<PAGE>
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, 1998
/ / 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
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Broadway Financial Corporation
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(Name of Small Business Issuer in Its Charter)
Delaware 95-4547287
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4800 Wilshire Boulevard, Los Angeles, California 90010
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(Address of Principal Executive Offices) (Zip Code)
(323) 634-1700
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.01 per share
-----------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes X No
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/
<PAGE>
State issuer's revenues for its most recent fiscal year. $9,685,000.
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State the aggregate market value of the voting stock held by
non-affiliates, based on the average bid and asked prices of such stock as of
March 8, 1999 as quoted on The Nasdaq Stock Market: $6,818,862.
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
932,494 shares of Common Stock at March 8, 1999
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Transitional Small Business Disclosure Format (check one):
Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 1999
annual Meeting of Shareholders are incorporated by reference into Part III.
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BROADWAY FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-KSB
<TABLE>
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PAGE
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PART I.
ITEM 1. Description of Business. . . . . . . . . . . . . . . . . . . . . . 1
Broadway Financial Corporation . . . . . . . . . . . . . . . . 1
Broadway Federal Bank, f.s.b.. . . . . . . . . . . . . . . . . 1
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Strategic Objectives . . . . . . . . . . . . . . . . . . . . . 2
Market Area and Competition. . . . . . . . . . . . . . . . . . 2
Lending Activities . . . . . . . . . . . . . . . . . . . . . . 3
Investment Activities. . . . . . . . . . . . . . . . . . . . . 17
Sources of Funds . . . . . . . . . . . . . . . . . . . . . . . 19
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Subsidiary Activities. . . . . . . . . . . . . . . . . . . . . 22
Personnel. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 29
ITEM 2. Description of Property. . . . . . . . . . . . . . . . . . . . . . 30
ITEM 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 32
ITEM 4. Submission of Matters To A Vote of Security Holders. . . . . . . . 32
PART II.
ITEM 5. Market For Common Equity and Related Stockholder Matters . . . . . .32
ITEM 6. Management's Discussion and Analysis . . . . . . . . . . . . . . . .33
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
Interest Rate Sensitivity. . . . . . . . . . . . . . . . . . . .34
Net Portfolio Value. . . . . . . . . . . . . . . . . . . . . . .34
Market Risks . . . . . . . . . . . . . . . . . . . . . . . . . .35
Year 2000 Compliance . . . . . . . . . . . . . . . . . . . . . .37
Comparison of Operating Results for the Years Ended
December 31, 1998 and December 31, 1997. . . . . . . . . . . . .40
Comparison of Financial Condition at December 31, 1998 and
December 31, 1997. . . . . . . . . . . . . . . . . . . . . .42
ITEM 7. Financial Statements of Broadway Financial Corporation . . . . . . .44
ITEM 8. Changes In And Disagreements With Accountants On
Accounting And Financial Disclosure. . . . . . . . . . . . . . .44
PART III.
ITEM 9. Directors, Executive Officers, Promoters and Control
Persons, Compliance with Section 16(a) of the Exchange Act . . .45
ITEM 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . .45
ITEM 11. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . .46
ITEM 12. Certain Relationships and Related Transactions . . . . . . . . . . .46
ITEM 13. Exhibits, Lists and Reports on 8-K . . . . . . . . . . . . . . . . .46
</TABLE>
<PAGE>
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 (323) 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.
The Bank is 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."
At December 31, 1998 the Bank is classified as "well-capitalized" under
applicable OTS and FDIC capital regulations.
1
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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
("ARMs") 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 the
increased emphasis by federal regulators on financial institutions'
fulfillment of their responsibilities under the Community Reinvestment Act.
See "--Regulation--Community Reinvestment Act."
For much of the period since World War II, the communities of 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 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.
2
<PAGE>
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, 1998, 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, 1998 and 1997, Broadway
Federal had $2.5 million and $0.2 million, respectively, in fixed-rate loans
classified as held for sale.
The types of loans that Broadway Federal originates are subject to federal 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, 1998, Broadway Federal's loan portfolio totaled $111.6
million, of which approximately 45.06% was secured by one- to four-family
residential properties, 36.87% was secured by multi-family properties and 16.74%
was secured by nonresidential properties, with approximately 66% of such
nonresidential properties being church properties. At that same date,
approximately 64.14% of Broadway Federal's one- to four-family mortgage loans,
98.04% of its multi-family residential mortgage loans, and 93.77% of its
nonresidential mortgage loans had adjustable rates.
3
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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,
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1998 1997
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AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate:
Residential:
One-to Four-Units $ 50,305 45.06% $ 54,902 51.84%
Five or More Units 41,162 36.87 31,588 29.82
Nonresidential 18,694 16.74 16,671 15.74
Construction - - 446 0.42
Loans Secured by
Savings Accounts 1,114 1.00 1,862 1.76
Other 373 0.33 445 0.42
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Gross Loans 111,648 100.00% 105,914 100.00%
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Plus:
Premiums on Loans Purchased 107 71
Less:
Allowance for Loan Losses 1,151 1,054
Loans in Process 218 143
Deferred Loan
Fees, net 774 820
Unamortized Discounts 62 57
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109,550 103,911
Less:
Loans Held for Sale 2,495 222
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Total Loans Held for Investment $ 107,055 $ 103,689
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</TABLE>
4
<PAGE>
LOAN MATURITY. The following table sets forth the contractual maturities of
Broadway Federal's gross loans at December 31, 1998 The table does not reflect
the effect of scheduled principal repayments. Principal repayments on loans
totaled $28.8 million and $9.2 million for the years ended December 31, 1998 and
1997, respectively.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
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ONE-TO- FIVE OR MORE GROSS LOANS
FOUR FAMILY UNITS NONRESIDENTIAL OTHER RECEIVABLE
----------- ------------- -------------- --------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Amounts Due:
One year or less $ 21 $ 8 $ 66 $ 1,194 $ 1,289
-------- -------- --------- ------- ---------
After one year:
After one to three years 645 548 1,203 221 2,617
After three to five years 693 246 1,128 24 2,091
After five to ten years 2,785 11,009 1,895 21 15,710
After ten to twenty years 10,048 15,456 13,996 - 39,500
More than twenty years 36,113 13,895 406 27 50,441
-------- -------- --------- ------- ---------
Total due after one years 50,284 41,154 18,628 293 110,359
-------- -------- --------- ------- ---------
Total Amounts Due $ 50,305 $ 41,162 $ 18,694 $ 1,487 $ 111,648
-------- -------- --------- ------- ---------
-------- -------- --------- ------- ---------
</TABLE>
5
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The following table sets forth the dollar amount of gross loans receivable at
December 31, 1998 which are contractually due after December 31, 1999, and
whether such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------
ADJUSTABLE FIXED TOTAL
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(In thousands)
<S> <C> <C> <C>
Real Estate Loans:
One-to four-units $ 32,056 $ 17,919 $ 49,975
Five or more units 40,346 808 41,154
Nonresidential real 17,468 1,160 18,628
estate
Construction and land 309 - 309
Other - 293 293
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Total $ 90,179 $ 20,180 $ 110,359
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</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. At December 31, 1998,
Broadway Federal had $2.5 million in fixed-rate loans and no ARMs categorized
as held for sale. Typically, Broadway Federal will retain the servicing
rights associated with loans sold. The servicing rights are recorded as
assets based upon the relative fair values of the servicing rights and
underlying loans and are amortized over the period of the related loan
servicing income stream. Amortization of these rights is reflected in the
Company's Consolidated Statements of Earnings. The Company evaluates
servicing assets for impairment in accordance with the provisions of SFAS No.
125, which require that the servicing assets be carried at the lower of
capitalized cost or fair value.
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, 1998,
Broadway Federal was servicing $8.1 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, 1998 and 1997, $15.3 million
and $7.9 million, respectively, in loans were purchased by Broadway Federal.
6
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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,
-------------------------------
1998 1997
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<S> <C> <C>
(In thousands)
Gross Loans:
Beginning Balance: $105,914 $ 98,430
Loans Originated:
One-to Four-Units 7,110 6,164
Five or More Units 11,723 3,849
Nonresidential 2,020 1,971
Construction - 321
Loans Secured by Savings 979 1,270
Accounts
Other 289 723
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Total Loans Originated 22,121 14,298
Loans Purchased 15,257 7,923
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Total New Loans 37,378 22,221
-------- --------
Less:
Transfer to REO 444 1,437
Principal Repayments 28,817 9,224
Sales of Loans 2,030 3,690
Loan Write-Offs, net 353 386
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$111,648 $ 105,914
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-------- --------
</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, 1998, 35.62%
were fixed-rate loans and 64.38% 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). At December 31,
1998 and 1997 Broadway Federal had approximately $20.5 million and $13.2
million, respectively, in mortgage loans that are 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. There were no loans in negative amortization
status at December 31, 1998 and 1997.
7
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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 is often discounted to a rate
determined by Broadway Federal in accordance with market and competitive
factors. As of December 31, 1998, the introductory discount rate offered by
Broadway Federal on ARMs that adjust monthly was 3.875%, which was below the
fully-indexed rate based on the COFI, which was 4.69% at that date. For ARMs
that adjust annually, the introductory rate offered by Broadway Federal at
December 31, 1998 was 1.35% below the fully-indexed rate based on the
Treasury, which was 4.47% at that date. As of December 31, 1998, the
fully-indexed rates on ARMs that adjust annually and those that adjust
monthly were 7.25% and 7.375%, 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 the 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.
Because of interest rate caps, market rates may exceed the maximum rates
payable on Broadway Federal's ARMs. At December 31, 1998, Broadway Federal
charged fees of up to 2.5% of the original loan amount for its one- to
four-family 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, 1998.
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 selling price if private mortgage
insurance is obtained. Many of Broadway Federal's borrowers on one- to
four-family properties are older home owners who typically prefer to maintain
lower than the maximum permitted loan balances. 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 or the appraised
value. At December 31, 1998 multi-family lending represented 36.87% of the
Bank's gross loan portfolio, compared to 29.82% at December 31, 1997.
Multi-family lending is part of the Company's strategic focus on less
competitive, higher yielding loan products. The Company 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 loan may only be made in an amount
up to 75% 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, may result 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 125%, 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
8
<PAGE>
mortgage and a history of making mortgage payments on a timely basis. In
making its assessment of the creditworthiness of the borrower, Broadway
Federal generally reviews the financial statements, employment and credit
history of the borrower, as well as other related documentation.
Broadway Federal's largest multi-family loan at December 31, 1998 was a loan
totaling $1,024,000. The loan is secured by a twenty-eight 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-four unit property
located in Los Angeles. At December 31, 1998, this loan had an outstanding
balance of $1,013,000, and was 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 that prevailed in recent years in Southern
California, had severe effects in Broadway Federal's primary market areas in
Mid-City and South Central Los Angeles, and resulted in declines in real
estate values of multi-family properties that were 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 total $18.7 million
in Broadway Federal's nonresidential real estate loan portfolio at December
31, 1998, $10.4 million was originated prior to 1993.
Broadway Federal's nonresidential real estate loans are generally made in
amounts up to 70% of the lower of the selling price or the appraised value of
the property. Subsequent declines in the real estate values in Broadway
Federal's primary market area have resulted in increases in the loan-to-value
ratios on Broadway Federal's existing nonresidential mortgage loans. These
loans may be made with amortizations and maturity dates of up to 30 years and
are indexed to the COFI or the Treasury. Broadway Federal's nonresidential
loan 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 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, 1998 of
$770,000. 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, 1998 of $666,000.
This loan is paid current, but is classified as "Substandard" due to
foreclosure proceedings initiated by the second trust deed holder. Broadway
Federal's loan is secured by a first trust deed.
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
9
<PAGE>
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 $12.3 million and $11.6
million at December 31, 1998 and 1997, respectively.
Loans secured by nonresidential real estate generally involve a greater
degree of risk than residential mortgage loans because payment on loans
secured by nonresidential real estate 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, recessionary economic conditions
of the type that prevailed in the Company's primary lending market area in
recent years tend to result in reduced cash flows on commercial real estate
loans, vacancies and reduced rental rates on such properties. 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, 1998, loans secured by
savings accounts represented $1.1 million, or 1.00%, 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 4% 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 1999, 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 $240,000, 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
$240,000 to $599,999, 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 $599,999 up to $999,999, the new loan must be
approved by three Loan Committee members; and if the total of existing loans
and the loan under consideration is $1.0 million 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
10
<PAGE>
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.
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, 1998, 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
11
<PAGE>
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.
At December 31, 1998, Broadway Federal had $3.2 million of loans classified as
"Substandard," of which the largest loan so classified had a principal balance
of $666,000 and was secured by a nonresidential property. At December 31, 1998
$9,000 was classified as "Doubtful" for one loan and $396,000 for six loans and
two REO properties were classified as "Loss". As of December 31, 1998, loans
designated as "Special Mention" consisted of 29 loans totaling $6.2 million,
which were so designated due to delinquencies or other identifiable weaknesses.
