of service as an Outside Director, each Subsequent Outside
Director shall be deemed to be granted Fixed Service Awards as set forth in this
Section 6.2(a). Notwithstanding the preceding, no Plan Share Award shall be
deemed to be granted under this Plan to any Subsequent Outside Director who at
any previous time was an employee of either the Company or an Affiliate and in
such capacity was eligible for a "Plan Share Grant" under the Company's
Performance Equity Program for Officers and Employees.
(c) If sufficient Plan Shares are not available under this Plan for a
Fixed Award or Fixed Service Award to be made to an Outside Director, including
a Subsequent Outside Director, and thereafter Plan Shares become available
through forfeiture or by reason of the purchase of additional shares of Common
Stock by
6
<PAGE>
the Trustee, such Outside Director(s) shall then receive a Plan Share Award,
sharing pro rata among such Outside Directors the number of Plan Shares then
available under this Plan. The date of such Plan Share Award shall be the date
such Plan Shares become available.
VI.3 FORM OF ALLOCATION. As promptly as practicable after a Plan Share
Award has been deemed granted pursuant to Section 6.2, the Recipient shall be
notified in writing of the grant of the Plan Share Award. Such notice shall
include the number of Plan Shares covered by the Plan Share Award and the terms
upon which the Plan Shares subject to the Plan Share Award may be earned. The
Bank shall maintain records as to all grants of Plan Share Awards under this
Plan.
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
VII.1 EARNING PLAN SHARES; FORFEITURES.
(a) GENERAL RULES. Plan Shares subject to a Plan Share Award shall be
deemed earned by a Recipient at the rate of twenty percent (20%) annually of the
aggregate number of shares covered by the Plan Share Award commencing one year
from the date of grant for awards made to Outside Directors serving in such
capacity at the time of Conversion. Subsequent Outside Directors shall be
deemed to earn Plan Shares subject to Plan Share Awards at the rate of twenty
percent (20%) annually commencing one year from the date of grant. If an
Outside Director is not renominated, reelected or otherwise discontinues service
on the Board or the Board of Directors of an Affiliate prior to earning all Plan
Shares subject to a Plan Share Award for any reason (except as specifically
provided in subsections (b) and (c) below), the Recipient shall forfeit the
right to earn any Shares subject to the Plan Share Award which have not
theretofore been earned. In determining the number of Plan Shares which are
earned, fractional shares shall be rounded down to the nearest whole number,
provided that such fractional shares shall be aggregated and earned, on the
fifth anniversary of the date of grant.
(b) EXCEPTION FOR TERMINATIONS DUE TO DEATH, DISABILITY OR CHANGE IN
CONTROL. Notwithstanding the general rule contained in Section 7.1(a) above,
Plan Shares subject to a Plan Share Award held by a Recipient whose service as
an Outside Director with the Company or an Affiliate terminates due to death or
Disability, or, to the extent not prohibited by 12 C.F.R. Section 563b.3(g)(4),
in the event of a Change in Control, shall be deemed earned as of
7
<PAGE>
the Recipient's last day of service with the Company or an Affiliate.
(c) RETIREMENT. Notwithstanding the general rule contained in Section
7.1(a) above, all awards held by a Recipient whose service on the Board of the
Company or the Board of Directors of an Affiliate terminates due to Retirement
and who, as of the Recipient's last day of service as a director of the Company
or an Affiliate, is performing services for the Company or an Affiliate as a
consultant or advisory director of the Company or an Affiliate shall not be
forfeited and shall continue to be earned as determined by the Committee;
PROVIDED, HOWEVER, that any unearned shares shall be forfeited upon such
Recipient's termination of services as a consultant or active advisory director
of the Company or any Affiliate. Plan shares earned pursuant to this subsection
shall be otherwise subject to the provisions of this Plan.
(d) REVOCATION FOR MISCONDUCT. Notwithstanding anything to the contrary,
any Plan Share Award, or portion thereof, previously awarded under this Plan
shall be deemed revoked to the extent Plan Shares have not been delivered
thereunder to the Recipient in the case of an Outside Director who is removed
from the Board of the Company or the Board of Directors of an Affiliate for
cause (as hereinafter defined) by shareholder, regulatory or other appropriate
action. "Cause" is defined as personal dishonesty, incompetence, willful
misconduct, any breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, or the willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or a final cease
and desist order.
VII.2 ACCRUAL OF DIVIDENDS. Whenever Plan Shares are distributed to a
Recipient or Beneficiary under Section 7.3, such Recipient or Beneficiary shall
also be entitled to receive, with respect to each Plan Share distributed, an
amount attributable to any cash dividends and a number of shares of Common Stock
equal to any stock dividends declared and paid with respect to a share of Common
Stock between the date the relevant Plan Share Award was granted and the date
the Plan Shares are being distributed. There shall also be distributed an
appropriate amount of net earnings, if any, of the Trust with respect to any
cash dividends so paid out.
VII.3 DISTRIBUTION OF PLAN SHARES.
(a) TIMING OF DISTRIBUTIONS; GENERAL RULE. Except as provided in
subsection (b) below, Plan Shares shall be distributed to the Recipient or his
or her Beneficiary, as the
8
<PAGE>
case may be, as soon as practicable after they have been earned.
(b) FORM OF DISTRIBUTION. All Plan Shares, together with any shares
representing stock dividends, shall be distributed in the form of Common Stock.
One share of Common Stock shall be distributed for each Plan Share earned and
payable. Payments representing accumulated cash dividends (and earnings
thereon, if any) shall be made in cash or Common Stock.
VII.4 VOTING OF PLAN SHARES. After a Plan Share Award has been
granted, the Recipient shall be entitled to direct the Trustee as to the voting
of the Plan Shares which are covered by the Plan Share Award and which have not
yet been earned and distributed to him or her pursuant to Section 7.3. All
shares of Common Stock held by the Trust as to which Recipients are not entitled
to direct, or have not directed, the voting, shall be voted by the Trustee in
the same proportion as Plan Shares which have been awarded and voted.
ARTICLE VIII
MISCELLANEOUS
VIII.1 ADJUSTMENTS FOR CAPITAL CHANGES. In the event of any change in
the outstanding shares of Common Stock of the Company by reason of any stock
dividend or split, recapitalization, merger, consolidation, spin-off,
reorganization, combination or exchange of shares, or other similar corporate
change, or other increase or decrease in such shares effected without receipt or
payment of consideration by the Company, the number of Plan Shares available for
issuance pursuant to this Plan shall automatically be adjusted to prevent
dilution or enlargement of the rights granted to the Recipient under this Plan.
VIII.2 NONTRANSFERABLE. Plan Share Awards and rights to Plan Shares
shall not be transferrable by a Recipient, and during the lifetime of the
Recipient, Plan Shares may only be earned by and paid to the Recipient who was
notified in writing of the Award by the Committee pursuant to Section 6.3.
VIII.3 RIGHT TO SERVE AS A DIRECTOR. Neither this Plan nor any grant of
a Plan Share Award or Plan Shares hereunder nor any action taken by the Trustee
or the Board in connection with this Plan shall create any right on the part of
any Outside Director to continue in such capacity with the Company or any
Affiliate thereof.
VIII.4 VOTING AND DIVIDEND RIGHTS. No Recipient shall
9
<PAGE>
have any voting or dividend rights or other rights of a stockholder in respect
of any Plan Shares covered by a Plan Share Award, except as expressly provided
in Sections 7.2 and 7.4 above, prior to the time said Plan Shares are actually
distributed to him or her.
VIII.5 AMENDMENT OF PLAN. This Plan may be amended from time to time
by the Board; PROVIDED, that Sections 6.2 and 7.1 hereof shall not be amended
more than once every six months other than to comply with the Code or the
Employee Retirement Income Security Act of 1974, as amended, or the
respective regulations thereunder. Except as provided in Section 8.1 hereof,
rights and obligations under any Plan Share Award granted before an amendment
shall not be altered or impaired by such amendment without the written
consent of the Recipient. If this Plan becomes qualified under 17 C.F.R.
Section 240.16(b)-3 ("RULE 16(b)-3") of the rules and regulations promulgated
under the Exchange Act and an amendment would require stockholder approval
under such Rule 16(b)-3 to retain this Plan's qualification, then subject to
the discretion of the Board, such amendment shall be presented to the
stockholders of the Company for ratification, provided, however, that the
failure to obtain stockholder ratification shall not affect the validity of
this Plan as so amended and the Plan Share Awards granted thereunder.
VIII.6 GOVERNING LAW. This Plan shall be governed by and construed in
accordance with the internal laws of the State of California to the extent not
preempted by the laws of the United States.
VIII.7 [Reserved.]
VIII.8 COMPLIANCE WITH SECTION 16. Transactions under this Plan are
intended to comply with all applicable conditions of Rule 16b-3 or any successor
provision under the Exchange Act. Unless otherwise hereafter determined by the
Board, to the extent any provision of this Plan does not so comply, such
provision shall be deemed null and void, to the extent permitted by law.
VIII.9 TERM OF PLAN. This Plan shall remain in effect until the earlier
of (1) 21 years from the Effective Date, (2) termination of this Plan by a
majority of the outstanding shares of the Common Stock entitled to vote;
PROVIDED, HOWEVER, no such termination shall affect the Recipients' rights under
a previously granted Plan Share Award without the consent of the affected
Recipients, or (3) the distribution of all assets of the Trust. Termination of
this Plan shall not affect any Plan Share Awards previously granted, and such
Plan Share Awards shall
10
<PAGE>
remain valid and in effect until they have been earned and paid, or by their
terms expire or are forfeited.
11
<PAGE>
BROADWAY FINANCIAL CORPORATION
PERFORMANCE EQUITY PROGRAM FOR OFFICERS AND EMPLOYEES
ARTICLE I
ESTABLISHMENT OF THE PLAN
1.01 Broadway Financial Corporation, a Delaware corporation (the "Holding
Company") hereby establishes the Performance Equity Program ("Plan") upon the
terms and conditions set forth herein.
ARTICLE II
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to retain officers and employees of
experience and ability by providing such persons with a proprietary interest the
Holding Company as an additional incentive to perform in a superior manner and
to promote the Company's growth and profitability in the future.
ARTICLE III
DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meanings set forth below. Whenever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural.
3.01 "Affiliate" means (i) a member of a controlled group of corporations
of which the Holding Company is a member or (ii) an unincorporated trade or
business which is under common control with the Holding Company as determined in
accordance with Section 414(c) of the Internal Revenue Code of 1986, as amended,
(the "Code") and the regulations issued thereunder. For purposes hereof, a
"controlled group of corporations" shall mean a controlled group of corporations
as defined in Section 1563(a) of the Code determined without regard to Section
1563(a)(4) and (e)(3)(C).
3.02 "Bank" means Broadway Federal Bank, f.s.b., which is a wholly-owned
subsidiary of the Bank.
3.03 "Base Grant" means a grant of Plan Shares under the Plan.
3.04 "Beneficiary" means the person or persons designated
1
<PAGE>
by a Recipient to receive any benefits payable under the Plan in the event of
such Recipient's death. Such person or persons shall be designated in writing
on forms provided for this purpose by the Committee and may be changed from time
to time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or if none, his estate.
3.05 "Board" means the Board of Directors of the Holding Company.
3.06 "Change in Control" of the Bank or the Holding Company means an event
of a nature that (i) would be required to be reported in response to Item 1 of a
current report on Form 8-K, as in effect on the Effective Date hereof, pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"); or (ii) results in a Change in Control of the Bank or the Holding Company
within the meaning of the Home Owners' Loan Act of 1933, as amended and the
Rules and Regulations promulgated by the Office of Thrift Supervision ("OTS")
(or its predecessor Agency), as in effect on the Effective Date hereof
(provided, that in applying the definition of change in control as set forth
under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); and, without limitation such a Change in Control
shall be deemed to have occurred at such time as (A) any "person" (as the term
is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Bank or the Holding Company representing 20%
or more of the Bank's or the Holding Company's outstanding securities except for
any securities of the Bank purchased by the Holding Company in connection with
the conversion of the Bank to the stock form and any securities purchased by any
tax qualified employee benefit plan of the Bank; or (B) individuals who
constitute the Board on the date hereof (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least three-quarters of the directors then comprising the Incumbent
Board, or whose nomination for election by the Holding Company's stockholders
was approved by the same Nominating Committee serving under an Incumbent Board,
shall be, for purposes of this clause (B), considered as though he or she were a
member of the Incumbent Board; or (C) a plan of liquidation or reorganization,
merger, consolidation, sale of all or substantially all the assets of the Bank
or the Holding Company or similar transaction is approved by the Board or the
Board of Directors of the Holding Company or otherwise occurs in which the Bank
or the Holding Company is not the resulting entity; or (D) solicitations of
shareholders of the Holding Company, by someone other than the current
management of
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the Holding Company, seeking stockholder approval of a plan of reorganization,
merger or consolidation of the Holding Company or Bank or similar transaction
with one or more corporations as a result of which the outstanding shares of the
class of securities then subject to the plan or transaction are exchanged for or
converted into cash or property or securities not issued by the Bank or the
Holding Company shall be distributed; or (E) a tender offer is made for 20% or
more of the voting securities of the Bank or the Holding Company.
3.07 "Committee" means the Committee of the Board administering this Plan,
which shall be comprised of members of the Board of the Bank who are
non-employee directors and "disinterested directors" as that term is defined
under Rule 16b-3 under the Securities Exchange Act of 1934, as amended, (the
"Exchange Act") promulgated by the Securities and Exchange Commission.
3.08 "Common Stock" means shares of the common stock, $.01 par value per
share, of the Holding Company.
3.09 "Conversion" means the conversion of the Bank from the mutual to the
stock form of organization and the acquisition of the Bank by the Holding
Company.
3.10 "Disability" means disability as defined in the Bank's long term
disability plan, or if not so defined, disability shall mean the permanent and
total inability by reason of mental or physical infirmity, or both, of a
Recipient to perform the work customarily assigned to him. If requested by the
Board, a medical doctor selected or approved by the Board of Directors must
advise the Committee that it is either not possible to determine when such
Disability will terminate or that it appears probable that such Disability will
be permanent during the remainder of said Recipient's lifetime.
3.11 "Effective Date" means August 1, 1997.
3.12 "Employee" means any person who is currently employed by the Holding
Company or an Affiliate, including officers, but such term shall not include
Outside Directors.
3.13 "High Performance Allocation" means an allocation of Plan Shares to be
granted upon achievement by the Holding Company of specified High Performance
Goals as established by the Committee pursuant to Section 4.01(b) of this Plan.
3.14 "High Performance Grant" means a grant of Plan Shares based upon
achievement by the Holding Company of specified High Performance Goals as
established by the Committee pursuant to Section 4.01(b) of this Plan.
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<PAGE>
3.15 "Holding Company" means Broadway Financial Corporation.
3.16 "OTS" means Office of Thrift Supervision.
3.17 "Performance Allocation" means an allocation of Plan Shares to be
granted upon achievement by the Holding Company of specified Performance Goals
as established by the Committee in accordance with Section 4.01(b) of this Plan.
3.18 "Performance Grant" means a grant of Plan Shares based upon
achievement by the Holding Company of specified Performance Goals as established
by the Committee in accordance with Section 4.01(b) of this Plan.
3.19 "Plan Share Allocation" means the allocation of Plan Shares under the
Plan to be granted subject to the achievement of Performance Goals or High
Performance Goals.
3.20 "Plan Share Grant" means a right to vest in Plan Shares under the
Plan.
3.21 "Plan Shares" means shares of Common Stock held in the Trust and
issued or issuable to a Recipient pursuant to the Plan.
3.22 "Plan Share Reserve" means the shares of Common Stock held by the
Trustee pursuant to Sections 5.03 and 5.04.
3.23 "Recipient" means an Employee who receives a Plan Share Grant or Plan
Share Allocation under the Plan.
3.24 "Retirement" means retirement at the normal or early retirement date
as set forth in any tax qualified or non-tax qualified retirement or pension
plan of the Bank Holding Company or an Affiliate.
3.25 "Trust" means a trust established by the Board in connection with this
Plan to hold Plan assets for the purpose set forth herein.
3.26 "Trustee" means that person or persons and entity or entities approved
by the Board pursuant to Sections 4.01 and 4.02 to hold legal title to any of
the Plan assets for the purposes set forth herein.
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<PAGE>
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 ROLE OF THE COMMITTEE.
(a) The Plan shall be administered and interpreted by the Committee, which
shall have all of the powers allocated to it in this and other Sections of the
Plan. The interpretation and construction by the Committee of any provisions of
the Plan or of any Plan Share Grant or Plan Share Allocation hereunder shall be
final and binding. The Committee shall act by vote or written consent of a
majority of its members. Subject to the express provisions and limitations of
the Plan, the Committee may adopt such rules, regulations and procedures as it
deems appropriate for the conduct of its affairs. The Committee shall report
its actions and decisions with respect to the Plan to the Board at appropriate
times, but in no event less than one time per calendar year. The Committee
shall recommend to the Board one or more person(s) or entities to act as
Trustee(s) in accordance with the provisions of this Plan and Trust and the
terms of Article VIII hereof.
(b) The Committee shall determine the Recipients under the Plan and the
Base Grants, Performance Allocations and High Performance Allocations to be
granted or allocated to Recipients. The Committee also shall establish the
Performance Goals and High Performance Goals required to be met with respect to
the granting of Performance Grants and High Performance Grants to Employees
under the Plan. Such Performance Goals and High Performance Goals shall be
financial goals of the Bank based upon the Holding Company's return on average
assets as set forth in the Bank's annual Call Report and/or any other
performance standard established by the Committee and approved by the Board.
4.02 ROLE OF THE BOARD. The Trustee(s) for the Plan and the members of the
Committee shall be appointed or approved by, and will serve at the pleasure of,
the Board. The Board shall have all of the powers allocated to it in this and
other Sections of the Plan.
4.03 LIMITATION ON LIABILITY. No member of the Board or the Committee or
any Trustee(s) shall be liable for any determination made in good faith with
respect to the Plan, any Plan Shares, Plan Share Grants or Plan Share
Allocations. If a member of the Board or the Committee is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of anything done or not done by him in such capacity under or with
respect to the
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Plan, the Holding Company shall indemnify such member against expense (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in the best
interests of the Holding Company and its Affiliates and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 AMOUNT AND TIMING OF CONTRIBUTIONS. At the Effective Date and
thereafter as necessary, the Holding Company shall contribute to the Trust an
amount sufficient to purchase 18,747 shares of Common Stock. No contributions
by Employees shall be permitted.
5.02 INVESTMENT OF TRUST ASSETS; CREATION OF PLAN SHARE RESERVE. The
Trustee shall invest all of the Trust's assets exclusively in Common Stock
except as otherwise provided below; provided, however, that the Trust shall not
invest in more than 18,747 shares of Common Stock, which shall constitute the
initial "Plan Share Reserve." The Trustee shall purchase such shares of Common
Stock in accordance with applicable rules and regulations either in the open
market or directly from authorized but unissued shares of the Common Stock from
the Holding Company. Any earnings received with respect to Common Stock held in
the Reserve shall be held in an interest bearing account. Any earnings received
with respect to Common Stock subject to a Plan Share Grant shall be held in an
interest bearing account on behalf of the individual Recipient.