At December 31, 1998, the largest loan designated as "Special Mention" had a
principal balance of $580,000 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,
---------------------------------------------------------------------------------------------------------
1998 1997
--------------------------------------------------- -------------------------------------------------
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 $ 433 9 $ 876 7 $183 8 $ 606
Multi-family - - 1 214 - - 1 214
Nonresidential - - - - - - - 99
Construction and land - - - - - - - -
Other loans - - - - - - 1 2
------ ------- ------ -------- ------- ------- ----- -------
Total 7 $ 433 10 $1,090 7 $ 183 10 $ 921
------ ------- ------ -------- ------- ------- ----- -------
------ ------- ------ -------- ------- ------- ----- -------
Delinquent loans to
total gross loans 0.39% 0.98% 0.17% 0.87%
------- -------- ------- -------
------- -------- ------- -------
</TABLE>
NON-ACCRUAL LOANS AND REO. Nonperforming assets, consisting of non-accrual
loans and REO, decreased from $2.1 million at December 31, 1997 to $1.3
million at December 31, 1998. The $753,000 decrease resulted from a $169,000
increase in non-accrual loans, offset by a $922,000 decrease in REO. As a
percentage of total assets, nonperforming assets were 0.90% at December 31,
1998, as compared to 1.65% at December 31, 1997. The allowance for loan
losses was 105.60% of nonperforming loans at December 31, 1998, as compared
to 114.44% at December 31, 1997.
The following table includes information regarding Broadway Federal's
non-accrual loans and REO at the dates indicated. For the years ended
December 31, 1998 and 1997, 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 $80,000 and $71,000,
respectively, as compared with the respective amounts actually received on
non-accrual loans of $22,000 and $28,000. Broadway Federal had no
commitments to lend additional funds to borrowers whose loans are non-accrual
at December 31, 1998. No accruing loans were contractually past due 90 days
or more at December 31, 1998.
12
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------
1998 1997
-------- ---------
(Dollars in thousands)
<S> <C> <C>
Non-accrual loans:
Residential real estate:
One- to four-family $ 876 $ 606
Multi-family 214 214
Nonresidential - 99
Other loans - 2
-------- --------
Total non-performing loans 1,090 921
REO 222 1,144
-------- --------
Total non-performing assets $ 1,312 $ 2,065
-------- --------
-------- --------
Allowance for loan losses as a percentage
of gross loans 1.03% 1.00%
Allowance for loan losses as a percentage
of total non-performing loans 105.60 114.44
Allowance for losses as a percentage of
total non-performing assets (1) 98.09 57.19
Non-performing loans as a percentage of
gross loans 0.98 0.87
Non-performing assets as a percentage of
total assets 0.90 1.65
Net charge-offs to average loans 0.32 0.38
Impaired loans as a percentage of gross
loans 0.83 1.70
</TABLE>
_______________________
(1) Allowance for losses includes valuation allowances on loans
and REO.
At December 31, 1998, the total recorded investment in impaired loans was
$926,000. Of this amount, $214,000 had a related impairment allowance totaling
$148,000 at December 31, 1998. 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 earnings. During the year ended
December 31, 1998, Broadway Federal's average investment in impaired loans was
$1.2 million, and interest income recorded on impaired loans during this period
totaled $68,000. Impaired loans which are performing under their contractual
terms are reported as performing loans and cash payments are allocated to
principal and interest in accordance with the terms of the loan.
ALLOWANCE FOR LOAN LOSSES
Broadway Federal's allowance for loan losses is established through
provisions for loan losses charged against income in amounts that are based
on management's evaluation of the risks inherent in the loan portfolio and
the general economy. The allowance for loan losses is maintained at an amount
that management considers adequate to cover losses in loans receivable which
are deemed probable and estimable. The Board of Directors of Broadway
Federal reviews the level and reasonableness of the monthly provision for
loan losses, as well as the matrix which supports the adequacy of the
allowance for loan losses. The allowance is based upon a number of factors,
including current economic conditions, actual loss experience, industry
trends, asset classifications, levels of impaired loans, geographic
13
<PAGE>
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.
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, 1998,
Broadway Federal had $222,000 of REO, net of valuation allowances, compared
to $1.1 million in 1997.
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,
-----------------------------
1998 1997
--------- ---------
(In thousands)
<S> <C> <C>
Allowance for loan losses:
Balance at beginning of year $ 1,054 $ 1,174
Charge-offs, net:
One- to four-family 287 139
Multi-family 64 247
Construction and Land - -
Other 2 -
--------- --------
Total charge-offs, net (1) 353 386
Provision charged to earnings 450 266
--------- --------
Balance at end of year 1,151 1,054
--------- --------
Allowance for REO
Balance at beginning of year 127 181
Provision for losses 167 60
Charge-offs (158) (114)
--------- --------
Balance at end of year 136 127
--------- --------
Total $ 1,287 $ 1,181
--------- --------
--------- --------
</TABLE>
____________________
(1) There were no recoveries during the year ended December 31, 1998 and $1,000
in recoveries during the same period in 1997.
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,
-----------------------------------------------------------------------------------------
1998 1997
----------------------------------------- -------------------------------------------
PERCENTAGE OF PERCENTAGE OF
PERCENTAGE OF LOANS IN EACH PERCENTAGE OF LOANS IN EACH
ALLOWANCE TO CATEGORY TO ALLOWANCE TO CATEGORY TO
AMOUNT TOTAL ALLOWANCE TOTAL LOANS AMOUNT TOTAL ALLOWANCE TOTAL LOANS
-------- --------------- ------------ -------- --------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to Four-family $ 325 28.24% 45.06% $ 338 32.07% 51.84%
Multi-family 370 32.15 36.87 254 24.10 29.82
Nonresidential 297 25.80 16.74 217 20.59 15.74
Construction and Land - - - 10 0.95 0.42
Other 25 2.17 1.33 54 5.12 2.18
Unallocated 134 11.64 - 181 17.17 -
-------- ------- ------ -------- ------ ------
Total valuation allowance $ 1,151 100.00% 100.00% $ 1,054 100.00% 100.00%
-------- ------- ------ -------- ------ ------
-------- ------- ------ -------- ------ ------
</TABLE>
The decrease in unallocated allowance at December 31, 1998 as compared to
December 31, 1997 is a result of an increase in the allocated allowance required
on multi-family and nonresidential loans as a result of an increase in the
respective loan portfolios during the year.
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, 1998 and 1997, the Company
had investment and mortgage-backed securities in the aggregate amount of
$20.7 million and $9.2 million, respectively, with fair values of $20.7
million and $9.2 million, respectively. All investment and mortgage-backed
securities were categorized as held-to-maturity at December 31, 1998 and 1997.
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,
---------------------------------------------------------------------
1998 1997
----------------------------- ------------------------------
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 $ 4,605 $ 4,605 $ 3,731 $ 3,731
Federal funds sold 2,600 2,600 1,100 1,100
--------- --------- --------- ---------
Total cash and cash equivalents $ 7,205 $ 7,205 $ 4,831 $ 4,831
--------- --------- --------- ---------
--------- --------- --------- ---------
Investment and mortgage-backed securities:
Held to maturity:
Mortgage-Backed Securities $ 12,096 $ 12,079 $ 3,208 $ 3,237
U.S. Government and Federal
agency obligations 8,622 8,607 5,999 5,983
--------- --------- --------- ---------
Total investment and mortgage-
backed securities $ 20,718 $ 20,686 $ 9,207 $ 9,220
--------- --------- --------- ---------
--------- --------- --------- ---------
</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, 1998.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-------------------------------------------------------------------------------------------------------------
LESS THAN ONE YEAR ONE TO FIVE YEARS FIVE TO TEN YEARS TOTAL
------------------------ ----------------------- ----------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
--------- -------- -------- -------- -------- -------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 2,600 3.00% - - - - $ 2,600 3.00%
Investment Securities
Held to maturity: - - - -
Mortgage-Backed
Securities 120 6.02% - - $ 11,976 7.20% 12,096 7.18
U.S. Government
& Federal Agency
obligations - - $ 2,500 5.90% 6,122 6.16 8,622 6.09
--------- ------- -------- ------ --------- ------ -------- ------
Total investment
securities $ 2,720 3.13% $ 2,500 5.90% $ 18,098 6.85% $ 23,318 6.30%
--------- ------- -------- ------ --------- ------ -------- ------
--------- ------- -------- ------ --------- ------ -------- ------
</TABLE>
18
<PAGE>
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 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, 1998 out-of-state deposits
totaled $14.3 million or 11.39% 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.
The following table presents the deposit activity of Broadway Federal for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Deposits $ 279,690 $ 197,544
Withdrawals 267,037 192,707
---------- ----------
Net Deposits 12,653 4,837
Interest credited on deposits 3,478 3,036
---------- ----------
Total Increase in deposits $ 16,131 $ 7,873
---------- ----------
---------- ----------
</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>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
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 $ 4,562 3.89% 1.84% $ 4,394 4.18% 2.00%
Passbook deposits 28,063 23.94 1.81 28,515 27.15 1.99
NOW and other demand deposits 14,130 12.05 0.48 10,818 10.30 0.62
-------- ------ -------- ------
Total 46,755 39.88 43,727 41.64
-------- ------ -------- ------
Time Deposits:
Three months or less 1,971 1.68 3.78 - - -
Over three months through six
months 8,925 7.61 4.85 11,464 10.66 4.67
Over six through twelve months 11,892 10.14 5.20 13,728 12.77 5.30
Over one to three years 19,663 16.77 5.39 18,730 17.83 5.51
Over three to five years 3,961 3.39 5.81 3,736 3.47 5.77
Over five to ten years 1,568 1.34 5.99 1,444 1.34 6.08
Certificates over $100,000 22,503 19.19 5.00 12,193 11.34 4.78
-------- ------ -------- ------
Time Deposits 70,483 60.12 5.07 61,295 55.36 5.29
-------- ------ -------- ------
Total deposits $117,238 100.00% $105,022 100.00%
-------- ------ -------- ------
-------- ------ -------- ------
</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 time deposits outstanding at December 31, 1998.
<TABLE>
<CAPTION>
PERIOD TO MATURITY AT DECEMBER 31, 1998
--------------------------------------------------------------------
LESS THAN ONE TO TWO TWO TO THREE
ONE YEAR YEARS YEARS THEREAFTER TOTAL
---------- ---------- ------------ ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Certificate Accounts Less Than $100,000:
0 to 4.00% $ 1,805 $ -- $ -- $ -- $ 1,805
4.01 to 5.00% 21,407 1,797 112 68 23,384
5.01 to 6.00% 8,989 6,191 1,240 1,735 18,155
6.01 to 7.00% 2,803 345 330 213 3,691
------- ------- ------- ------- -------
Total 35,004 8,333 1,682 2,016 47,035
------- ------- ------- ------- -------
Certificate Accounts $100,000 or Greater:
0 to 4.00% 4,575 -- -- 3,610 8,185
4.01 to 5.00% 4,219 123 -- -- 4,342
5.01 to 6.00% 10,478 826 1,239 1,008 13,551
6.01 to 7.00% 1,284 1,205 282 158 2,929
------- ------- ------- ------- -------
Total 20,556 2,154 1,521 4,776 29,007
------- ------- ------- ------- -------
Grand Total $55,560 $10,487 $ 3,203 $ 6,792 $76,042
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
The following table presents, by various rate categories, the amounts of
certificate accounts outstanding at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
0 to 4.00% $ 9,990 $ 3,695
4.01 to 5.00% 27,726 12,695
5.01 to 6.00% 31,706 42,108
6.01 to 7.00% 6,620 6,135
------- -------
Total $76,042 $64,633
------- -------
------- -------
</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, 1998 Broadway Federal
had $4.5 million outstanding from the FHLB and no other borrowings. Broadway
Federal had no borrowings at December 31, 1997.
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,
1998 1997
-------- --------
<S> <C> <C>
(Dollars in thousands)
FHLB advances:
Average balance outstanding $ 2,607 $ 541
Maximum amount outstanding 5,500 3,500
at any month-end period
Balance outstanding at end of period 4,500 -
Weighted average interest rate during the 5.67% 3.51%
period
Weighted average interest rate at end of 5.05% -
period
</TABLE>
21
<PAGE>
SUBSIDIARY ACTIVITIES
BSC provides trust deed 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, 1998, and for the twelve
months then ended, BSC had total assets of $197,000 and net earnings of $13,000.
PERSONNEL
At December 31, 1998, Broadway Federal had 56 full-time employees and 9
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, which is 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.
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.
22
<PAGE>
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 1998, Broadway Federal's assessment rate was 0.03%.
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 mortgage servicing rights and certain other intangibles,
which may be included on a limited basis.