5.03 EFFECT OF GRANTS, ALLOCATIONS, RETURNS AND FORFEITURES UPON PLAN SHARE
RESERVES. Upon the grant of Plan Share Grants under Section 6.02, or the
decision of the Committee to sell Plan Shares and return the proceeds to the
Holding Company, the Plan Share Reserve shall be reduced by the number of Shares
subject to the Plan Share Grants so granted or sold. Any Shares subject to a
Plan Share Grant which may not be earned because of a forfeiture by the
Recipient pursuant to Section 7.01 shall be returned (added) to the Plan Share
Reserve for future Plan Share Grants or Plan Share Allocations. In addition,
any Shares allocated subject to the achievement of a Performance Goal or a High
Performance Goal which are not granted due to failure of the Company to meet the
Performance Goals or High Performance Goals, shall be retained in the Plan Share
Reserve for future Plan Share Grants or Plan Share Allocations.
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ARTICLE VI
ELIGIBILITY; ALLOCATIONS AND GRANTS
6.01 ELIGIBILITY. Employees of the Holding Company and its Affiliates are
eligible to receive Plan Share Allocations and Plan Share Grants.
6.02 ALLOCATIONS AND GRANTS.
(a) The Committee may determine which of the Employees referenced in
Section 6.01 above shall be granted Base Grants, the number of shares covered
by each Base Grant and the manner in which Plan Shares shall be vested under
each Base Grant. The Committee may also determine which of the Employees
referenced in Section 6.01 above shall be allocated Performance Allocations and
High Performance Allocations in addition to any Base Grants granted under this
Plan.
(b) Notwithstanding anything contained herein to the contrary, the number
of Plan Shares covered by Plan Share Allocations and Plan Share Grants may not
exceed the number of Shares in the Plan Share Reserve immediately prior to the
grant of such Plan Share Allocations or Plan Share Grants; PROVIDED that in no
event shall any Plan Share Allocations or Plan Share Grants be made which will
violate the Company's Certificate of Incorporation or Bylaws or any applicable
federal or state law or regulation. In the event Plan Shares are forfeited for
any reason, or in the event that Plan Share Allocations are not granted, such
shares shall remain in the Plan Share Reserve until used to satisfy subsequent
Plan Share Allocations or Plan Share Grants or until the termination of the
Plan. At that time any remaining Plan Shares shall be sold by the Trustee and
the proceeds of such sale shall be returned to the Holding Company.
6.03 FORM OF GRANT OR ALLOCATION. As promptly as practicable after a
determination is made pursuant to Section 6.02 that a Plan Share Allocation has
been allocated or a Plan Share Grant has been granted, the Recipient shall be
notified in writing of the grant or allocation. Such notice shall include the
number of Plan Shares covered by the Plan Share Allocation or Plan Share Grant,
the terms upon which the Plan Shares subject to the Plan Share Grant will vest,
and/or the terms upon which the Plan Share Allocation will be allocated to the
individual Recipient, subsequently granted and vest. Except as the committee
may otherwise determine, the date on which the Committee so notifies the
Recipient shall be considered the date of grant in this case of Plan Share
Grants or the date of allocation in the case of Plan Share Allocations. The
Committee shall maintain records as to all Plan Share Grants and Plan Share
Allocations under the Plan.
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<PAGE>
6.04 GRANTS AND ALLOCATIONS NOT REQUIRED. Notwithstanding anything to the
contrary in Sections 6.01, no Employee shall have any right or entitlement to
receive a Plan Share Grant or Plan Share Allocation hereunder, such Plan Share
Grants and Plan Share Allocations being at the total discretion of the
Committee, no shall the Employees as a group have such a right. The Committee
may, with the approval of the Board (or, if so directed by the Board, may)
direct the Trustee to sell all Common Stock in the Plan Share Reserve and return
the proceeds from such sale to the Bank at any time. The Holding Company shall
have the right of first refusal upon the sale of any Common Stock by the
Trustee.
ARTICLE VII
VESTING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 VESTING OF PLAN SHARES; FORFEITURES.
(a) GENERAL RULES. The Plan provides for the grant of Base Grants,
Performance grants, and High Performance Grants.
(i) BASE GRANTS. The Committee shall determine which of the
Employees referenced in Section 6.01 above shall be granted Base Grants, the
amount of such Base Grants and the timing of the vesting of such grants.
(ii) PERFORMANCE GRANTS. [Commencing on the first anniversary of the
effective date of this Plan,] Employees shall be eligible to receive Performance
Grants under the Plan. Performance Grants shall only be granted upon attainment
by the Holding Company of the Performance Goals established by the Committee in
establishing Performance Allocations pursuant to Section 4.01(b) hereof.
(iii) HIGH PERFORMANCE GRANTS. [Commencing on the first
anniversary of the effective date of this Plan,] Employees shall also be
eligible to receive High Performance grants. High Performance Grants shall only
be granted upon attainment by the Holding Company of the High Performance goals
established by the Committee in establishing High Performance Allocations
pursuant to Section 4.01(b) hereof.
(b) VESTING. Unless the Committee shall specifically provide to the
contrary, Plan Shares subject to a Base Grant shall vest in equal installments
over a five-year period commencing one year from the date of the grant of the
Base Grant. With regard to Performance Grants and High Performance Grants, Plan
Shares subject to Performance Grants or High Performance Grants shall vest in
equal installments over a five-year period
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<PAGE>
commencing one year from the date on which the applicable Performance Goals or
High Performance Goals are attained. Notwithstanding the foregoing, the
Committee may provide for a less or more rapid vesting rate than that set forth
herein, and may accelerate the time at which a Grant vests in whole or in part.
If the employment of a Recipient is terminated prior to the full vesting of a
Grant for any reason (except as specifically provided in Subsections (c) and (d)
below), the Recipient shall forfeit the right to any Shares subject to the Plan
Share Grant which have not theretofore vested.
In determining the number of Plan Shares which vest, fractional shares
shall be rounded down to the nearest whole number, provided that such fractional
shares shall be aggregated and vest on the last anniversary in which the Plan
Share Grant vests.
(c) EXCEPTION FOR TERMINATIONS DUE TO DEATH, DISABILITY OR CHANGE IN
CONTROL. Notwithstanding the general rule contained in Section 7.01(b) above,
all Plan Shares subject to a Plan Share Grant held by a Recipient whose
employment with the Holding Company or an Affiliate terminates due to death,
Disability or, to the extent not prohibited by 12 C.F.R. Section 563b.3(g)(4), a
Change in Control, shall vest as of the Recipient's last day of employment with
the Holding Company or an Affiliate; Plan Shares subject to a Plan Share
Allocation allocated to a Recipient whose employment with the Holding Company or
an Affiliate terminates for any other reason shall not vest but shall remain in
the Plan Share Reserve.
(d) RETIREMENT. Notwithstanding the general rule contained in Section
7.01(b) above, all Plan Shares subject to a Plan Share Grant held by a Recipient
whose employment with the Holding Company or an Affiliate terminates due to
Retirement and who, as of the Recipient's last day of employment with the
Holding Company or Affiliate, is performing services on behalf of the Holding
Company, the Bank or an Affiliate as a consultant or a director shall not be
forfeited and shall continue to be earned as provided by Section 7.01(b);
PROVIDED, HOWEVER, that any unearned Plan Shares shall be forfeited upon such
Recipient's termination of services as a consultant or director of the Holding
Company or any Affiliate. Plan Shares earned pursuant to this subsection shall
be otherwise subject to the provisions of this Plan.
(c) REVOCATION FOR MISCONDUCT. Notwithstanding anything herein to the
contrary, the Committee may be resolution immediately revoke, rescind and
terminate any Plan Share Grant or Plan Share Allocation, or portion thereof,
previously granted or allocated under this Plan, to the extent Plan Shares have
not been delivered thereunder to the Recipient, whether or not yet
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vested, in the case of an Employee who is discharged from the Holding Company or
an Affiliate for cause (as hereinafter defined), or who is discovered after
termination of employment or service to have engaged in conduct that would have
justified termination for cause. "Cause" is defined as personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, or the willful
violation of any law, rule or regulation (other than traffic violations or
similar offenses) or final cease and desist order.
7.02 ACCRUAL OF DIVIDENDS. Whenever Plan Shares are distributed to a
Recipient or Beneficiary under Section 7.03, such Recipient or Beneficiary shall
also be entitled to receive, with respect to each Plan Share distributed, an
amount attributable to any cash dividends and a number of shares of Common Stock
equal to any stock dividends declared and paid with respect to a share of Common
Stock between the date the relevant Plan Share Grant was granted and the date
the Plan Shares are being distributed. There shall also be distributed an
appropriate amount of net earnings, if any, of the Trust with respect to any
dividends so paid out.
7.03 DISTRIBUTION OF PLAN SHARES.
(a) TIMING OF DISTRIBUTIONS: GENERAL RULE. Plan Shares shall be
distributed to the Recipient or his Beneficiary, as the case may be, as soon as
practicable after they have vested.
(b) FORM OF DISTRIBUTION. All Plan Shares, together with any shares
representing stock dividends, shall be distributed in the form of Common Stock.
One share of Common Stock shall be given for each Plan Share vested. Payments
representing accumulated dividends (and earnings thereon, if any) shall be made
in cash or Common Stock.
(c) WITHHOLDING. The Trustee may withhold from any payment or
distribution made under this Plan sufficient amounts of cash or shares of Common
Stock to cover any applicable withholding and employment taxes, and if the
amount of such payment is insufficient, the Trustee may require the Recipient or
Beneficiary to pay to the Trustee the amount required to be withheld as a
condition of delivering the Plan Shares. The Trustee shall pay over to the
Holding Company or Affiliate which employs or employed such Recipient any such
amount withheld from or paid by the Recipient or Beneficiary. If this Plan is
qualified under 17 C.F.R. Section 240.16b-3 of the Exchange Act Rules, then any
withholding shall comply with 17 C.F.R. Section 240.16b-3(e).