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 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. At December 31, 1998 and 1997,
Broadway Federal's general valuation allowance included in supplementary
23
<PAGE>
capital was $891,000 and $879,000, 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 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, 1998 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, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 AS OF DECEMBER 31, 1997
-------------------------------------- -------------------------------------
TANGIBLE CORE RISK-BASED TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
-------- -------- ----------- -------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Equity Capital-Broadway Federal $ 11,208 $ 11,208 $ 11,208 $ 10,708 $ 10,708 $ 10,708
Additional supplementary capital:
General valuation allowance - - 891 - - 879
Assets required to be deducted - - (195) - - -
-------- -------- --------- -------- -------- ---------
Regulatory capital amounts 11,208 11,208 11,904 10,708 10,708 11,587
Minimum requirement 2,167 4,334 6,855 1,861 3,722 6,266
-------- -------- --------- -------- -------- ---------
Excess over requirement $ 9,041 $ 6,874 $ 5,049 $ 8,847 $ 6,986 $ 5,321
-------- -------- --------- -------- -------- ---------
-------- -------- --------- -------- -------- ---------
</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
24
<PAGE>
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, 1998, Broadway Federal was a
well-capitalized institution.
25
<PAGE>
The table below presents Broadway Federal's capital ratios at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
ACTUAL
-----------------------------
(Dollars in thousands) AMOUNT RATIO
-------- -------
<S> <C> <C>
December 31, 1998:
Leverage/Tangible Ratio $11,208 7.62%
Tier I Risk-based ratio 11,208 13.08
Total Risk based ratio 11,904 13.90
December 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
</TABLE>
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, 1998, 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 $1.8 million. At December 31, 1998, the largest aggregate
amount of loans which Broadway Federal had outstanding to any one borrower
was $1.7 million.
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
26
<PAGE>
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).
LIQUIDITY
Effective November 24, 1997 revised regulations allow savings institutions to
maintain an average daily balance of liquid assets in each calendar quarter
of not less than 4% of (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. For the
calculation period including December 31, 1998, the liquidity ratio for
Broadway Federal was 20.76%, 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, 1998, Broadway Federal was in compliance with its
QTL test requirements.
SAVINGS AND LOAN HOLDING COMPANY REGULATION
As a savings and loan holding company, the Company is subject to certain
restrictions with respect to its activities and investments. Among other
things, the Company is generally prohibited, either directly or indirectly,
from acquiring more than 5% of the voting shares of any savings association
or savings and loan holding company which is not a subsidiary of the Company.
Prior OTS approval is required for the Company to acquire an additional
savings association as a subsidiary.
Similarly, OTS approval must be obtained prior to any person acquiring
control of the Company or Broadway Federal. Control is conclusively presumed
to exist if, among other things, a person acquires more than 25% of any class
of voting stock of the institution or holding company or controls in any
manner the election of a majority of the directors of the insured institution
or the holding company.
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
27
<PAGE>
and that are similar to the restrictions on the conduct of unrelated business
activities that are applicable to bank holding companies under the Bank
Holding Company Act.
SERVICE CORPORATIONS
Federal regulations permit federal savings institutions to invest in the
capital stock, obligations or other securities of certain types of
subsidiaries (referred to as "service corporations") that engage in certain
prescribed activities and to make loans to these corporations (and to
projects in which they participate) in an aggregate amount not to exceed 3%
of the institution's assets, as long as any investment over 2% serves
primarily community development or inner-city purposes. Additionally,
federal regulations permit an institution having regulatory capital in an
amount at least equal to the minimum requirements set forth in the applicable
OTS regulations to make additional loans to such subsidiaries in an aggregate
amount which, generally, may not exceed 100% of the regulatory capital in the
case of subsidiaries of which the institution owns or controls not more than
10% of the capital stock of certain limited partnership joint ventures and
50% of regulatory capital in the case of certain other subsidiaries or joint
ventures. Federal savings institutions are also permitted to invest in and
maintain so-called "operating subsidiaries" (generally, subsidiaries that are
engaged solely in activities the parent institution could conduct directly
and meeting certain other criteria) free of such investment limitations.
RESTRICTIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
Savings institution subsidiaries of holding companies generally are required
to provide advance notice to their OTS Regional Director of any proposed
declaration of a dividend on the institution's stock. Any dividend declared
within the notice period, or without giving the prescribed notice, is invalid.
Limitations are imposed under OTS regulations on "capital distributions" by
savings institutions, including cash dividends, payments to repurchase or
otherwise acquire an institution's shares, payments to stockholders of
another institution in a cash-out merger and other distributions charged
against capital. The regulations establish a tiered system of regulation
with the greatest flexibility being afforded to well-capitalized institutions.
An institution that meets its fully phased-in capital requirements is
permitted to make capital distributions, without prior OTS approval, during a
calendar year of up to the greater of (i) 100% of its net income during the
calendar year, plus the amount that would reduce by not more than one-half
its "surplus capital ratio" at the beginning of the calendar year (the amount
by which the institution's actual capital exceeded its fully phased-in
capital requirement at that date) and (ii) 75% of its net income over the
most recent four-quarter period. An institution that meets its current
minimum capital requirements but not its fully phased-in capital requirements
may make capital distributions, without prior OTS approval, of up to 75% of
its net income over the most recent four-quarter period, as reduced by the
amounts of any capital distributions previously made during such period. An
institution that does not meet its minimum regulatory capital requirements
prior to, or on a pro forma basis after giving effect to, a proposed capital
distribution, or that the OTS has notified as needing more than normal
supervision, is not authorized to make any capital distributions unless it
receives prior written approval from the OTS or the distributions are in
accordance with the express terms of an approved capital plan.
The OTS 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.
In connection with a conversion from mutual to stock form, a savings
institution is required to establish a liquidation account in an amount equal
to the converting institution's net worth as of a practicable date prior to
the conversion. The liquidation account is maintained for the benefit of
certain eligible account holders maintaining accounts at or prior to the date
of conversion. In the event of a complete liquidation of the converted
savings institution (and only in such event), each such account holder is
entitled to receive a distribution from the liquidation account equal to the
then current adjusted balance of the holder's savings accounts with the
savings institution. Broadway Federal'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 institution from
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.
28
<PAGE>
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, has, utilized
the reserve method of accounting for bad debts based on Broadway Federal's
actual loss experience.
The elimination of the preferential bad debt reserve methodologies allowed to
qualified savings institutions by the Small Business Job Protection Act of
1996 requires Broadway Federal to recapture into taxable income the amount of
which its bad debt reserve as of December 31, 1995 (other than its
supplemental reserve) exceeds the reserve allowable using a computation based
upon actual experience, or its 1987 reserve balance, if larger. Such excess
reserves (approximately $264,000) are required to be recaptured into taxable
income over a period of 6-years.
The balance of Broadway Federal's bad debt reserves accumulated prior to 1988
(approximately $3.0 million) will, in future years, be subject to recapture
in whole or in part upon the occurrence of certain events, such as a
distribution to shareholders in excess of Broadway Federal's current and
accumulated earnings and profits, a redemption of shares, a partial or
complete liquidation of Broadway Federal or the failure of Broadway Federal
to qualify as a "bank" for federal income tax purposes. However, dividends
paid out of Broadway Federal's current or accumulated earnings and profits,
as computed for federal income tax purposes, will not cause recapture.
Broadway Federal does not intend to make distributions to shareholders that
would result in recapture of any portion of its bad debt reserves.
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%. 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.
29
<PAGE>
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 located at 4800 Wilshire Boulevard, Los Angeles, which also
houses a fifth branch office. Broadway Federal opened its sixth branch office
at 10920 So. Central Avenue, Los Angeles in November 1998.
There are no mortgages, material liens or encumbrances against any of
Broadway Federal's owned properties. Management believes that all of the
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.
<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, 1998
- ------------ ----------- ------------ ------------- -----------------
<S> <C> <C> <C> <C>
ADMINISTRATIVE/BRANCH OFFICE:
4800 Wilshire Blvd..(1)(6) Owned 1997 - $2,033,000
Los Angeles, CA
BRANCH OFFICE:
4429 S. Broadway Blvd.(1)(2)(9) Leased 1997 Monthly 2,000
Los Angeles, CA
4835 West Venice Blvd. (1)(8) Building 1965 2013 140,000
Los Angeles, CA Owned on
Leased Land
3555 West Slauson Blvd. (1)(7) Leased 1997 1999 20,000
10920 S. Central Ave. (1) Leased 1998 (9) 154,000
Los Angeles, CA
BRANCH OFFICE/LOAN ORIGINATION
AND SERVICE CENTER:
170 N. Market Street(1)(4) Owned 1996 - 974,000
Inglewood, CA
4429 West Adams Blvd.(3)
Los Angeles, CA Owned 1993 - 196,000
4001 South Figueroa Street (5) Owned 1996 - 911,000
Los Angeles, CA
</TABLE>
- -------------------
(1) These offices are used as savings branch facilities.
(2) 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 May of
1999.
(3) 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.
(4) 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.
30
<PAGE>
(5) 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 a
new branch facility. When complete, the 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, the cost of
constructing the new branch is approximately $1.3 million.. The source of
funds for this acquisition were the insurance proceeds received for
property that was destroyed during the 1992 Los Angeles civil disturbance.
(6) 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 $466,000 were completed in early
1998.
(7) 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 $36,000 were performed and the Slauson Business Center
began operations in July 1997.
(8) In June 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 branch facility located at 4835 West Venice Blvd.
(9) Final lease terms including the expiration date of the lease are currently
being negotiated.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 1998 two unrelated legal proceedings arising out of alleged
fraudulent endorsements by Broadway Federal customers are pending against
Broadway Federal. One proceeding involves a complaint filed against Broadway
Federal for fraud, conversion, declaratory relief and injunctive relief. The
complaint seeks damages of $95,000, as well as punitive damages. The second
proceeding involves a complaint for breach of transfer and presentment
warranties. This complaint seeks damages of $182,000. The Company is presently
evaluating both complaints and is considering filing cross-complaints in each
case.
In the ordinary course of business, the Company and Broadway Federal are
defendants in various litigation matters, other than the ones discussed above.
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,
results of operations or cash flows.
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 in 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." As of March 8,
1999, 932,494 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>
4th 3rd 2nd 1st
1998 Quarter Quarter Quarter Quarter
- ------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
High.......... $ 8 3/4 $11 7/8 $13 $13 3/4
Low.......... 6 3/4 8 1/4 10 7/8 12 1/2
1997
- ------
High.......... 13 3/8 11 1/2 11 1/4 11 1/4
Low.......... 11 1/8 10 1/2 10 3/4 9 1/4
</TABLE>
31
<PAGE>
During 1998 and 1997, the Company paid quarterly dividends to Common Stock
shareholders at the rate of $0.05 per share, per quarter. During 1998 the
Company also issued an 8% stock dividend, which increased total shares
outstanding by 69,047 to 932,447.
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. 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 the Company's principal source of income. The
payment of dividends and other capital distributions by the Bank to the
Company is subject to regulation by the OTS. 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.
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 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
1998 and 1997, the Company paid dividends to Preferred Stockholders at the
rate of $0.125 per share, per quarter.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Broadway Financial Corporation was incorporated under Delaware law on
September 25, 1995 for the purpose of acquiring and holding all of the
outstanding capital stock of the Bank as part of the Bank's conversion from a
federally chartered mutual savings association to a federally chartered stock
savings bank. The Conversion was completed, and the Bank became a
wholly-owned subsidiary of the Company, on January 8, 1996. See "Description
of Business--Broadway Financial Corporation."
The Company's principal business is serving as the holding company for
Broadway Federal. Prior to the completion of the Conversion, the Company had
no assets or liabilities and did not conduct any business other than that of
an organizational nature.
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.
32
<PAGE>
For the years ended December 31, 1998 and 1997, the Company recorded net
earnings of $209,000 and $559,000, respectively. At December 31, 1998 and
1997, respectively, the Company had total consolidated assets of $145.4
million and $125.1 million; total deposits of $126.0 million and $109.9
million; and stockholders' equity of $13.6 million and $13.4 million,
representing 9.32% and 10.74% of assets. Each of the Bank's regulatory
capital ratios exceeded regulatory requirements at December 31, 1998 and
1997, with tangible and core capital each at 7.65% and 8.63% and risk-based
capital at 13.93% and 14.79%, 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 the 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 its deposit costs are not. Rapid increases
in interest rates could therefore have a negative impact on Broadway
Federal's earnings. Declining interest rates have, in general, benefitted
Broadway Federal primarily due to the effect of the lagging market index
which has resulted in the interest income earned on loans declining at a
slower rate than interest expense paid on deposits. This effect of the
lagging index, however, has been partially offset by the increase in
refinancings of portfolio loans to lower yielding loans.
The principal objective of the Company's 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 ARMs,
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 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
33
<PAGE>
for each institution. At December 31, 1998 there would have been 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, 1998
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 PRESENT VALUE
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE (1) OF ASSETS
--------------------- -------- -------- ------------ ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
400 $17,139 114 1 .29
300 17,469 444 3 .43
200 17,524 499 3 .41
100 17,294 269 2 .22
Zero 17,025 - - -
(100) 17,049 24 - (.04)
(200) 17,236 211 1 .01
(300) 17,622 597 4 .17
(400) 17,908 883 5 .27
</TABLE>
- -----------------
(1) Percentage changes less than 1% not shown.