7.04 VOTING OF PLAN SHARES. After a Plan Share Grant has been granted, the
Recipient shall be entitled to direct the
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Trustee as to the voting of the Plan Shares which are covered by the Plan Share
Grant and which have not yet vested and been distributed to him pursuant to
Section 7.03, subject to rules and procedures adopted by the Committee for this
purpose. Recipients of Plan Share Allocations shall not direct the voting of
Plan Shares subject to Plan Share Allocations. All shares of Common Stock held
by the Trust as to which Recipients are not entitled to direct, or have not
directed, the voting, shall be voted by the Trustee in the same proportion as
Plan Shares which have been granted and voted.
ARTICLE VIII
MISCELLANEOUS
8.01 ADJUSTMENTS FOR CAPITAL CHANGES. In the event of any change in the
outstanding shares of Common Stock of the Holding Company by reason of any stock
dividend or split, recapitalization, merger, consolidation, spin-off,
reorganization, combination or exchange of shares, or other similar corporate
change, or other increase or decrease in such shares effected without receipt or
payment of consideration by the Holding Company, the Committee shall adjust the
aggregate number of Plan Shares available for issuance pursuant to the Plan and
shall adjust the number of shares to which any Plan Share Grant or Plan Share
Allocation relates to prevent dilution or enlargement of the rights granted to
the Recipient under the Plan.
8.02 AMENDMENT AND TERMINATION OF PLAN. The Board may, by resolution, at
any time amend or terminate the Plan and Trust; PROVIDED, that rights and
obligations under any Plan Share Grant granted or Plan Share Allocation
allocated before an amendment shall not be altered or impaired by such amendment
without the written consent of the Recipient. If the Plan becomes qualified
under 17 C.F.R. Section 16(b)-3 of the rules and regulations promulgated under
the Exchange Act and an amendment would require shareholder approval to retain
the Plan's qualification under such Rule 16(b)-3, then such amendments shall be
presented to shareholders for ratification; PROVIDED, HOWEVER, that the failure
to obtain shareholder ratification shall not affect the validity of this Plan as
so amended and the Plan Share Grants granted thereunder. The power to amend or
terminate shall include the power to direct the Trustee to return to the Holding
Company all or any part of the assets of the Trust, including proceeds from the
sale of shares of Common Stock held in the Plan Share Reserve, as well as shares
of Common Stock and other assets subject to Plan Share Grants not yet vested to
the Recipients to whom they are granted. However, the termination of the Trust
shall not affect a Recipient's right to vest in Plan Share Grants and to the
distribution of Common Stock relating thereto,
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including earnings thereon, in accordance with the terms of this Plan and the
grant.
8.03 NONTRANSFERABLE. Plan Share Grants and Plan Share Allocations shall
not be transferable by a Recipient, and during the lifetime of the Recipient,
Plan Shares may only be vested in and distributed to the Recipient who was
notified in writing of the Plan Share Grant by the Committee pursuant to Section
6.03.
8.04 EMPLOYMENT RIGHTS. Neither the Plan nor any grant of a Plan Share
Grant or allocation of a Plan Share Allocation hereunder nor any action taken by
the Trustee, the Committee or the Board in connection with the Plan shall create
any right on the part of any Employee to continue in the employ of the Holding
Company or an Affiliate.
8.05 VOTING AND DIVIDEND RIGHTS. No Recipient shall have any voting or
dividend rights or other rights of a shareholder in respect of any Plan Shares
covered by a Plan Share Grant or Plan Share Allocation, except as expressly
provided in Sections 7.02 and 7.04 above, prior to the time said Plan Shares are
actually distributed to him or her.
8.06 GOVERNING LAW. The Plan and Trust shall be governed by the internal
laws of the State of California.
8.07 [Reserved.]
8.08 TERM OF PLAN. This Plan shall remain in effect until the earlier of
(1) 21 years from the Effective Date, (2) termination by the Board, or (3) the
distribution of all assets of the Trust. Termination of the Plan shall not
affect any Plan Share Grants previously granted, and such Plan Share Grants
shall remain valid and in effect until they have been vested and distributed, or
by their terms expire or are forfeited.
8.09 COMPLIANCE WITH SECTION 16. If this Plan is qualified under 17 C.F.R.
Section 240.16b-3 of the Exchange Act Rules, with respect to persons subject to
Section 16 of the Exchange Act, and unless hereafter otherwise determined by the
Committee, transactions under this Plan are intended to comply with all
applicable conditions of Rule 16b-3 or its successors under the Exchange Act.
To the extent any provision of the Plan fails to so comply, it shall be deemed
null and void, to the extent permitted by law.
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BROADWAY FINANCIAL CORPORATION
STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
I. PURPOSE
The purpose of this 1996 Stock Option Plan for Outside Directors (the
"PLAN") is to promote the growth and profitability of Broadway Financial
Corporation (the "HOLDING COMPANY") and Broadway Federal Bank, f.s.b. (the
"BANK") by providing Outside Directors (as defined in Section II(a)) of the
Holding Company and its affiliates, including the Bank, with an incentive to
achieve the long-term objectives of the Holding Company and to attract and
retain non-employee directors of outstanding abilities by providing such outside
directors with an opportunity to acquire an equity interest in the Holding
Company.
II. GRANT OF OPTIONS
(a) INITIAL GRANT. Each member of the Board of Directors of the Holding
Company or any of its affiliates not also serving as a full-time employee of the
Holding Company or any of its affiliates (an "OUTSIDE DIRECTOR"), who was
serving in such capacity on the date of the Holding Company's initial public
offering of securities and who is continuing in such service at the effective
date of this Plan, is hereby granted a nonqualified stock option ("OPTION") to
purchase shares of the common stock, $0.01 par value of the Holding Company
("COMMON STOCK"), subject to adjustment pursuant to Section IV, based on the
number of his or her years of service with the Holding Company or any of its
affiliates on a non-cumulative basis in accordance with the following schedule:
<TABLE>
<CAPTION>
YEARS OF SERVICE SHARES GRANTED
---------------- --------------
<S> <C>
0 - 2 892
3 - 14 1,620
15 - 18 3,101
</TABLE>
The purchase price per share of the Common Stock deliverable on exercise of
Options shall be the Fair Market Value (as defined in paragraph (d) below) of
the Common Stock on the date of grant. The grants provided for in this
paragraph (a) shall be deemed granted on the Effective Date (as defined in
Section V).
(b) GRANTS TO SUBSEQUENT OUTSIDE DIRECTORS. Each Outside Director who is
first elected as a director subsequent to the Effective Date ("SUBSEQUENT
OUTSIDE DIRECTOR") shall be granted an Option in accordance with the following:
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(i) To the extent shares are then available under this Plan, as of
the date on which such Subsequent Outside Director is qualified
and first begins to serve as an Outside Director, the Subsequent
Outside Director shall be granted an Option to purchase 892
shares of Common Stock, subject to adjustment pursuant to Section
IV.
(ii) The purchase price per share of the Common Stock deliverable upon
exercise of such Option shall equal the Fair Market Value of a
share of Common Stock on the date the Option is granted.
(iii) If sufficient shares are not available under this Plan to fulfill
the grants of Options provided for in subparagraph (i) above, and
thereafter shares become available for such purpose, each
Subsequent Outside Director who has not previously received an
Option for the full number of shares set forth in subparagraph
(i) above, shall receive an Option to purchase the number of
shares of Common Stock determined by dividing pro rata among each
such Subsequent Outside Directors the number of shares then
available under this Plan, but in no event shall a Subsequent
Outside Director receive an Option for a number of shares which
exceeds the number of shares set forth in subparagraph (i). The
date of grant for Options awarded under this subparagraph (iii)
shall be the date shares become available. The purchase price
per share of the Common Stock deliverable upon exercise of each
such Option shall equal the Fair Market Value of a share of
Common Stock on the date the Option is granted.
(c) INELIGIBILITY. An Option under this Plan shall not be granted to any
Outside Director who at any previous time was an employee of either the Holding
Company or the Bank and in such capacity was eligible to receive any Options to
purchase Common Stock.
(d) FAIR MARKET VALUE. For purposes of this Plan, "Fair Market Value"
means the average of the high and low bid prices of the Common Stock as reported
by the Nasdaq Small-Cap Stock Market (as published by the Wall Street Journal,
if then so published) or, if the Common Stock is then listed on or quoted
through a stock exchange or transaction reporting system on or through which
actual sale prices are regularly reported, the closing sale price of the Common
Stock, on the grant date, or if the Common
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Stock was not traded on such date, on the next preceding day on which the Common
Stock was quoted or traded, as the case may be.
III. TERMS AND CONDITIONS
(a) OPTION AGREEMENT. Each Option shall be evidenced by a written option
agreement between the Holding Company and the recipient specifying the number of
shares of Common Stock that may be acquired through its exercise and containing
such other terms and conditions as are necessary or appropriate and not
inconsistent with the terms of this grant.
(b) VESTING. Subject to paragraph (e) below, each Option granted shall
vest (become exercisable) in five annual cumulative installments of twenty
percent (20%) per year, commencing on the first anniversary of the grant date
and each subsequent anniversary thereof.
(c) MANNER OF EXERCISE. The Option may be exercised from time to time, in
whole or in part to the extent then vested, by delivering a written notice of
exercise to the Chief Executive Officer of the Holding Company. Such notice is
irrevocable and must be accompanied by full payment of the exercise price (as
determined in accordance with Section II(a) or (b)) in cash or shares of
previously acquired Common Stock of the Holding Company, or in a combination of
cash and previously acquired shares. To the extent shares of Common Stock are
tendered in payment of all or part of the exercise price, such shares shall be
valued at the Fair Market Value thereof on the date of exercise.
(d) TRANSFERABILITY. Each option granted herein may be exercised only by
the Outside Director to whom it is issued or in the event of the Outside
Director's death, his or her personal representative(s) or designee(s), heir(s)
or devisee(s), if applicable under paragraph (e) below.