The above table suggests that in the event of a 200 basis point change in
interest rates, Broadway Federal would experience 3% increase 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.
MARKET RISK
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of December
31, 1998 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, 1998. 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.
34
<PAGE>
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total Fair Value
------ ------ ------ ------ ------ ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
- ------------------------
Loans Receivable: (1) (2) (3) (4)
Fixed $6,096 $4,124 $2,477 $2,034 $1,638 $ 4,997 $21,366 $25,660
Average Interest Rate 8.76% 8.82% 9.05% 9.07% 9.04% 8.86% 8.89%
Adjustable $7,336 $5,661 $4,860 $4,222 $3,716 $64,487 $90,282 $92,242
Average Interest Rate 7.51% 7.50% 7.53% 7.58% 7.62% 8.04% 7.90%
Investment Securities (5) $7,622 $1,000 $8,622 $8,607
Average Interest Rate 5.20% 5.70% 5.25%
Mortgage Backed Securities (6)(7)
Fixed $1,620 $1,277 $998 $877 $685 $3,321 $8,778 $9,650
Average Interest Rate 7.31% 7.40% 7.38% 7.36% 7.39% 7.29% 7.34%
Adjustable $607 $499 $410 $335 $275 $1,192 $3,318 $2,429
Average Interest Rate 6.63% 6.63% 6.63% 6.63% 6.64% 6.64% 6.64%
FHLB Stock (8) $987 $987 $987
Average Interest Rate 6.02% 6.02%
Interest Bearing Deposits $2,754 $2,754 $2,754
Average Interest Rate 4.55% 4.55%
Total Interest Earning Assets $27,022 $11,561 $8,745 $8,468 $6,314 $73,997 $136,107 $142,329
INTEREST BEARING LIABILITIES:
- -----------------------------
Savings Accounts:
Now Accounts (9) $1,721 $1,429 $1,186 $984 $817 $3,989 $10,126 $10,126
Average Interest Rate 1.01% 1.01% 1.01% 1.01% 1.01% 1.01% 1.01%
Passbook Accounts (10) $4,854 $4,029 $3,344 $2,776 $2,304 $11,247 $28,554 $28,554
Average Interest Rate 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%
Certificate Accounts (11) $55,560 $10,487 $3,203 $766 $5,146 $880 $76,042 $73,038
Average Interest Rate 4.86% 5.61% 5.75% 5.90% 4.08% 5.74% 4.97%
Money Market Funds (12) $1,698 $1,137 $2,305 $5,140 $5,140
Average Interest Rate 2.11% 2.11% 2.11% 2.11%
Non Interest Bearing Checking (13) $2,025 $1,357 $909 $576 $419 $850 $6,136 $6,136
Average Interest Rate
Fixed Interest Rate Borrowings:
Federal Home Loan Bank
Advances $4,500 $4,500 $4,467
Average Interest Rate 5.05% 5.05%
Other Interest Bearing Liabilities $521 $521 $521
Average Interest Rate 0.60% 0.60%
Total Interest Bearing Liabilities $65,858 $22,939 $10,947 $5,623 $8,686 $16,966 $131,019 $127,981
</TABLE>
35
<PAGE>
FOOTNOTES:
1) Loans receivable are not reduced for net deferred loan fees, undisbursed
loan proceeds and the allowance for loan losses.
2) For single family residential loans, assumes annual amortization and
balloon maturities as appropriate. Assumes a prepayment rate of 17.52% for
adjustable rate loans, and 15% to 33% 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 COFI 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 $1.1 million are categorized as maturing
in 1999.
5) As of December 31, 1998, $1.5 million of the securities have maturities
ranging from 1999 to 2003. 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 adjusted for prepayment rates on fixed rate securities are
assumed to range from 13% to 18.5%.
7) The Company's adjustable rate 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 floors exist.
The schedule uses an assumed prepayment rate of 17.52%.
8) FHLB Stock does not have a market. Its fair value is therefore unknown.
However, historically the stock could be redeemed 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
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
Many existing computer programs use only two digits to identify a year in the
date field with the assumption that the first two digits are always 19. Systems
that calculate, compare or sort data using the incorrect date may cause
erroneous results, ranging from system malfunctions to incorrect or incomplete
processing. If not remedied, potential risks include: business disruption or
temporary shutdown and financial loss. Pursuant to its information technology
strategy, the Company principally utilizes third-party computer service
providers and third-party software for its information technology needs. As a
result, the Year 2000 compliance of the Company's information technology assets
("IT assets"), such as computer hardware, software and systems, is primarily
dependent upon the Year 2000 compliance efforts and results of its third-party
vendors. The Year 2000 compliance of the Company's non-IT assets, which include
automated teller machines (ATMs), copiers, fax machines, coin/currency counters,
and emergency communications radios, is also primarily dependent upon the Year
2000 compliance efforts and results of third parties.
State of Readiness
In June 1998, the Company developed a plan to address Year 2000 issues and
appointed a Year 2000 Committee comprised of representatives from all divisions
of the Company. The Year 2000 Committee has developed and is currently
implementing a comprehensive initiative to make the Company's IT assets and
non-IT assets Year 2000 compliant. A Year 2000 compliance review and test of
the computer hardware and software used by the Company was conducted in the
first quarter of 1998. As a result, the Company replaced approximately 95% of
its existing personal computers and monitors, as well as its date processing
service bureau.
The Company's non-IT assets were also assessed for Year 2000 compliance.
Manufacturers, installers, and/or servicers of each have been contacted for
certification of Year 2000 readiness.
The Year 2000 Committee's initiative to make the Company's IT assets and non-IT
assets Year 2000 compliant is comprised of the following phases:
1. Awareness-Educational initiative on Year 2000 issues and concerns. This
phase has been completed.
36
<PAGE>
2. Assessment-Inventory of IT assets and non-IT assets as well as
identification of third-party vendors and service providers with which
the Company has material relationships. This phase has been completed.
3. Renovation-Review of vendor and service providers' responses to the
Company's Year 2000 inquiries and development of a follow-up plan and
time-line. This phase has been completed.
4. Validation-The Year 2000 Committee's readiness initiative is currently in
this phase. This phase consists of testing of IT assets and non-IT assets
as well as testing of third-party vendors and service providers of Year
2000 issues. The testing of IT assets and non-IT assets is substantially
complete. The testing of third-party vendors and service providers has
begun and will continue through June 30, 1999. Testing of all
mission-critical systems is scheduled to be completed by June 30, 1999.
5. Implementation-As mentioned above, the Company replaced 95% of its computer
hardware and software, and converted to a data processing service bureau
that is considered to be Year 2000 compliant. The Company has conducted
sufficient testing to satisfy itself of such compliance. The Company has
also tested its new hardware and software and ascertained their compliance.
The major focus of the Company's efforts is currently to ensure that its
vendors are compliant. This process is expected to be completed by the end
of the second quarter of 1999.
Costs to Address the Year 2000 Issue
The total cost of carrying out the Company's plan to address the Year 2000 issue
is currently estimated to be approximately $500,000, including estimates of
personnel costs, and is comprised primarily of costs for equipment and software
that will be acquired and depreciated over its useful life in accordance with
Company policy. Any personnel and additional costs have been and will continue
to be expensed as incurred. These currently contemplated Year 2000 compliance
costs are expected to be funded primarily through operating cash flow and are
not expected to have a material adverse effect on the Company's business,
financial condition or results of operations. To date, the costs incurred
related to Year 2000, excluding estimates of personnel costs, are approximately
$452,000, of which $20,000 were expensed. The major part of the costs incurred
to date relate to the replacement of hardware and software which have been
capitalized in accordance with Company policies.
Risks Presented by the year 2000 Issue
Because the Company is substantially dependent upon the proper functioning of
its computer systems and the computer systems and services of third parties, a
failure of those computer systems and services to be Year 2000 compliant could
have a material adverse effect on the Company's business, financial condition or
results of operations. The Company relies heavily on third-party vendors and
service providers for its information technology needs. The Company's primary
third-party computer service provider is a computer service bureau that provides
data processing for virtually of the Company's savings and checking accounts,
real estate lending and real estate loan servicing, general ledger, fixed assets
and accounts payable. This third-party's data processing services are
mission-critical services for the Company and a failure of this provider's
services to be Year 2000 compliant could cause substantial disruption of the
Company's business and could have a material adverse financial impact on the
Company. Testing of this third-party data processing service bureau was
performed with satisfactory results.
If this third-party service provider or other third-party providers with which
the Company has material relationships are not Year 2000 compliant, the
following problems could result: (i) in the case of vendors, important services
upon which the Company depends, such as telecommunications and electrical power,
could be interrupted, (ii) in the case of third-party service providers, the
Company could receive inaccurate or outdated information, which could impair the
Company's ability to perform critical data functions, such as the processing of
deposit accounts, loan servicing and internal accounting, and (iii) in the case
of governmental agencies, such as the FHLB, and correspondent banks, such
agencies and financial institutions could fail to provide funds to the Company,
which could materially impair the Company's liquidity and affect the Company's
ability to fund loans and deposit withdrawals. In addition, whether or not the
Company is Year 2000 compliant, the Company may experience an outflow of
deposits if customers are concerned about the integrity of financial
institutions' records regarding customers' accounts.
Contingency Plans
Where it is possible to do so, the Company has scheduled testing with
third-party vendors and service providers. Where this is not possible, the
company will rely upon certifications of Year 2000 compliance from vendors
and service providers. Most vendors and service providers have targeted
March 31, 1999 as their expected date available for testing. Until that
time, the Company is unable to fully assess its risks from potential Year
2000 non-compliance and to develop its Year 2000 contingency plans. The
Company is currently developing a contingency plan to minimize disruption of
operations due to Year 2000 issues. Included are plans to recover critical
business operations and alternatives to mitigage potential effects of
critical third-party vendors and service providers whose own failure to
properly address Year 2000 issues may adversely impact the ability to perform
certain functions. Alternative strategies and contingency plans for liquidity
and cash will also be included as part of the plan. The contingency plan is
expected to be substantially complete for critical business operations by
June 30, 1999.
There can be no assurance that the Company's Year 2000 initiative will
effectively address the Year 2000 issue, that the Company's estimates of the
timing and costs of completing the initiative will ultimately be accurate or
that the impact of any failure of the Company or its third-party vendors and
service providers to be Year 2000 compliant will not have a material adverse
effect on the Company's business, financial condition or results of operations.
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Company's
average balance sheets for the years ended December 31, 1998 and 1997. 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.
37
<PAGE>
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1998 1997
-------------------------------------- -------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------------- ---------- -------- ---------- ----------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS:
Interest-earning deposits $ 148 $ 4 2.70% $ 19 $ 6 3.05%
Federal Funds sold and other
short-term investments 2,638 113 4.28 2,938 164 5.58
Investment securities, (1) 8,689 541 6.23 7,827 396 5.06
Loans receivable(2)(3) 106,535 8,630 8.10 97,503 8,354 8.57
Mortgage-backed securities, (1) 5,650 338 5.98 2,218 141 6.36
FHLB Stock 963 59 6.13 904 59 6.53
------------ ---------- ---------- ----------
TOTAL INTEREST-EARNING ASSETS 124,623 $ 9,685 7.77 111,587 $ 9,120 8.17
---------- ----------
NONINTEREST-EARNING ASSETS 10,645 ---------- 8,834 ----------
------------ ----------
TOTAL ASSETS $ 135,268 $ 120,421
------------ ----------
------------ ----------
LIABILITIES AND RETAINED EARNINGS
INTEREST-BEARING LIABILITIES:
Money market deposits $ 4,562 $ 84 1.84% $ 4,394 $ 88 2.00%
Passbook deposits 28,063 508 1.81 28,515 567 1.99
NOW and other demand deposits 14,130 67 0.48 10,818 67 0.62
Certificate accounts 70,483 3,577 5.07 61,295 3,244 5.29
------------ ---------- ---------- ----------
TOTAL SAVINGS DEPOSITS 117,238 4,236 3.61 105,022 3,966 3.78
FHLB advances 2,607 148 5.67 541 19 3.51
------------ ---------- ---------- ----------
TOTAL INTEREST-BEARING LIABILITIES 119,845 $ 4,384 3.66 105,563 $ 3,985 3.77
------------ ---------- ---------- ----------
---------- ----------
Noninterest-bearing liabilities 1,868 1,733
Retained earnings 13,555 13,125
TOTAL LIABILITIES AND RETAINED
EARNINGS $ 135,268 $ 120,421
------------ ----------
------------ ----------
NET INTEREST RATE SPREAD(4) $ 5,301 4.11% $ 5,135 4.40%
NET INTEREST MARGIN(5) 4.25 4.60
RATIO OF INTEREST-EARNING ASSETS TO
INTEREST-BEARING LIABILITIES 103.99 105.71
RETURN ON AVERAGE ASSETS 0.18 0.46
RETURN ON AVERAGE EQUITY 1.79 4.26
AVERAGE EQUITY TO
AVERAGE ASSETS RATIO 10.02 10.90
</TABLE>
- ---------------
(1) All investment and mortgage-backed 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.