(e) TERMINATION OF SERVICE; CHANGE OF CONTROL. Upon the termination of
Outside Director's service on the Board for any reason other than Disability (as
defined herein), death, Removal for Cause (as defined herein) or, to the extent
not prohibited by 12 C.F.R. Section 563b.3(g)(4), following a Change in Control
(as defined herein) of the Bank or the Holding Company, the Outside Director's
Option shall be exercisable within the period described in paragraph (f) below,
but only to the extent the Option was vested at the date of termination.
In the event of death or termination of service due to Disability of any
Outside Director or, to the extent not
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prohibited by 12 C.F.R. Section 563b.3(g)(4), following a Change in Control of
the Bank or Holding Company, an Option held by such Outside Director, whether or
not exercisable at such time, shall become immediately exercisable by the
Outside Director or the Outside Director's legal representatives or
beneficiaries. In the event of a Change in Control as the result of a
Terminating Event (as defined herein), the Outside Director's Option will become
exercisable pursuant to this paragraph only if no provision has been made in
writing in connection with such Terminating Event for the continuance of this
Plan and for the assumption of the Options theretofore granted hereunder, or the
substitution for such Options of new awards issued by the successor corporation
or, if applicable, the publicly traded entity that is the parent entity of the
successor corporation, with such appropriate adjustments as may be determined or
approved by a committee of the Board of Directors or its successor, in which
event this Plan and the Options theretofore granted or substituted therefor
shall continue in the manner and under the terms so provided.
For purposes of this Plan the following terms are defined as follows:
(i) As used herein, a "CHANGE IN CONTROL" of the Bank or the Holding
Company shall mean an event of a nature that (i) would be
required to be reported in response to Item 1 of a current report
filed on Form 8-K pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")
as in effect on the Effective Date of this Plan; or (ii) results
in any person acquiring control of the Bank or the Holding
Company within the meaning of the Home Owners' Loan Act of 1933,
as amended, and the rules and regulations promulgated by the
Office of Thrift Supervision ("OTS") (or its predecessor agency),
as in effect on the Effective Date of this Plan by the Board of
Directors of the Holding Company (provided, that in applying the
definition of change in control as set forth under the rules and
regulations of the OTS, the Board shall substitute its judgment
for that of the OTS), and, without limitation, such a Change in
Control shall be deemed to have occurred at such time as (A) any
"person" (as that term is used in Sections 13(d) and 14(d) of the
Exchange Act and the regulations of the Securities and Exchange
Commission ("SEC") thereunder, each as in effect on the date of
the
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adoption of this Plan by the Board of Directors of the Holding
Company, and including any such persons that may be deemed to be
acting in concert with respect to the Bank or the Holding
Company, or the acquisition, ownership or voting of Bank or
Holding Company securities) is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act and the
regulations of the SEC thereunder, each as in effect on the date
of the adoption of this Plan by the Board of Directors of the
Holding Company), directly or indirectly, of securities of the
Bank or the Holding Company representing 20% or more of the
Bank's or the Holding Company's outstanding securities except for
any securities of the Bank purchased by the Holding Company in
connection with the conversion of the Bank to stock form and any
securities purchased by any tax-qualified employee benefit plan
of the Bank or the Holding Company; or (B) individuals who
constitute the Board on the date of the adoption of this Plan by
the Board of Directors of the Holding Company (the "INCUMBENT
BOARD") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent
to the date hereof whose election was approved by a vote of at
least three-quarters of the directors then comprising the
Incumbent Board, or whose nomination for election by the Holding
Company's stockholders was approved by the same nominating
committee serving under an Incumbent Board, shall be, for
purposes of this clause (B), considered as though he or she were
a member of the Incumbent Board; or (C) a plan of liquidation,
reorganization, merger, consolidation, sale of all or
substantially all the assets of the Bank or the Holding Company
or similar transaction is not the resulting entity (a
"TERMINATING EVENT"), is approved by the Board of Directors and
stockholders or otherwise occurs; or (D) solicitations of
stockholders of the Holding Company, by someone other than the
Incumbent Board of the Holding Company, seeking stockholder
approval of a plan of reorganization, merger or consolidation of
the Holding Company or Bank or similar transaction with one or
more corporations as a result of which the outstanding shares of
the class of
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securities then subject to this Plan are exchanged for or
converted into cash or property or securities not issued by the
Bank or the Holding Company shall be distributed; or (E) a tender
offer is made for 20% or more of the voting securities of the
Bank or the Holding Company; or (F) any other event, transaction
or series of transactions occurs as a result of which any person
may be deemed to "acquire control" of the Bank or the Holding
Company (as such terms are defined in the regulations of the OTS
set forth at 12 C.F.R. Part 574 as in effect on the Effective
Date).
(ii) "DISABILITY" means the permanent and total inability by reason of
mental or physical infirmity, or both, of an Outside Director to
perform his or her duties as such. If requested by the Board of
Directors, a medical doctor selected or approved by the Board of
Directors must advise the Board that it is either not possible to
determine when such disability will terminate or that it appears
probable that such disability will be permanent during the
remainder of such Director's lifetime.
(iii) "REMOVAL FOR CAUSE" means the removal of the Outside
Director by shareholder, regulatory or other appropriate
action because of a material loss to the Holding Company or
one of its affiliates caused by the Outside Director's
personal dishonesty, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional
failure to perform stated duties, or the willful violation
of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease and desist
order.
(f) TERMINATION OF OPTION. Each Option shall expire upon the earlier of
(i) 120 months following the date of grant, or (ii) one year following the date
on which the recipient ceases to serve in the capacity of Outside Director,
consultant or advisory director for any reason other than Removal for Cause. If
the Outside Director dies before fully exercising any portion of an Option then
exercisable, such Option may be exercised by such Outside Director's
beneficiary, personal representative(s), heir(s) or devisee(s) at any time
within the one year period following his or her death; provided, however, that
in no event
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shall the option be exercisable more than 120 months after the date of its
grant. If the Outside Director's service terminates on account of Removal for
Cause, Option awarded to him or her shall expire upon such removal.
IV. COMMON STOCK SUBJECT TO THIS PLAN
The shares which shall be issued and delivered upon exercise of Options
granted under this Plan may be either authorized and unissued shares of Common
Stock or authorized and issued shares of Common Stock purchased by the Holding
Company. The number of shares of Common Stock reserved for issuance under this
Plan shall not exceed 26,781 shares of the Common Stock, subject to adjustments
pursuant to this Section IV. Any shares of Common Stock subject to an Option
which for any reason either terminates unexercised or expires, shall again be
available for issuance under this Plan.
In the event of any change or changes in the outstanding Common Stock of
the Holding Company by reason of any stock dividend or stock split,
recapitalization, reorganization, merger, consolidation, spin-off, combination
or any similar corporate change, or other increase or decrease in such shares
effected without receipt or payment of consideration by the Company, the number
of shares of Common Stock which may be issued under this Plan, the number of
shares of Common Stock subject to Options granted under this Plan and the
exercise price of such Options, shall be automatically adjusted to prevent
dilution or enlargement of the rights granted to recipient under this Plan.
V. EFFECTIVE DATE OF THIS PLAN
The "EFFECTIVE DATE" of this Plan is August 1, 1997.
VI. TERMINATION OF THIS PLAN
The right to grant Options under this Plan will terminate automatically
upon the earlier of ten years after the Effective Date of this Plan or the
issuance of the maximum number of shares of Common Stock reserved for issuance
pursuant to this Plan.
VII. AMENDMENT OF THIS PLAN
This Plan may be amended from time to time by the Board of Directors of the
Company provided that Section II and III hereof shall not be amended more than
once every six months other than to comport with the Internal Revenue Code of
1986, as amended, or the Employee Retirement Income Security Act of 1974, as
amended, or the respective rules thereunder. Except as provided in
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Section IV hereof, rights and obligations under any Option granted before an
amendment shall not be altered or impaired by such amendment without the written
consent of the optionee. If this Plan satisfies the requirements of Rule 16b-3
("RULE 16b-3") of the Exchange Act, and an amendment would require stockholder
approval to retain this Plan's exemption under Rule 16b-3, then subject to the
discretion of the Board of Directors of the Holding Company, such amendment
shall be presented to stockholders for ratification, provided, however, that the
failure to obtain stockholder ratification shall not affect the validity of this
Plan as so amended and the Options granted thereunder.
VIII. APPLICABLE LAW
This Plan shall be governed by and construed in accordance with the
internal laws of the State of California.
IX. COMPLIANCE WITH SECTION 16
Unless otherwise hereafter determined by the Board of Directors of the
Holding Company, to the extent that any provision of this Plan fails to satisfy
the requirements of Rule 16b-3, such provisions shall be deemed null and void,
to the extent permitted by law.
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BROADWAY FINANCIAL CORPORATION
LONG TERM INCENTIVE PLAN
Section 1
PURPOSE
The purpose of this Broadway Financial Corporation Long Term Incentive Plan
(this "PLAN") is to increase stockholder value and to advance the interests of
Broadway Financial Corporation (the "HOLDING COMPANY") and its subsidiary,
Broadway Federal Bank, f.s.b. (the "BANK") (the Holding Company and Bank are
collectively referred to herein as the "COMPANY") by awarding equity based
incentives designed to attract, retain and motivate employees.
Section 2
ADMINISTRATION
2.1. ADMINISTRATION BY COMMITTEE. This Plan shall be administered by a
committee (the "COMMITTEE") consisting of two or more members of the Holding
Company's Board of Directors ("BOARD"), who are appointed and may be removed by
the Board, and who are "disinterested persons" within the meaning of Securities
and Exchange Commission Rule 16b-3 ("RULE 16b-3") promulgated under the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") and "outside
directors" within the meaning of Section 162(m) of the Internal Revenue Code of
1986, as amended (the "CODE").