38
<PAGE>
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, 1998 YEAR ENDED DECEMBER 31, 1997
COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------- --------------------------------
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
----------------------------- ---------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-earning deposits $ (2) $ - $ (2) $ 8 $ (13) $ (5)
Federal funds sold and other short term
investments (17) (34) (51) (57) 6 (51)
Investment securities, net 44 101 145 21 (60) (39)
Loans receivable, net 774 (498) 276 544 (66) 478
Mortgage backed securities, net 218 (21) 197 (28) 14 (14)
FHLB stock 4 (4) - 3 - 3
----------------------------- ---------------------------------
TOTAL INTEREST-EARNING ASSETS 1,021 (456) 565 491 (119) 372
----------------------------- ---------------------------------
INTEREST-BEARING LIABILITIES:
Money market deposits 3 (7) (4) 3 (9) (6)
Passbook deposits (9) (50) (59) (39) (9) (48)
NOW and other demand deposits 21 (21) - - 5 5
Certificate accounts 486 (154) 332 467 58 525
FHLB advances 68 62 130 27 (2) 25
----------------------------- ---------------------------------
TOTAL INTEREST-BEARING LIABILITIES 569 (170) 399 458 43 501
----------------------------- ---------------------------------
CHANGE IN NET INTEREST INCOME $ 452 $ (286) $ 166 $ 38 $ (162) $ (129)
----------------------------- ---------------------------------
----------------------------- ---------------------------------
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997
GENERAL
The Company recorded net earnings of $209,000 or $0.19 per diluted share, for
the year ended December 31, 1998, compared to net earnings of $559,000 or
$0.56 per diluted share, for the year ended December 31, 1997. This
$350,000 decrease in net earnings for the year was impacted by several
factors occurring in 1998 and 1997. During the twelve months ended December
31, 1998 an additional provision for loan losses of $184,000 was taken
primarily due to the charge-off of a loan secured by a single-family
property, and a $228,000 write-down of premiums on loans purchased and
servicing assets resulting from accelerated payoffs of such loans which was
recorded as a reduction of interest income. During the twelve months ended
December 31, 1997 net earnings included a $272,000 gain on the sale of an
office property sold during the fourth quarter. Excluding such adjustments
the Company would have recorded net earnings for the years ended December 31,
1998 and 1997 of $454,000 and $401,000, respectively. The net earnings for
1998 were also impacted by the net effect of other offsetting factors, which
included higher interest income on loans and investments, higher interest
expense on savings deposits and borrowings and higher noninterest expense.
INTEREST INCOME
Interest income increased by $565,000, or 6.20%, from $9.1 million in 1997 to
$9.7 million in 1998. This increase was primarily the result of an increase in
average interest-earning assets of $13.0 million, to $124.6 million for the year
ended December 31, 1998 from
39
<PAGE>
$111.6 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 and investment portfolios.
The effect of the increase in average interest-earning assets was partially
offset by a decrease in the average yield on such assets from 8.17% during the
year ended December 31, 1997 to 7.77% during the year ended December 31, 1998.
Interest income from loans, which accounted for approximately 89% of total
interest income in 1998, increased by $276,000, or 3.30%, due to a $9.0 million,
or 9.26%, increase in the average balance of loans, offset by a 47 basis point
decrease in the average yield on loans from 8.57% for 1997 to 8.10% for 1998.
Interest income from mortgage-backed securities increased $197,000, or 139.72%,
from $141,000 in 1997 to $338,000 in 1998, primarily due to a $3.4 million, or
154.73%, increase in the average balance of mortgage-backed securities, offset
by a 33-basis point decrease in the average yield on such securities from 6.31%
during 1997 to 5.98% during 1998. The decreases in average yields on loans and
mortgage-backed securities resulted from a decreasing interest rate environment
during 1998. Interest income from investment securities, which includes income
from fed funds and other short-term investments, interest earning deposits and
investment securities, increased $92,000, or 16.25%, from $566,000 in 1997 to
$658,000 in 1998, primarily due to a 117 basis point increase in the average
yield on investment securities to 6.23% during 1998 from 5.06% during 1997,
coupled with a $862,000, or 11.01% increase in the average balance of investment
securities to $8.7 million during 1998, from $7.8 million during 1997. The
increase in average yields on investment securities primarily resulted from more
emphasis being placed on higher yielding intermediate-term investments during
1998.
INTEREST EXPENSE
Interest expense includes interest on savings deposits and on borrowings.
Interest expense increased $399,000, or 10.01%, for the year ended December 31,
1998, to $4.4 million, from $4.0 million for the same period a year ago. This
increase was primarily the result of an increase in average interest-bearing
liabilities of $14.2 million, to $119.8 million for the year ended December 31,
1998 from $105.6 million for the same period a year ago. Interest on savings
deposits, which accounted for approximately 97% of interest expense in 1998,
increased by $270,000 or 6.81%, due to a $12.2 million, or 11.63%, increase in
the average balance of savings deposits offset by a 17 basis point decrease in
the average cost of deposits from 3.78% for 1997 to 3.61% for 1998. The
decrease in the average cost of savings deposits also reflects the decreasing
interest rate environment during 1998 and the Bank's ability to maintain its
core deposit portfolio mix and increase its NOW and other demand deposit
portfolio from $12.9 million at December 31, 1997 to $16.2 million at December
31, 1998.
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 4.40% at December 31, 1997 to 4.11% at December 31,
1998. This 29-basis point decrease in NIS primarily results from lower yields
on interest earning assets between 1997 and 1998. However, the Company's net
interest income increased $166,000, or 3.23%, from $5.1 million during 1997 to
$5.3 million during 1998, due primarily to higher asset turnover resulting from
$28.8 million in loan principal repayments during the year ended December 31,
1998, compared to $9.2 million during 1997. Management continues to take 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
noninterest 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 Federal Home Loan Bank 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 increased by $184,000, or 69.17%, from $266,000
for the year ended December 31, 1997 to $450,000 for the year ended December 31,
1998. The higher provision results from management's ongoing analysis of the
Company's allowance for loan losses, which in turn is impacted by the level of
charge-offs during the period. For the year ended December 31, 1998 loan
charge-offs totaled $353,000, as compared to $386,000 for the same period in
1997. The charge-offs during 1998 primarily consisted of a $233,000 charge-off
of two loans made to one borrower. The property securing these loans was a
single-family residence located in Los Angeles, California that was sold through
foreclosure. Another charge-off totaling $64,000 was on a loan secured by a
32-unit property that was taken back in foreclosure during the year and sold by
year end. Other charge-offs during the period, totaling $54,000, were on five
properties transferred to REO and a $2,000 nonmortgage loan.
Total non-performing assets, consisting of non-accrual loans and REO, decreased
by $753,000, from $2.1 million at December 31, 1997 to $1.3 million at December
31, 1998. Of the $753,000 decrease, $169,000 represented an increase in
non-accrual loans, offset by a $922,000 decrease in REO. As a percentage of
total assets, non-performing assets were 0.90% at December 31, 1998, compared to
1.65% at December 31, 1997. The allowance for loan losses was 105.62% of
nonperforming loans at December 31, 1998, compared to 114.44% at December 31,
1997. Non-accrual loans at December 31, 1998 included nine loans totaling
$876,000 secured by one-
40
<PAGE>
to four-unit properties and one loan totaling $214,000 secured by a
multi-family property. REO at December 31, 1998 included a commercial
property with a book value of $83,000 and one parcel of land having a book
value of $139,000.
NONINTEREST INCOME
Noninterest income decreased by $4,000, or 0.47%, to $855,000 for the year ended
December 31, 1998, from $859,000 for the same period a year ago. The decrease
is due to a number of offsetting factors. Gain on sale of mortgage loans
decreased $109,000, from $123,000 in 1997 to $14,000 in 1998 due to a decrease
in loans sold during the year. Gain on sale of office properties and equipment
decreased from $272,000 in 1997 to $7,000 in 1998 due the sale in 1997 of
property previously used as Broadway Federal's corporate office and main savings
branch, which was destroyed during the 1992 Los Angeles civil disturbance. Gain
on casualty insurance reimbursement increased from zero in 1997 to $199,000 in
1998 due to the recognition of insurance proceeds resulting from the April 1992
destruction by fire of Broadway Federal's main branch office. Other noninterest
income increased $171,000, from $50,000 in 1997 to $221,000 in 1998 due to the
reversal of a $170,000 accrual that had been set up for interest and penalties
on funds escheated to the State of California in 1992. It has been determined
that the interest and penalties are not due and that the accrual was no longer
necessary.
NONINTEREST EXPENSE
Noninterest expense increased by $589,000, or 12.36%, to $5.4 million for the
year ended December 31, 1998, from $4.8 million for the same period a year ago.
The increase in noninterest expense was primarily due to increases in
compensation and benefits, occupancy expense, advertising and promotional
expense, federal insurance premiums, insurance bond premiums, write-downs,
expenses and write-offs related to the operation and sale of REO, contracted
security services and other expenses, offset primarily by a decrease in net
operational losses. Compensation and benefits increased by $129,000 for the
year ended December 31, 1998, 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 $193,000, to $1.1 million
for the year ended December 31, 1998, as compared to the same period a year ago.
The increases were primarily due to increases in computer expenses, rent and
utilities, maintenance and repair and depreciation on office buildings.
Advertising and promotional expense increased $45,000, to $208,000 for the year
ended December 31, 1998, as compared to the same period a year ago. The
increases were primarily attributable to increased marketing and promotions
during the year and the grand opening of the Wilshire corporate office.
Federal deposit insurance premiums increased by $17,000 due to an increase in
savings deposits. Write-downs, expenses and write-offs related to the operation
and sale of REO increased $72,000, from $130,000 in 1997 to $202,000 in 1998.
The increase results from the aggressive resolution of REO assets during the
year, resulting in the disposal of eleven REO's. Contracted security services
increased by $21,000, from $128,000 in 1997 to $149,000 in 1998. The increase
results from security services provided to new branch offices during 1998.
Other noninterest expense increased $134,000, from $568,000 in 1997 to $702,000
in 1998. The increase resulted from an increase in legal fees, telephone and
postage, loan expense and other operating expense. Offsetting these increases
is a $30,000 decrease, to $70,000 for the year ended December 31, 1998, in
operational expense, which includes bad debt write-offs and the portion of
savings losses in excess of insurance proceeds. The decrease primarily resulted
from lower savings losses incurred in 1998 as compared to the prior year.
INCOME TAXES
Income taxes decreased from $403,000 for the year ended December 31, 1997, to
$142,000 for 1998, resulting in a respective decrease in the effective tax rate
from 41.89% to 40.46%. The decrease in income taxes was the result of lower
earnings before income taxes during 1998, as compared to the same period in
1997.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND DECEMBER 31, 1997
Total assets at December 31, 1998 were $145.7 million compared to $125.1 million
at December 31, 1997, an increase of $20.3 million, or 16.23%. Net loans
receivable increased $5.7 million to $109.6 million at the year ended December
31, 1998, as compared to $103.9 million at December 31, 1997. The increase in
net loans resulted from $22.1 million in loan originations and $15.3 million in
loan purchases, offset primarily by $28.9 million in principal repayments,
$561,000 in loans transferred to foreclosure and $2.0 million in loans sold
during the year. Loans held for sale at December 31, 1998 and 1997 totaled
$2.5 million and $222,000, respectively. Investment securities increased $11.5
million, from $9.2 million at December 31, 1997 to $20.7 million at December 31,
1998. The increase in investment securities resulted from the acquisition of
mortgage-backed and U.S. government federal agency securities during the year.
Office properties and equipment increased from $1.4 million, to $5.4 million at
December 31, 1998, primarily as a result of renovation costs incurred for the
Bank's branch and administrative offices located in the City of Los Angeles and
the costs
41
<PAGE>
incurred for a new computer system. The new Wilshire Boulevard facility,
which includes a new savings branch, was acquired to replace the Bank's
administrative office lost by fire during the 1992 civil disturbance in Los
Angeles. The Company began to occupy the new facility in March 1998.
Total liabilities at December 31, 1998 were $132.0 million compared to $111.7
million at December 31, 1997. The $20.3 million increase is primarily
attributable to a $16.1 million increase in savings deposits which were used to
fund the increase in total assets.
Total capital at December 31, 1998 was $13.6 million as compared to $13.4
million at December 31, 1997, representing an increase of $114,000. Capital
decreased due to the payment of $208,000 in dividends during the year. This
decrease was offset by net earnings of $209,000 for the year and a $113,000
Employee Stock Ownership Plan ("ESOP") repayment.
LIQUIDITY AND CAPITAL RESOURCES
Sources of liquidity and capital for the Company on a stand-alone basis include
distributions from the Bank and borrowings such as securities sold under
agreements to repurchase. Dividends and other capital distributions from the
Bank are subject to regulatory restrictions.
The Bank'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 14.86% and 14.18%
for the years ended December 31, 1998and 1997, respectively. The relatively
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 Bank has other sources of liquidity in the event that a need for additional
funds arises, including FHLB advances to the Bank. At December 31, 1998 and
1997 FHLB advances totaled $4.5 million and zero, respectively. During the
years ended December 31, 1998 and 1997 Broadway Federal had borrowed from the
FHLB to meet its short-term loan funding needs. 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 (used in) or provided by operating activities were $(2.1) million and
$1.2 million for the years ended December 31, 1998 and 1997, respectively.
Loans originated for sale, net of refinances, totaled $4.3 million and $3.9
million for the years ended December 31,1998 and 1997, respectively. Proceeds
from the sale of loans receivable held for sale totaled $2.0 million and $3.8
million for the years ended December 31, 1998 and 1997, 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 $33.0 million
and $18.3 million for the years ended December 31, 1998 and 1997, respectively.
Proceeds from loan principal repayments were $28.8 million and $9.2 million for
the years ended December 31, 1998 and 1997, respectively. Purchases of
investment securities held to maturity were $25.2 million and $5.0 million for
the years ended December 31, 1998 and 1997, respectively. Proceeds from the
sale, maturity or redemption and principal payments of mortgage-backed and
investment securities were $13.7 million and $6.0 million for the years ended
December 31, 1998 and 1997, respectively. Capital expenditures for office
properties and equipment for the years ended December 31, 1998 and 1997 totaled
$1.7 million and $2.3 million, respectively. Net cash provided by financing
activities was derived from an increase in savings deposit accounts and advances
from the FHLB. The net increase in savings deposits for the year totaled $16.1
million, or 14.7%.
At December 31, 1998, the Company had outstanding commitments to originate loans
of $2.4 million and no commitments to purchase loans. The Company anticipates
that it will have sufficient funds available to meet its current loan
origination commitments. Certificates of deposits which have contractual
maturities of one year or less from December 31, 1998, totaled $55.6 million.
If a significant portion of the maturing certificates are not renewed at
maturity, the Company's other sources of liquidity include FHLB advances,
principal and interest payments on loans, proceeds from loan sales and other
borrowings, such as repurchase transactions. The Company could also choose to
pay higher rates to maintain maturing deposits, which could res result in
increased cost of funds. Historically, the Company has maintained a significant
portion of maturing deposits. While management anticipates that there may be
some outflow of these deposits upon maturity due to the current competitive rate
environment, these are not expected to have a material impact on the long-term
liquidity position of the Company.
42
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Company and Notes thereto presented
herein have been prepared in accordance with generally accepted accounting
principles ("GAAP") which require the measurement of financial position and
operating results in terms of historical dollars without considering the changes
in the relative purchasing power of money over time due to inflation. The
impact of inflation is reflected in the increased cost of the Company's
operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Company and Broadway Federal are monetary in nature. As a
result, interest rates have a greater impact on the Company's performance than
do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the price of
goods and services.
RECENT ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities." ("SFAS
No. 133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments in the statement of financial position as either assets
or liabilities and the measurement of derivative instruments at fair value.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The
adoption of SFAS No. 133 is not expected to have a material effect on the
Company's consolidated results of operations or financial condition.
MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS
HELD FOR SALE - In October 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." ("SFAS No. 134"). SFAS No. 134
is an amendment of SFAS No. 65, "Accounting for Certain Mortgage Banking
Activities." SFAS No. 134 requires mortgage banking enterprises to classify
loans held for sale that they have securitized, based on their intent to sell or
hold those investments. SFAS No. 134 is effective for the first fiscal quarter
beginning after December 15, 1998. The adoption of SFAS No. 134 is not expected
to have a material impact on the Company's consolidated results of operations or
financial condition, as currently there are no mortgage loans that have been
securitized by the Company.
43
<PAGE>
ITEM 7. FINANCIAL STATEMENTS OF BROADWAY FINANCIAL CORPORATION
See Index to Financial Statements of Broadway Financial Corporation on Page 49
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
On November 20, 1998, the Company dismissed its independent accountant, Ernst &
Young ("E&Y"). E&Y's report on the financial statements for the past two years
did not contain an adverse opinion or disclaimer of opinion and was not modified
as to uncertainty, audit scope or accounting principles. The decision to change
accountants was recommended by the Audit Committee of the Board of Directors and
ratified by the full Board of Directors on November 18, 1998. There were no
disagreements with E&Y on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. The Company
retained the accounting firm of KPMG LLP ("KPMG") on November 20, 1998, to
provide audit and tax services for the years ending December 31, 1998, 1999 and
2000. There were no consultations with KPMG regarding the application of
accounting principles to specific transactions, or the type of audit opinion
that might be rendered prior to their engagement by the Company.
44
<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 here in by reference to
the definitive Proxy statement, under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance", to be filed with the Securities and Exchange
Commission in connection with the Company's 1999 Annual Meeting of Shareholders
(the "Company's 1999 Proxy Statement").
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
Company's 1999 Proxy Statement, under the caption "Executive Compensation
Benefits and Related Matters".
45
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the
Company's 1998 Proxy Statement, under the caption "Voting Securities and
Principal Holders Thereof".
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>
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)
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
16. Letter on Change in Certifying Accountant (filed by Registrant as part of
Form 8-K on November 25, 1998)
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)
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule
</TABLE>
- ------------
* Exhibits followed by a parenthetical reference are incorporated by
reference herein from the document described therein.
(b) REPORTS ON FORM 8-K
A Report on Form 8-K was filed on November 25, 1998 disclosing a change in the
Company's certifying accountants.
46
<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: April 7, 1999
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: April 7, 1999
- -------------------------------------------
Paul C. Hudson
Chief Executive Officer, President
and Director
(Principal Executive Officer)
/s/ Bob Adkins Date: April 7, 1999
- -------------------------------------------
Bob Adkins
Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ Elbert T. Hudson Date: April 7, 1999
- -------------------------------------------
Elbert T. Hudson
Chairman of the Board
/s/ Kellogg Chan Date: April 7, 1999
- -------------------------------------------
Kellogg Chan
Director
/s/ Dr. Willis K. Duffy Date: April 7, 1999
- -------------------------------------------
Dr. Willis K. Duffy
Director
47
<PAGE>
/s/ Rosa M. Hill Date: April 7, 1999
- -------------------------------------------
Rosa M. Hill
Director
/s/ A. Odell Maddox Date: April 7, 1999
- -------------------------------------------
A. Odell Maddox
Director
/s/ Lyle A. Marshall Date: April 7, 1999
- -------------------------------------------
Lyle A. Marshall
Director
/s/ Larkin Teasley Date: April 7, 1999
- -------------------------------------------
Larkin Teasley
Director
/s/ Daniel A. Medina Date: April 7, 1999
- -------------------------------------------
Daniel A. Medina
Director
48
<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, 1998 and 1997 . . . . . . . . F-2
Consolidated Statements of Earnings for the years ended
December 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Changes In Stockholders' Equity
for the years ended December 31, 1998 and 1997. . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . F-7
</TABLE>
49
<PAGE>
Consolidated Financial Statements
Broadway Financial Corporation
and Subsidiary
YEARS ENDED DECEMBER 31, 1998 AND 1997
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Broadway Financial Corporation and Subsidiary
Consolidated Financial Statements
Years ended December 31, 1998 and 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors......................................F-1
Audited Consolidated Financial Statements:
Consolidated Balance Sheets.........................................F-2
Consolidated Statements of Earnings.................................F-3
Consolidated Statements of Changes In Stockholders' Equity..........F-4
Consolidated Statements of Cash Flows...............................F-5
Notes to Consolidated Financial Statements..........................F-7
</TABLE>
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Broadway Financial Corporation and Subsidiary:
We have audited the accompanying consolidated balance sheet of Broadway
Financial Corporation and Subsidiary (the Company) as of December 31, 1998,
and the related consolidated statements of earnings, changes in stockholders'
equity and cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1998 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, 1998, and the results
of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
KPMG LLP
Los Angeles, California
March 12, 1999
F-1
<PAGE>
Report of Independent Auditors
The Shareholders and Board of Directors
Broadway Financial Corporation and Subsidiary
We have audited the accompanying consolidated balance sheet of Broadway
Financial Corporation and Subsidiary (the Company) as of December 31, 1997
and the related consolidated statements of earnings, stockholders' equity,
and cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1997 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 the results
of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
March 11, 1998
F-2
<PAGE>
Broadway Financial Corporation and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
----------------------------------------
<S> <C> <C>
ASSETS
Cash $ 4,605,000 $ 3,731,000
Fed funds sold 2,600,000 1,100,000
Investment securities held-to-maturity (fair value of $8,607,000
at December 31, 1998 and $5,983,000 at December 31, 1997)
8,622,000 5,999,000
Mortgage-backed securities held-to-maturity (fair value of $12,079,000 at
December 31, 1998 and $3,237,000 at December 31,
1997) 12,096,000 3,208,000
Loans receivable, net 107,055,000 103,689,000
Loans receivable held for sale, at lower of cost or
fair value 2,495,000 222,000
Accrued interest receivable 888,000 834,000
Real estate acquired through foreclosure, net 222,000 1,144,000
Investment in capital stock of Federal Home Loan Bank, at cost
987,000 931,000
Office properties and equipment, net 5,360,000 3,995,000
Other assets 721,000 263,000
----------------------------------------
Total assets $ 145,651,000 $ 125,116,000
----------------------------------------
----------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 125,998,000 $ 109,867,000
Advance from Federal Home Loan Bank 4,500,000 -
Advance payments by borrowers for taxes and insurance 205,000 199,000
Deferred income taxes 609,000 463,000
Other liabilities 786,000 1,148,000
----------------------------------------
Total liabilities 132,098,000 111,677,000
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 shares at December 31, 1998 and 1997, respectively 1,000 1,000
Common stock, $.01 par value, authorized 3,000,000 shares;
issued and outstanding 932,494 and 863,447 shares at
December 31, 1998 and 1997, respectively 10,000 9,000
Additional paid-in capital 9,633,000 8,820,000
Retained earnings - substantially restricted 4,664,000 5,427,000
Treasury stock - 29,241 shares, at cost (318,000) (318,000)
Unearned ESOP shares (437,000) (500,000)
----------------------------------------
Total stockholders' equity 13,553,000 13,439,000
----------------------------------------
----------------------------------------
Total liabilities and stockholders' equity $ 145,651,000 $ 125,116,000
----------------------------------------
----------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
Broadway Financial Corporation and Subsidiary
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
----------------------------
<S> <C> <C>
Interest on loans receivable $ 8,630,000 $ 8,354,000
Interest on investment securities held-to-maturity 541,000 396,000
Interest on mortgage-backed securities held-to-maturity 338,000 141,000
Interest on Fed funds sold 113,000 164,000
Other interest income 63,000 65,000
----------------------------
Total interest income 9,685,000 9,120,000
Interest on deposits 4,236,000 3,966,000
Interest on borrowings 148,000 19,000
----------------------------
Total interest expense 4,384,000 3,985,000
Net interest income before provision for loan losses 5,301,000 5,135,000
Provision for loan losses 450,000 266,000
----------------------------
Net interest income after provision for loan losses 4,851,000 4,869,000
Noninterest income:
Service charges 414,000 414,000
Gain on sale of loans receivable held for sale 14,000 123,000
Gain on sale of office properties and equipment 7,000 272,000
Gain on casualty insurance reimbursement 199,000 -
Other 221,000 50,000
----------------------------
Total noninterest income 855,000 859,000
----------------------------
Noninterest expense:
Compensation and benefits 2,603,000 2,474,000
Occupancy expense, net 1,148,000 955,000
Advertising and promotional expense 208,000 163,000
Professional services 59,000 64,000
Federal deposit insurance premiums 103,000 86,000
Insurance bond premiums 111,000 98,000
Real estate operations, net 182,000 130,000
Contracted security services 149,000 128,000
Net branch losses 70,000 100,000
Telephone and postage 122,000 109,000
Stationary, printing and supplies 127,000 110,000
Other 473,000 349,000
----------------------------
Total noninterest expense 5,355,000 4,766,000
----------------------------
Earnings before income taxes 351,000 962,000
Income taxes 142,000 403,000
----------------------------
Net earnings $ 209,000 $ 559,000
----------------------------
----------------------------
Earnings per share - basic $ 0.19 $ 0.56
----------------------------
----------------------------
Earnings per share - diluted $ 0.19 $ 0.56
----------------------------
----------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
Broadway Financial Corporation and Subsidiary
Consolidated Statements of Changes In Stockholders' Equity
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-in Retained
Stock Stock Capital Earnings
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 1,000 $ 9,000 $ 9,117,000 $ 5,080,000
Net earnings for the year ended
December 31, 1997 - - - 559,000
Treasury stock acquired
Preferred stock exchanged for common
stock (355,000)
Cash dividends paid - 2% common stock - - - (171,000)
Cash dividends paid - 5% preferred stock - - - (41,000)
Employee Stock Ownership Plan payments - - 58,000 -
--------------------------------------------------------------------
Balance, at December 31, 1997 1,000 9,000 8,820,000 5,427,000
Net earnings for the year ended December 31,
1998 - - - 209,000
Stock dividends - 1,000 763,000 (764,000)
Cash dividends paid - 2% common stock - - - (180,000)
Cash dividends paid - 5% preferred stock - - - (28,000)
Employee Stock Ownership Plan payments - - 50,000 -
--------------------------------------------------------------------
Balance at December 31, 1998 $ 1,000 $ 10,000 $ 9,633,000 $ 4,664,000
--------------------------------------------------------------------
--------------------------------------------------------------------
<CAPTION>
Total
Treasury Unearned Stockholders'
Stock ESOP Shares Equity
-------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ - $ (563,000) $13,644,000