2.2. AUTHORITY. Subject to the provisions of this Plan, the Committee
shall have the authority to (a) manage and control the operation of this Plan,
(b) interpret and construe the provisions of this Plan, and prescribe, amend and
rescind rules and regulations relating to this Plan, (c) make awards under this
Plan in such forms and amounts and subject to such restrictions, limitations and
conditions as it deems appropriate, including, without limitation, awards which
are made in combination with or in tandem with other awards (whether or not
contemporaneously granted), (d) modify the terms of outstanding awards, (e)
prescribe the form of agreement, certificate or other instrument evidencing any
award under this Plan, (f) correct any defect or omission and reconcile any
inconsistency in this Plan or in any award hereunder, and (g) make all other
determinations and take all other actions as it deems necessary or desirable for
the implementation and administration of this Plan. The determination of the
Committee on matters within its authority shall be conclusive and binding on the
Company and all other
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persons.
Section 3
PARTICIPATION
All employee of the Company, or of any subsidiaries or affiliates, are
eligible to receive awards granted pursuant to this Plan. Subject to the terms
and conditions of this Plan, the Committee shall determine and designate from
time to time the employees of the Company and its subsidiaries and affiliates
(including employees who are directors) who shall receive awards under this Plan
("PARTICIPANTS").
Section 4
SHARES SUBJECT TO THIS PLAN
4.1. NUMBER OF SHARES RESERVED. Subject to adjustment in accordance with
subsection 4.2, the maximum number of shares of common stock, $0.01 par value,
of the Holding Company ("COMMON STOCK") which may be issued under this Plan
shall not exceed 62,488 shares in the aggregate, and shall not exceed 4,463
shares with respect to any one individual in any calendar year. Such shares may
be either authorized and unissued shares, treasury shares or a combination
thereof, as the Committee shall determine. The number of shares related to
awards that expire unexercised or are forfeited, surrendered, terminated or
cancelled (except for shares of Common Stock withheld or surrendered to satisfy
tax withholding obligations) shall again be available for additional awards
under this Plan unless this Plan shall have terminated.
4.2. ADJUSTMENTS TO SHARES RESERVED. In the event of any merger,
consolidation, reorganization, recapitalization, spinoff, stock dividend, stock
split, reverse stock split, exchange or other distribution with respect to
shares of Common Stock or other change in the corporate structure or
capitalization of the Company affecting the Common Stock, the type and number of
shares of stock which are or may be subject to awards under this Plan and the
terms of any outstanding awards (including the price at which shares of stock
may be issued pursuant to an outstanding award) shall be equitably adjusted by
the Committee, in its sole discretion, to preserve the value of benefits awarded
or to be awarded to Participants under this Plan.
Section 5
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STOCK OPTIONS
5.1. AWARDS. Subject to the terms and conditions of this Plan, the
Committee shall designate the Participants to whom options to purchase shares of
Common Stock ("OPTIONS") are to be awarded under this Plan and shall determine
the number, type and terms of the Options to be awarded to each of them. Each
Option awarded under this Plan shall be a "nonqualified stock option" for tax
purposes, unless the Option satisfies all of the requirements of Section 422 of
the Code and the Committee designates such Option as an "Incentive Stock
Option".
5.2. OPTION PRICE. The "Option Price" for any Option awarded hereunder
shall not be less than the Fair Market Value of a share of Common Stock on the
date the Option is awarded. The "Fair Market Value" of a share of Common Stock
as of any date shall be equal to the average of the high and low bid prices of
the Common Stock or the closing sale price thereof as reported by an applicable
transaction reporting system or stock exchange on the date preceding the
applicable date or, if no bid quotations or sale prices of Common Stock are
reported on such date, the average of the high and low bid prices or closing
sale price of a share of Common Stock on the date as of which trading in the
Common Stock was last reported on the applicable transaction reporting system or
exchange. If the Common Stock is not listed or admitted to trading on any
exchange or system that reports actual sale prices or bid and asked quotations,
the Fair Market Value of a share of Common Stock shall be as determined in good
faith by the Committee.
5.3. OPTION EXPIRATION DATE. All rights to purchase shares of Common
Stock pursuant to an Option shall cease as of the date (the "OPTION EXPIRATION
DATE") established by the Committee at the time of the award of such Option
(subject to any earlier permitted termination by the Committee), but in no event
later than the date which is ten years after the date on which the Option is
awarded. Unless provided otherwise by the Committee, if the employment of a
Participant terminates for any reason, his or her nonvested options shall
terminate and his or her vested options shall be exercisable no later than the
earliest to occur of (i) twelve months after termination of the Participant's
employment if termination is by reason of his or her becoming disabled (within
the meaning of Section 22(e)(3) of the Code) or his or her death, (ii) 90 days
after the date of his or her termination of employment for any other reason, or
(iii) the Option Expiration Date; PROVIDED, HOWEVER, the Committee may not
provide that the Participant's right to exercise vested options shall terminate
less than six months from the date of termination of employment due to death or
disability or less than 30 days
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after the date of termination of employment for any other reason, but no options
shall be exercisable later than the Option Expiration Date.
5.4. VESTING. Each Option awarded under this Plan shall vest (become
exercisable), either in whole or in part, at such time or times as shall be
determined by the Committee at the time the Option is granted, or at such
earlier time or times as the Committee shall subsequently determine, but shall
be at the rate of at least 20% per year over five years from the date the Option
is granted.
5.5. MANNER OF EXERCISE. An Option may be exercised by a Participant (or,
in the event of his or her death, by the person or persons to whom that right
passes by will or by the laws of descent and distribution), to the extent then
vested, by giving written notice of such exercise to the Secretary of the
Company at the principal executive offices of the Company prior to the Option
Expiration Date; provided, however, that an Option may only be exercised with
respect to whole shares of Common Stock. Such notice shall specify the number
of shares of Common Stock to be purchased and shall be accompanied by payment of
the Option Price for such shares (and, if required by the Committee, any
applicable withholding taxes) in such form and manner as the Committee may from
time to time approve.
Section 6
STOCK APPRECIATION RIGHTS
6.1. AWARDS. Subject to the terms and conditions of this Plan, the
Committee shall designate the employees to whom stock appreciation rights
("SARS") are to be awarded under this Plan and shall determine the number and
terms of the SARs to be awarded to each of them. An SAR may be awarded in
tandem with an Option at the time the Option is granted or thereafter.
Notwithstanding any provision of this Section 6 to the contrary, an SAR awarded
in tandem with an Option shall be exercisable only to the extent that the
related Option is exercisable.
6.2. PAYMENT. Subject to the terms and conditions of this Plan, upon
exercise of an SAR, a Participant shall be entitled to receive the number of
shares of Common Stock having a Fair Market Value (as of the date of exercise)
equal to:
(a) the number of shares of Common Stock as to which the SAR is exercised;
MULTIPLIED BY
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(b) the excess of the Fair Market Value (as of the date of exercise) of a
share of Common Stock over the exercise price of the SAR;
provided, however, that, in lieu of fractional shares of Common Stock, a
Participant shall be entitled to receive an appropriate cash payment; and
provided, further, that the Committee, in its sole discretion, may elect to
settle the SAR (or any portion thereof) in cash equal to the Fair Market Value
on the exercise date of any or all of the shares of Common Stock that would
otherwise be issuable upon such exercise.
6.3. SAR EXPIRATION DATE. All rights to acquire shares of Common Stock
pursuant to an SAR shall cease as of the date (the "SAR EXPIRATION DATE")
established by the Committee at the time of award (subject to any earlier
permitted termination by the Committee), but in no event later than the date
which is ten years after the date on which the SAR is awarded. Unless provided
otherwise by the Committee, if the employment of a Participant terminates for
any reason, his or her nonvested SARs shall terminate and his or her vested SARs
shall be exercisable no later than the earliest to occur of (i) twelve months
after termination of the Participant's employment if termination is by reason of
his or her becoming disabled (within the meaning of Section 22(e)(3) of the
Code) or his or her death, (ii) 90 days after the date of his or her termination
of employment for any other reason, or (iii) the SAR Expiration Date.
6.4. VESTING. Each SAR awarded under this Plan shall become exercisable,
either in whole or in part, at such time or times as shall be determined by the
Committee at the time the SAR is granted, or at such earlier times as the
Committee shall subsequently determine.
6.5. MANNER OF EXERCISE. An SAR may be exercised, in whole or in part to
the extent then vested, by giving written notice of such exercise to the
Secretary of the Company prior to the date on which the SAR expires. Such
notice shall specify the number of shares with respect to which the SAR is
exercised. As soon as practicable after receipt of such notice, the Company
shall deliver to the Participant certificates for the shares of Common Stock or
cash or both to which the Participant is entitled pursuant to subsection 6.2.
To the extent that an SAR that is awarded in tandem with an Option is exercised,
the related Option will be cancelled, and to the extent that an Option awarded
in tandem with an SAR is exercised, the tandem SAR will be cancelled.
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Section 7
LIMITED STOCK APPRECIATION RIGHTS
7.1. AWARDS. Subject to the terms and conditions of this Plan, the
Committee may designate that limited stock appreciation rights ("LSARs") are to
be awarded in tandem with all or a portion of any Option award under this Plan.
An LSAR may be awarded in tandem with an Option at the time the Option is
granted or thereafter. Notwithstanding any provision of this Section 7 to the
contrary, an LSAR shall be exercisable only to the extent that the related
Option is exercisable. Unless otherwise provided by the Committee, an LSAR
shall not be exercised in whole or part prior to the date which is six months
after the date of award of the LSAR and may only be exercised following a Change
in Control (as defined in subsection 7.5) of the Company.
7.2. PAYMENT. Subject to the terms and conditions of this Plan, upon
exercise of an LSAR, a Participant shall be entitled to receive a cash payment
equal to:
(a) the number of shares of Common Stock as to which the LSAR is
exercised;
MULTIPLIED BY
(b) the excess of the Fair Market Value (as of the date of exercise) of a
share of Common Stock over the exercise price of the LSAR.