Net earnings for the year ended
December 31, 1997 - - 559,000
Treasury stock acquired (673,000) - (673,000)
Preferred stock exchanged for common
stock 355,000 - -
Cash dividends paid - 2% common stock - - (171,000)
Cash dividends paid - 5% preferred stock - - (41,000)
Employee Stock Ownership Plan payments - 63,000 121,000
-------------------------------------------------------
Balance, at December 31, 1997 (318,000) (500,000) 13,439,000
Net earnings for the year ended December 31,
1998 - - 209,000
Stock dividends - - -
Cash dividends paid - 2% common stock - - (180,000)
Cash dividends paid - 5% preferred stock - - (28,000)
Employee Stock Ownership Plan payments - 63,000 113,000
-------------------------------------------------------
Balance at December 31, 1998 $ (318,000) $ (437,000) $13,553,000
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
Broadway Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
---------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 209,000 $ 559,000
Adjustments to reconcile net earnings to net cash (used in) provided
by operating activities:
Depreciation and amortization 188,000 164,000
Amortization of net deferred loan origination fees (47,000) (42,000)
Amortization of discounts and premiums on investment securities
and mortgage-backed securities 13,000 170,000
Federal Home Loan Bank stock dividends (56,000) (55,000)
Gain on sale of real estate liquidated through foreclosure (28,000) (18,000)
Gain on sale of loans receivable held for sale (14,000) (123,000)
Gain on sale of office properties and equipment (7,000) (272,000)
Provision for loan losses 450,000 266,000
Provision for write-downs and losses on real estate 167,000 60,000
Loans originated for sale, net of refinances (4,302,000) (3,912,000)
Proceeds from sale of loans receivable held for sale 2,043,000 3,813,000
Changes in operating assets and liabilities:
Accrued interest receivable (54,000) (101,000)
Deferred income tax liability 146,000 11,000
Other assets (458,000) 428,000
Other liabilities (395,000) 235,000
---------------------------------
Total adjustments (2,354,000) 624,000
---------------------------------
Net cash (used in) provided by operating activities (2,145,000) 1,183,000
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated, net of refinances (17,744,000) (10,372,000)
Loans purchased (15,286,000) (7,923,000)
Principal repayment on loans 28,817,000 9,224,000
Purchases of investment securities held-to-maturity (14,619,000) (1,999,000)
Purchases of mortgage-backed securities held-to-maturity (10,580,000) (3,005,000)
Proceeds from sale of office properties and equipment 134,000 456,000
Proceeds from maturities and repayments of investment
securities held-to- maturity 11,995,000 5,998,000
Proceeds from maturities of mortgage-backed securities held-
to-maturity 1,680,000 -
Capital expenditures for office properties and equipment (1,681,000) (2,291,000)
Proceeds from sale of real estate acquired through foreclosure 1,261,000 1,233,000
---------------------------------
Net cash used in investing activities (16,023,000) (8,679,000)
</TABLE>
F-6
<PAGE>
Broadway Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
---------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 16,131,000 $ 7,873,000
Increase in advance from Federal Home Loan Bank 4,500,000 -
Dividends paid (208,000) (212,000)
Employee Stock Ownership Plan payments 113,000 121,000
Treasury stock acquired - (673,000)
Increase in advance payments by borrowers for taxes and insurance
6,000 38,000
---------------------------------
Net cash provided by financing activities 20,542,000 7,147,000
---------------------------------
Net increase (decrease) in cash and cash equivalents 2,374,000 (349,000)
Cash and cash equivalents at beginning of year 4,831,000 5,180,000
---------------------------------
Cash and cash equivalents at end of year $ 7,205,000 $ 4,831,000
---------------------------------
---------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 4,458,000 $ 4,000,000
---------------------------------
---------------------------------
Cash paid for income taxes $ 312,000 $ 2,500
---------------------------------
---------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Additions to real estate acquired through foreclosure $ 444,000 $ 1,437,000
Common stock exchanged for preferred stock - (355,000)
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 1998
1. ORGANIZATION
Broadway Financial Corporation (the Company) is a Delaware corporation,
primarily engaged in the savings and loan business through its wholly owned
subsidiary, Broadway Federal Bank, f.s.b. (Broadway Federal). 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, 1998, Broadway
Federal operated six 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.
All of the Company's operations are considered by management to be aggregated in
one reportable operating segment - banking.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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 the prior year consolidated
financial statements to conform to the 1998 presentation.
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. The most significant estimate for the Company relates to the
allowance for loan losses. Actual results could differ from those estimates.
F-8
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ASSETS HELD TO MATURITY
Investment securities and mortgage-backed securities 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. If a decline in the fair value of securities is determined to be
other than temporary, the cost basis of the individual security is written down
to fair value as a new cost basis and the amount of the writedown is included in
earnings.
Premiums and discounts on investment securities and mortgage-backed securities
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 balance, adjusted for the allowance for loan losses, loans in process,
net deferred loan fees or costs and unamortized discounts. Interest on loans
receivable is accrued monthly as earned, except for loans delinquent for 90 days
or more which are generally 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
F-9
<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)
for loan losses and recoveries on loans previously charged off are added to the
allowance. The allowance for loan losses is subjective and may be adjusted in
the future depending on economic conditions. In addition to management, 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 their judgements of the information available at the time of
examination.
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 with balances of $250,000 and greater 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. The accrual of interest income on impaired loans is stopped when the
loan becomes 90 days or more delinquent, and previously accrued but uncollected
interest income is reversed.
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. Discounts on loans
receivable are recognized in income using the interest method over the
contractual life of loans, adjusted for prepayments. Accretion of discounts
and deferred loan fees is discontinued when loans are placed on nonaccrual
status.
F-10
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS HELD FOR SALE
Broadway Federal identifies those loans for which, at the time of origination or
acquisition, it does not have the positive intent 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 yields to the investor based upon the current market
rate. Gain or loss on the sale of loans is recognized to the extent that the
selling prices differ from the carrying value of the loans sold based on the
estimated relative fair values of the assets sold and any retained interests,
less any liabilities incurred. Typically, Broadway Federal will retain the
servicing rights associated with loans sold. The servicing rights are
recorded as assets based upon the relative fair values of the servicing
rights and underlying loans and are amortized over the period of the related
loan servicing income stream. Amortization of these rights is reflected in
the Company's Consolidated Statements of Earnings. The Company evaluates
servicing assets for impairment in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 125, which require
that the servicing assets be carried at the lower of capitalized cost or fair
value.
LOANS PURCHASED
The Company purchases or participates in loans originated by other institutions.
The determination to purchase loans is based upon the Company's investment needs
and market opportunities. Subject to regulatory restrictions applicable to
savings institutions, the Company's current loans policies allow all loan types
to be purchased. The determination to purchase specific loans or pools of loans
is subject to the Company's underwriting policies, which require consideration
of the financial condition of the borrower and the appraised value of the
property, among other factors. Premiums paid on the purchase of loan are
recognized against income using the interest method over the estimated life of
the loans, adjusted for prepayments.
F-11
<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 represents real estate received in
satisfaction of real estate and commercial loans and is recorded at estimated
fair value of the real estate, less costs of disposition. An allowance for
loss is provided when any subsequent decline in fair value occurs. Income
recognition on the sale of 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 and amortization. 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. The useful
lives for the classes of depreciable assets are shown as follows:
Buildings 10 to 48 years
Furniture, fixtures and equipment 3 to 15 years
Leasehold improvements Shorter of the estimated useful
life of the assets or the terms
of the respective leases, not to
exceed 15 years
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured during enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred taxes from a change in tax rates is recognized
in income in the period that includes the enactment date.
F-12
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREFERRED STOCK
The Series A preferred stock is nonconvertible, noncumulative, nonredeemable
and nonvoting perpetual preferred stock, with a par value of $0.01 per share.
At December 31, 1998 and 1997 there were 55,199 shares outstanding.
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
The Company is required to report both basic and diluted earnings per share
under generally accepted accounting principles. Basic earnings per share is
determined by dividing net income by the average number of shares of common
stock outstanding, while diluted earnings per share is determined by dividing
net income by the average number of shares of common stock outstanding
adjusted for the dilutive effect of common stock equivalents. Earnings per
share for all periods presented have been adjusted to reflect the 8% stock
dividend distributed to stockholders in August 1998.
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
F-13
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (CONTINUED)
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.
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.
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.
STOCK OPTION PLAN
In January 1997 the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the
vesting period the fair value of all stock-based compensation awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB No. 25, "Accounting for Stock Issued to
Employees." and provide pro forma net income and pro forma earnings per
share disclosures for employee stock options and grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the provisions of
APB No. 25 and to provide the pro forma disclosure provisions of SFAS No. 123.
EMPLOYEE STOCK OWNERSHIP PLAN
Generally accepted accounting principles require that the issuance or sale of
treasury shares to an Employee Stock Ownership Plan (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. An ESOP funded with an employer loan
(internally leveraged ESOP) is reflected as a reduction to equity and the
related interest income and expense is not recorded. The Company records
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 results in an offsetting
F-14
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
adjustment to paid-in capital. During 1998 and 1997, 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 SFAS No. 130,
"Reporting Comprehensive Income". Comprehensive income represents the change
in equity of the Company during a period from transactions and other events
and circumstances from nonowner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. Other comprehensive income includes unrealized
holding gains and losses on available-for-sale securities, gains and losses
on foreign currency transactions that are designated as economic hedges of a
net investment in a foreign entity, foreign currency translation adjustments
and net losses recognized as an additional pension liability not yet
recognized as net periodic pension costs. SFAS No. 130 establishes standards
for reporting and display of comprehensive income and the components in a
full set of general-purpose financial statements. SFAS No. 130 requires all
components of comprehensive income, which are required to be recognized under
accounting standards to be reported in a financial statement that is
displayed in equal prominence with the other financial statements. SFAS No.
130 does not require a specific presentation format, but will require the
Company to display an amount representing total comprehensive income for the
periods in the financial statements. SFAS No. 130 is effective for both
interim and annual periods of fiscal years beginning after December 15, 1997.
The Company adopted SFAS No. 130 effective January 1, 1998. For the years
ended December 31, 1998 and 1997, the Company's total comprehensive income
equaled net income as the Company did not have any other components of
comprehensive income.
F-15
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires recognition of all derivative
instruments in the statement of financial position as either assets or
liabilities and the measurement of derivative instruments at fair value. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999. The
adoption of SFAS No. 133 is not expected to have a material effect on the
Company's consolidated results of operations or financial condition.
In October 1998, the Financial Accounting Standards Board issued SFAS No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise.". SFAS No. 134 is an amendment of SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities." SFAS No. 134 requires mortgage banking
enterprises to classify loans held for sale that they have securitized, based
on their intent to sell or hold those investments. SFAS No. 134 is effective
for the first fiscal quarter beginning after December 15, 1998. The adoption
of SFAS No. 134 is not expected to have a material impact on the Company's
consolidated results of operations or financial condition, as currently there
are no mortgage loans that have been securitized by the Company.
3. INVESTMENT SECURITIES HELD-TO-MATURITY
At December 31, 1998 and 1997, all of the Company's investment securities are
classified as held-to-maturity based on the Company's intent and ability to hold
the securities to maturity.
F-16
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT SECURITIES HELD-TO-MATURITY (CONTINUED)
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> <S> <C> <C> <C>
December 31, 1998:
FHLB debentures $ 5,622,000 $ - $ 14,000 $ 5,608,000
FNMA debentures 3,000,000 - 1,000 2,999,000
----------------------------------------------------------------
$ 8,622,000 $ - $ 15,000 $ 8,607,000
----------------------------------------------------------------
----------------------------------------------------------------
December 31, 1997:
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
----------------------------------------------------------------
$ 5,999,000 $ - $ 16,000 $ 5,983,000
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>
The remaining contractual maturities for investment securities held-to-maturity
at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CONTRACTUAL MATURITY
---------------------------------------------------
AFTER
1 THROUGH AFTER
5 YEARS 5 YEARS TOTAL
---------------------------------------------------
<S> <C> <C> <C>
December 31, 1998:
FHLB debentures $ 2,500,000 $ 3,122,000 $ 5,622,000
FNMA debentures - 3,000,000 3,000,000
---------------------------------------------------
$ 2,500,000 $ 6,122,000 $ 8,622,000
---------------------------------------------------
---------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, the Company had accrued interest receivable on
investment securities held-to-maturity of $78,000 and $114,000, respectively,
which is included in accrued interest receivable in the accompanying
consolidated balance sheets.