7.3. LSAR EXPIRATION DATE. All rights to exercise an LSAR shall cease as
of the date (the "LSAR EXPIRATION DATE") established by the Committee at the
time of the award (subject to any earlier permitted termination by the
Committee), but in no event later than the date which is ten years after the
date on which the LSAR is awarded. Unless provided otherwise by the Committee,
if the employment of a Participant terminates for any reason, his or her
nonvested LSARs shall terminate and his or her vested LSARs shall be exercisable
no later than the earliest to occur of (i) twelve months after termination of
the Participant's employment if termination is by reason of his or her becoming
disabled (within the meaning of Section 22(e)(3) of the Code) or his or her
death, (ii) 90 days after the date of his or her termination of employment for
any other reason, or (iii) the LSAR Expiration Date. Notwithstanding any
provision of this subsection 7.3 to the contrary, an LSAR shall be exercisable
only to the extent that the underlying Option is exercisable.
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7.4. MANNER OF EXERCISE. An LSAR may be exercised, in whole or in part to
the extent then vested, by giving written notice of such exercise to the
Secretary of the Company after the date of a Change in Control and prior to the
date on which the LSAR expires. Such notice shall specify the number of shares
with respect to which the LSAR is exercised. To the extent that an LSAR is
exercised, the related Option will be cancelled, and to the extent that an
Option awarded in tandem with an LSAR is exercised, the tandem LSAR will be
cancelled.
Section 8
RESTRICTED STOCK
8.1. AWARDS. Subject to the terms and conditions of this Plan, the
Committee shall designate the employees to whom shares of "Restricted Stock"
shall be awarded under this Plan and determine the number of shares and the
terms and conditions of each such award. Each Restricted Stock award shall
entitle the Participant to receive shares of Common Stock upon the terms and
conditions specified by the Committee and subject to the following provisions of
this Section 8.
8.2. RESTRICTIONS. All shares of Restricted Stock awarded hereunder shall
be subject to such restrictions as the Committee may determine, including,
without limitation, any or all of the following:
(a) a required period of employment with the Company, as determined by the
Committee, prior to the vesting of the shares of Restricted Stock;
(b) a prohibition against the sale, assignment, transfer, pledge,
hypothecation or other encumbrance of the shares of Restricted Stock
for a specified period as determined by the Committee; and
(c) a requirement that the holder of shares of Restricted Stock forfeit
all or a part of such shares in the event of termination of his or her
employment during any period in which such shares are subject to
restrictions.
All restrictions on shares of Restricted Stock awarded pursuant to this Plan
shall expire, and such shares shall vest in the Participant when they were
awarded, at such time or times as the Committee shall specify.
8.3. REGISTRATION OF SHARES. Shares of Restricted Stock
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<PAGE>
awarded pursuant to this Plan shall be registered in the name of the Participant
and, in the discretion of the Committee, may be deposited with an entity
designated by the Committee or with the Company. The Committee may require the
Participant to endorse a stock power in blank with respect to shares of
Restricted Stock awarded to the Participant.
8.4. STOCKHOLDER RIGHTS. Subject to the terms and conditions of this
Plan, during any period in which shares of Restricted Stock are subject to
forfeiture or restrictions on transfer, each Participant who has been awarded
shares of Restricted Stock shall have such rights of a stockholder with respect
to such shares as the Committee may designate at the time of the award,
including the right to vote such shares and the right to receive all dividends
paid on such shares. Unless otherwise provided by the Committee, stock
dividends or dividends in kind and any other securities distributed with respect
to Restricted Stock shall be restricted to the same extent and subject to the
same terms and conditions as the Restricted Stock to which they are
attributable.
8.5. LAPSE OF RESTRICTIONS. Subject to the terms and conditions of this
Plan, at the end of any time period during which the shares of Restricted Stock
are subject to forfeiture or restrictions on transfer, such shares will vest and
thereupon be delivered free of all restrictions to the Participant (or to the
Participant's legal representative, beneficiary or heir); PROVIDED, HOWEVER,
that such shares will vest at the rate of at least 20% per year over five years
from the date of the award.
Section 9
GENERAL
9.1. EFFECTIVE DATE. This Plan will become effective on the date it is
adopted by the Holding Company's Board of Directors, subject to its approval by
the Company's stockholders. Awards may be issued under this Plan prior to the
time stockholder approval is obtained, but if stockholder approval is not
received within twelve months of this Plan's adoption, such awards shall be
cancelled and be of no effect. In no event may an Option or SAR be exercised,
or restrictions on Restricted Stock lapse, prior to the date stockholder
approval is obtained.
9.2. DURATION. This Plan shall remain in effect until all awards made
under this Plan have either been satisfied by the issuance of shares of Common
Stock or the payment of cash or been terminated in accordance with the terms of
this Plan and the award and until all restrictions imposed on shares of Common
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Stock issued under this Plan have lapsed. No award may be made under this Plan
after the tenth anniversary of the date this Plan is adopted by the Company's
Board of Directors.
9.3. NON-TRANSFERABILITY OF INCENTIVES. No Option, SAR, LSAR or share of
Restricted Stock may be transferred, pledged or assigned by the holder thereof
(except, in the event of the holder's death, by will or the laws of descent and
distribution), and the Company shall not be required to recognize any attempted
assignment of such rights by any Participant. During a Participant's lifetime,
awards may be exercised only by him or her or by his or her guardian or legal
representative.
9.4. EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH. In the event that a
Participant ceases to be an employee of the Company for any reason, including
death, any awards then outstanding may be exercised or shall expire in
accordance with the terms of this Plan and the award.
9.5. EFFECT OF CHANGE IN CONTROL.
(a) To the extent not then prohibited by 12 C.F.R. Section 563b.3(g)(4)
or other applicable regulation or law, unless determined otherwise
by the Committee, upon a Participant's termination of employment
within the twelve months following a Change in Control, all
unvested Restricted Stock awards shall become fully vested and all
Options, SARs and LSARs shall be exercisable for a period ending on
the earlier of the Expiration Date of the Option, SAR or LSAR or
the first anniversary of the Participant's termination of
employment. Notwithstanding the foregoing provisions of this
subsection 9.5, in the event of a Change in Control as the result
of a Terminating Event, a Participant's Options, SARs, LSARs and
Restricted Stock will become exercisable pursuant to this paragraph
only if no provision has been made in writing in connection with
such Terminating Event for the continuance of this Plan and for the
assumption of the awards theretofore granted hereunder, or the
substitution for such awards of new awards issued by the successor
corporation or, if applicable, the publicly traded entity that is
the parent entity of the successor corporation, with such
appropriate adjustments as may be determined or approved by the
Committee, in which event this Plan and the awards theretofore
granted or substituted therefor shall continue in the manner and
under the terms so provided.
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(b) As used in this Plan, a "Change in Control" of the Company shall mean
an event of a nature that (i) would be required to be reported in
response to Item 1 of a current report filed on Form 8-K pursuant to
Section 13 or 15(d) of the Exchange Act as in effect on the Effective
Date of this Plan; or (ii) results in any person acquiring control of
the Bank or the Holding Company within the meaning of the Home Owners'
Loan Act of 1933, as amended and the rules and regulations promulgated
by the Office of Thrift Supervision ("OTS") (or its predecessor
agency), as in effect on the Effective Date of this Plan, (provided,
that in applying the definition of change in control as set forth
under the rules and regulations of the OTS, the Board shall substitute
its judgment for that of the OTS); and, without limitation, such a
change in control shall be deemed to have occurred at such time as (A)
any "person" (as that term is used in Sections 13(d) and 14(d) of the
Exchange Act and the regulations of the SEC thereunder, each as in
effect on the date of the adoption of this Plan by the Board of
Directors of the Holding Company, and including any such persons that
may be deemed to be acting in concert with respect to the Bank or the
Holding Company, or the acquisition, ownership or voting of Bank or
Holding Company securities) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act and the regulations of
the SEC thereunder, each as in effect on the date of the adoption of
this Plan by the Board of Directors of the Holding Company), directly
or indirectly, of securities of the Bank or the Holding Company
representing 20% or more of the Bank's or the Holding Company's
outstanding securities except for any securities of the Bank purchased
by the Holding Company in connection with the conversion of the Bank
to the stock form and any securities purchased by any tax-qualified
employee benefit plan of the Bank; or (B) individuals who constitute
the Board on the date of the adoption of this Plan by the Board of
Directors of the Holding Company (the "INCUMBENT BOARD") cease for any
reason to constitute at least a majority thereof, provided that any
person becoming a director subsequent to the date hereof whose
election was approved by a vote of at least three-quarters of the
directors then comprising the Incumbent Board, or whose nomination for
election by the Holding Company's stockholders was approved by the
same Nominating Committee serving under an Incumbent Board, shall be,
for purposes of this clause (B), considered as though he were a member
of
10
<PAGE>
the Incumbent Board; or (C) a plan of liquidation reorganization,
merger, consolidation, sale of all or substantially all the assets of
the Bank or the Holding Company or similar transaction in which the
Bank or Holding Company is not the resulting entity (a "TERMINATING
EVENT") is approved by the Board and the stockholders or otherwise
occurs; or (D) solicitations of stockholders of the Holding Company,
by someone other than the Incumbent Board of the Holding Company,
seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Holding Company or Bank or similar transaction
with one or more corporations as a result of which the outstanding
shares of the class of securities then subject to this Plan are
exchanged for or converted into cash or property or securities not
issued by the Bank or the Holding Company shall be distributed; or (E)
a tender offer is made for 20% or more of the voting securities of the
Bank or the Holding Company; or (F) any other event, transaction or
series of transactions occurs as a result of which any person may be
deemed to "acquire control" of the Bank or the Holding Company (as
such terms are defined in the regulations of the OTS set forth at 12
C.F.R. Part 574 as in effect on the effective date of this Plan).
9.6. COMPLIANCE WITH APPLICABLE LAW AND WITHHOLDING.
(a) This Plan shall be governed by and construed in accordance with the
internal laws of the State of California. Notwithstanding any other
provision of this Plan, the Company shall have no obligation to issue
any shares of Common Stock under this Plan if such issuance would
violate any applicable law or any applicable regulation or requirement
of any securities exchange or similar entity.
(b) Prior to the issuance of any shares of Common Stock under this Plan,
the Company may require a written statement that the recipient is
acquiring the shares for investment and not for the purpose or with
the intention of distributing the shares and will not dispose of them
in violation of the registration requirements of Securities Act of
1933, as amended.
(c) With respect to any person who is subject to Section 16(a) of the
Exchange Act, the Committee may, at any time, add such conditions and
limitations to any award under this Plan that it deems necessary or
desirable to
11
<PAGE>
comply with the requirements of Rule 16b-3.
(d) If, at any time, the Company, in its sole discretion, determines that
the listing, registration or qualification (or any updating of any of
the foregoing) of any type of award, or the shares of Common Stock
issuable pursuant thereto, is necessary on any securities exchange or
under any federal or state securities or blue sky law, or that the
consent or approval of any governmental regulatory body is necessary
or desirable as a condition of, or in connection with, any award, the
issuance of shares of Common Stock pursuant to any award, or the
removal of any restrictions imposed on shares subject to an award,
such award shall not be made and the shares of Common Stock shall not
be issued or such restrictions shall not be removed, as the case may
be, in whole or in part, unless such listing, registration,
qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Company.
(e) All awards and payments under this Plan are subject to withholding of
all applicable taxes and the Company shall have the right to withhold
from any award under this Plan or to collect as a condition of any
payment under this Plan, as applicable, any taxes required by law to
be withheld. To the extent provided by the Committee, a Participant
may elect to have any distribution otherwise required to be made under
this Plan to be withheld or to surrender to the Company shares of
Common Stock already owned by the Participant to fulfill any tax
withholding obligation.
9.7. NO CONTINUED EMPLOYMENT. This Plan does not constitute a contract of
employment or continued service, and participation in this Plan will not give
any employee or Participant the right to be retained in the employ of the
Company or the right to continue as a director of the Company or any right or
claim to any benefit under this Plan unless such right or claim has specifically
accrued under the terms of this Plan or the terms of any award under this Plan.
9.8. TREATMENT AS A STOCKHOLDER. Any award to a Participant under this
Plan shall not create any rights in such Participant as a stockholder of the
Holding Company until shares of Common Stock are registered in the name of the
Participant.
9.9. AMENDMENT OF THIS PLAN. The Board may, at any time
12
<PAGE>
and in any manner, amend, suspend or terminate this Plan; provided, however,
that no such amendment or discontinuance shall:
(a) make any "material" (as such term is interpreted from time to time for
purposes of Rule 16b-3) increase in the number of shares reserved
under subsection 4.1 without stockholder approval;
(b) make any other change that would disqualify this Plan, or any award
granted under this Plan, intended to be so qualified, from the
exemption provided by Rule 16b-3; or
(c) alter or impair the rights of Participants with respect to awards
previously made under this Plan without the consent of the holder
thereof.
9.10. INFORMATION TO PARTICIPANTS. The Company will provide financial
statements of the Company to each Participant at least annually and without
charge.
13
<PAGE>
EXHIBIT 23
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 March 11, 1998, with respect to the consolidated
financial statements of Broadway Financial Corporation in the Annual
Report (Form 10-K) for the year ended December 31, 1997.
Ernst & Young LLP
Los Angeles, California
April 6, 1998
<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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,169
<INT-BEARING-DEPOSITS> 562
<FED-FUNDS-SOLD> 1,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 9,207
<INVESTMENTS-MARKET> 9,220
<LOANS> 104,743
<ALLOWANCE> (1,054)
<TOTAL-ASSETS> 125,116
<DEPOSITS> 109,687
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,810
<LONG-TERM> 0
0
552
<COMMON> 8,278
<OTHER-SE> (818)
<TOTAL-LIABILITIES-AND-EQUITY> 125,116
<INTEREST-LOAN> 8,354
<INTEREST-INVEST> 707
<INTEREST-OTHER> 59
<INTEREST-TOTAL> 9,120
<INTEREST-DEPOSIT> 3,968
<INTEREST-EXPENSE> 3,985
<INTEREST-INCOME-NET> 5,135
<LOAN-LOSSES> 266
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 0
<INCOME-PRETAX> 962
<INCOME-PRE-EXTRAORDINARY> 962
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 559
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.61
<YIELD-ACTUAL> 0.081
<LOANS-NON> 921
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,174
<CHARGE-OFFS> 387
<RECOVERIES> 1
<ALLOWANCE-CLOSE> (1,054)
<ALLOWANCE-DOMESTIC> (1,054)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 181
</TABLE>
<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 BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> SEP-30-1996 JUN-01-1996 MAR-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 1,982 1,287 4,278 1,290
<INT-BEARING-DEPOSITS> 706 307 301 240
<FED-FUNDS-SOLD> 8,015 2,250 500 3,650
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 2,787 3,590 3,475 0
<INVESTMENTS-CARRYING> 7,488 7,983 7,977 10,371
<INVESTMENTS-MARKET> 7,933 7,897 7,926 10,341
<LOANS> 89,005 90,496 95,180 97,434
<ALLOWANCE> (951) (900) (1,133) (1,174)
<TOTAL-ASSETS> 115,222 111,863 117,253 117,096
<DEPOSITS> 99,473 96,249 101,244 101,994
<SHORT-TERM> 0 0 0 0
<LIABILITIES-OTHER> 1,687 1660 2,494 1,458
<LONG-TERM> 0 0 0 0
0 0 0 0
911 911 911 911
<COMMON> 8,153 8,163 8,163 8,216
<OTHER-SE> (641) (649) (654) (563)
<TOTAL-LIABILITIES-AND-EQUITY> 115,222 111,863 117,253 117,096
<INTEREST-LOAN> 1907 3,837 5,855 7,878
<INTEREST-INVEST> 229 448 642 819
<INTEREST-OTHER> 11 23 35 50
<INTEREST-TOTAL> 2,147 4,308 6,532 8,747
<INTEREST-DEPOSIT> 863 1,728 2,591 3,476
<INTEREST-EXPENSE> 863 1,728 2,591 3,481
<INTEREST-INCOME-NET> 1,284 2,580 3,941 5,266
<LOAN-LOSSES> 55 243 498 586
<SECURITIES-GAINS> 0 0 0 (84)
<EXPENSE-OTHER> 0 0 0 0
<INCOME-PRETAX> 177 111 (531) (456)
<INCOME-PRE-EXTRAORDINARY> 177 111 (531) (456)
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 114 60 (318) (277)
<EPS-PRIMARY> 0.12 0.07 (0.44) (0.36)
<EPS-DILUTED> 0.00 0.00 0.00 0.00
<YIELD-ACTUAL> 0 0 0 0.082
<LOANS-NON> 755 1,198 1534 1,874
<LOANS-PAST> 0 0 0 0
<LOANS-TROUBLED> 24 24 24 24
<LOANS-PROBLEM> 0 0 0 0
<ALLOWANCE-OPEN> (8,967) (896) (896) (896)
<CHARGE-OFFS> 0 0 0 313
<RECOVERIES> 0 0 0 5
<ALLOWANCE-CLOSE> (951) (900) (1,133) (1,174)
<ALLOWANCE-DOMESTIC> (951) (900) (1,133) (1,174)
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0 335
</TABLE>
<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> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> SEP-01-1997 JUN-01-1997 MAR-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 1,308 2,059 2,869
<INT-BEARING-DEPOSITS> 132 130 32
<FED-FUNDS-SOLD> 3,900 4,250 900
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0 0
<INVESTMENTS-CARRYING> 8,874 11,870 10,309
<INVESTMENTS-MARKET> 8,773 11,745 10,291
<LOANS> 100,002 98,864 104,724
<ALLOWANCE> (1,194) (1,003) (1,071)
<TOTAL-ASSETS> 118,763 122,245 124,740
<DEPOSITS> 103,724 107,550 107,322
<SHORT-TERM> 0 0 2,500
<LIABILITIES-OTHER> 1,430 1,551 1,734
<LONG-TERM> 0 0 0
0 0 0
911 911 911
<COMMON> 8,216 8,230 8,248
<OTHER-SE> (563) (1,173) (1,203)
<TOTAL-LIABILITIES-AND-EQUITY> 118,763 122,245 124,740
<INTEREST-LOAN> 2,039 4,127 6,195
<INTEREST-INVEST> 163 349 547
<INTEREST-OTHER> 14 29 44
<INTEREST-TOTAL> 2,216 4,505 6,786
<INTEREST-DEPOSIT> 935 1,916 2,923
<INTEREST-EXPENSE> 935 1,916 2,925
<INTEREST-INCOME-NET> 1,281 2,589 3,861
<LOAN-LOSSES> 30 77 152
<SECURITIES-GAINS> 0 0 0
<EXPENSE-OTHER> 0 0 0
<INCOME-PRETAX> 111 360 536
<INCOME-PRE-EXTRAORDINARY> 111 360 536
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 111 208 310
<EPS-PRIMARY> 0.07 0.21 0.31
<EPS-DILUTED> 0.00 0.00 0.00
<YIELD-ACTUAL> 0.083 0.082 0.080
<LOANS-NON> 1,651 1039 979
<LOANS-PAST> 0 0 0
<LOANS-TROUBLED> 24 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 1,174 1,174 1,174
<CHARGE-OFFS> 11 249 249
<RECOVERIES> 1 1 1
<ALLOWANCE-CLOSE> (1,194) (1003) (1,071)
<ALLOWANCE-DOMESTIC> (1,194) (1003) (1,071)
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 270 208 169
</TABLE>