During the years ended December 31, 1998 and 1997, the Company sold no
investment securities.
F-17
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY
At December 31, 1998 and 1997, all of the Company's mortgage-backed securities
are classified as held-to-maturity based on the Company's intent and ability to
hold the securities to maturity.
The following table provides a summary of mortgage-backed 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, 1998:
FNMA $ 5,046,000 $ 9,000 $ - $ 5,055,000
GNMA 4,939,000 3,000 - 4,942,000
FHLMC 2,111,000 - 29,000 2,082,000
-------------------------------------------------------------------
$ 12,096,000 $ 12,000 $ 29,000 $ 12,079,000
-------------------------------------------------------------------
-------------------------------------------------------------------
December 31, 1997:
GNMA $ 1,455,000 $ 22,000 $ - $ 1,477,000
FHLMC 1,753,000 7,000 - 1,760,000
-------------------------------------------------------------------
$ 3,208,000 $ 29,000 $ - $ 3,237,000
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
The remaining contractual maturities for mortgage-backed securities
held-to-maturity at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CONTRACTUAL MATURITY
-----------------------------------------------------
WITHIN AFTER
1 YEAR 5 YEARS TOTAL
-----------------------------------------------------
<S> <C> <C> <C>
December 31, 1998:
FNMA $ -- $ 5,046,000 $ 5,046,000
GNMA -- 4,939,000 4,939,000
FHLMC 120,000 1,991,000 2,111,000
-----------------------------------------------------
$ 120,000 $11,976,000 $12,096,000
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, the Company had accrued interest receivable on
mortgage-backed securities held-to-maturity of $75,000 and $25,000,
respectively, which is included in accrued interest receivable in the
accompanying consolidated balance sheets.
F-18
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY (CONTINUED)
During the years ended December 31, 1998 and 1997, the Company sold no
mortgage-backed securities.
5. LOANS RECEIVABLE, NET
The following is a summary of loans receivable, net:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-----------------------------------
<S> <C> <C>
Held for investment:
Real estate:
Residential:
One to four units $ 47,810,000 $ 54,680,000
Five or more units 41,162,000 31,588,000
Construction loans - 446,000
Nonresidential 18,694,000 16,671,000
Loans secured by deposit accounts 1,114,000 1,862,000
Other 373,000 445,000
-----------------------------------
109,153,000 105,692,000
Plus:
Premium on loans purchased 107,000 71,000
Less:
Loans in process 218,000 143,000
Allowance for loan losses 1,151,000 1,054,000
Deferred loan fees, net 774,000 820,000
Unamortized discounts 62,000 57,000
-----------------------------------
Loans receivable, net 107,055,000 103,689,000
Loans receivable held for sale - residential real estate,
one to four units 2,495,000 222,000
-----------------------------------
$109,550,000 $103,911,000
-----------------------------------
-----------------------------------
Weighted average interest rate 8.03% 8.13%
-----------------------------------
-----------------------------------
</TABLE>
F-19
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. LOANS RECEIVABLE, NET (CONTINUED)
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------
<S> <C> <C>
Balance at beginning of year $ 1,054,000 $ 1,174,000
Provision for loan losses 450,000 266,000
Charge-offs, net of recoveries (353,000) (386,000)
-------------------------------------
Balance at end of year $ 1,151,000 $ 1,054,000
-------------------------------------
-------------------------------------
</TABLE>
At December 31, 1998 and 1997, Broadway Federal had accrued interest receivable
on loans of $713,000 and $695,000, respectively, which is included in accrued
interest receivable in the accompanying consolidated balance sheets.
Broadway Federal serviced loans for others totaling $8.1 million and $8.2
million at December 31, 1998 and 1997, respectively.
At December 31, 1998 and 1997, Broadway Federal had loans to senior officers and
directors amounting to $135,000 and $224,000, respectively.
The following is a summary of Broadway Federal's nonaccrual loans by loan type
at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-------------------------------------
<S> <C> <C>
Residential real estate $ 1,090,000 $ 919,000
Other - 2,000
-------------------------------------
Total nonaccrual loans $ 1,090,000 $ 921,000
-------------------------------------
-------------------------------------
</TABLE>
The Bank had no restructured loans or accruing loans which are contractually
past due 90 days or more or at December 31, 1998 and 1997.
F-20
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. LOANS RECEIVABLE, NET (CONTINUED)
The gross amount of interest income that would have been recorded during the
years ended December 31, 1998 and 1997, if nonaccrual loans had been current in
accordance with their original terms, was $80,000 and $71,000, respectively. For
the years ended December 31, 1998 and 1997, $22,000 and $28,000, respectively,
was actually received on nonaccrual loans and is included in interest income on
loans in the accompanying consolidated statements of earnings. Broadway Federal
had no commitments to lend additional funds to borrowers whose loans are on
nonaccrual at December 31, 1998 and 1997.
At December 31, 1998 and 1997, the total recorded investment in impaired loans
was approximately $926,000 and $1.8 million, respectively. Of these amounts,
$214,000 and $443,000 had a related impairment allowance totaling $148,000 and
$239,000 at December 31, 1998 and 1997, 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, 1998 and 1997,
Broadway Federal's average investment in impaired loans was $1.2 million and
$1.4 million, respectively, and interest income recorded on impaired loans
during these periods totaled $68,000 and $150,000 respectively, none of which
was recorded utilizing the accrual basis method of accounting. At December 31,
1998, 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, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------------------------
<S> <C> <C>
Residential real estate loans:
One to four units $ - $ 230,000
Five or more units 926,000 1,531,000
------------------------------------
$ 926,000 $ 1,761,000
------------------------------------
------------------------------------
</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, 1998 and 1997,
approximately 83% of the real estate portfolio consisted of loans secured by
residential real estate. In addition, approximately 17% and 16% of the loan
portfolio at December 31,
F-21
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. LOANS RECEIVABLE, NET (CONTINUED)
CREDIT RISK AND CONCENTRATION (CONTINUED)
1998 and 1997, respectively, was secured by nonresidential real estate. Loans
secured by church real estate represented 66% and 70% of nonresidential real
estate loans at December 31, 1998 and 1997, respectively.
6. REAL ESTATE ACQUIRED THROUGH FORECLOSURE, NET
The following is a summary of real estate acquired through foreclosure, net:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------------
<S> <C> <C>
Real estate acquired through foreclosure:
One to four residential units $ - $ 841,000
Five or more residential units - 165,000
Nonresidential 93,000 -
Land 265,000 265,000
------------------------------------
358,000 1,271,000
Less: valuation allowance 136,000 127,000
------------------------------------
Real estate acquired through foreclosure, net $ 222,000 $ 1,144,000
------------------------------------
------------------------------------
</TABLE>
Activity in the allowance for losses on real estate acquired through foreclosure
during the years ended December 31, 1998 and 1997, is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------
<S> <C> <C>
Balance at beginning of year $ 127,000 $ 181,000
Provision for losses 167,000 60,000
Charge-offs (158,000) (114,000)
------------------------------------
Balance at end of year $ 136,000 $ 127,000
------------------------------------
------------------------------------
</TABLE>
F-22
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. REAL ESTATE ACQUIRED THROUGH FORECLOSURE, NET (CONTINUED)
Real estate operations, net, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------
<S> <C> <C>
Net loss from operations of foreclosed
real estate $ (43,000) $ (88,000)
Net gain on sales of foreclosed real estate 28,000 18,000
--------------------------------------
(15,000) (70,000)
Provision for losses (167,000) (60,000)
--------------------------------------
Real estate operations, net $ (182,000) $ (130,000)
--------------------------------------
--------------------------------------
</TABLE>
7. INVESTMENT IN CAPITAL STOCK OF THE FHLB
As a member of the Federal Home Loan Bank (FHLB) System, Broadway Federal is
required to own capital stock in the FHLB in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the end of
each year, 5% of its outstanding borrowings from the FHLB, 0.3% of total assets
at the end of each year or $500. Broadway Federal was in compliance with this
requirement with an investment in FHLB stock at December 31, 1998 and 1997, of
$987,000 and $931,000, respectively.
8. OFFICE PROPERTIES AND EQUIPMENT, NET
Office properties and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------------
<S> <C> <C>
Land $ 1,918,000 $ 1,918,000
Office buildings and improvements 2,816,000 1,923,000
Furniture, fixtures and equipment 1,687,000 1,402,000
------------------------------------
6,421,000 5,243,000
Less accumulated depreciation (1,061,000) (1,248,000)
------------------------------------
Office properties and equipment, net $ 5,360,000 $ 3,995,000
------------------------------------
------------------------------------
</TABLE>
F-23
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
9. DEPOSITS
A summary of deposits by type of account and interest rate at December 31 is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-------------------------------------------------------------
RATE* AMOUNT RATE* AMOUNT
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance by account type:
NOW account and other demand
deposits .53% $ 16,262,000 .58% $ 12,894,000
Money market deposits 2.11 5,140,000 2.24 4,222,000
Passbook 1.50 28,554,000 2.00 28,118,000
Variable-rate time deposits:
3 months - - 3.79 2,093,000
18 months - - 5.00 988,000
Fixed index 5.07 48,691,000 5.35 44,785,000
Negotiable time deposits
($100,000 or more) 4.79 27,351,000 5.12 16,767,000
------------------ -------------------
$ 125,998,000 $ 109,867,000
------------------ -------------------
------------------ -------------------
</TABLE>
*Weighted average interest rate.
The weighted average interest rate on deposits was 3.60% and 3.74% at December
31, 1998 and 1997, respectively.
Deposit account maturities at December 31, 1998, are summarized as follows:
<TABLE>
<CAPTION>
MATURITY AMOUNT
-------- -----------------
<S> <C>
No stated maturity $ 49,956,000
1999 55,560,000
2000 10,487,000
2001 3,203,000
2002 766,000
Thereafter 6,026,000
-----------------
$ 125,998,000
-----------------
-----------------
</TABLE>
F-24
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
9. DEPOSITS (CONTINUED)
A tabulation of interest expense on deposits for the years ended December 31,
1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------
<S> <C> <C>
NOW accounts and other demand deposits $ 575,000 $ 634,000
Money market deposits 84,000 88,000
Time deposits 3,618,000 3,273,000
Penalty for early withdrawals (41,000) (29,000)
-------------------------------
$ 4,236,000 $ 3,966,000
-------------------------------
-------------------------------
</TABLE>
At December 31, 1998 and 1997, the Company had accrued interest payable on
deposits of $24,000 and $69,000, respectively, which is included in deposits in
the accompanying consolidated balance sheets.
The Company had no brokered deposits at December 31, 1998 and $1.2 million at
December 31, 1997.
10. FHLB ADVANCES
Pursuant to collateral agreements with the FHLB, advances are secured by loans
totaling $15.0 million and $18.8 million as of December 31, 1998 and 1997,
respectively. Available borrowing capacity with the FHLB approximates $13.0
million and $16.3 million as of December 31, 1998 and 1997, respectively. There
was $4.5 million in borrowings outstanding with the FHLB as of December 31, 1998
and none at December 31, 1997. The outstanding borrowing at December 31, 1998
has a fixed rate of 5.05% and matures in the year 2000.
F-25
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES
The following is a summary of the provision for income tax expense:
<TABLE>
<CAPTION>
1998 1997
----------------------------
<S> <C> <C>
Current taxes:
Federal income $ 87,000 $319,000
State franchise 2,000 3,000
----------------------------
89,000 322,000
----------------------------
Deferred taxes:
Federal income 44,000 37,000
State franchise 9,000 44,000
----------------------------
53,000 81,000
----------------------------
$142,000 $403,000
----------------------------
----------------------------
</TABLE>
A reconciliation of income taxes and the amounts computed by applying the
statutory federal income tax rate of 34% to earnings before income taxes
follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------
<S> <C> <C>
Computed "expected" federal taxes $119,000 $327,000
Increases to taxes resulting from:
California franchise tax , net of federal income tax 8,000 71,000
Other 15,000 5,000
----------------------------
$142,000 $403,000
----------------------------
----------------------------
</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-26
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
Retained earnings at December 31, 1998 and 1997, 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, 1998 and
1997, are presented below:
<TABLE>
<CAPTION>
1998 1997
------------------------------------
<S> <C> <C>
Deferred tax assets:
Loan valuation allowances deferred for tax $ 484,000 $ 402,000
Allowance for loss 151,000 151,000
REO 28,000 116,000
Other 145,000 91,000
------------------------------------
Net deferred tax assets 808,000 760,000
------------------------------------
Deferred tax liabilities:
Basis difference on fixed assets 434,000 454,000
Deferred loan fees 523,000 366,000
FHLB stock dividend 407,000 384,000
Other 53,000 19,000
------------------------------------
Total gross deferred tax liabilities 1,417,000 1,223,000
------------------------------------
Net deferred tax liability $ 609,000 $ 463,000
------------------------------------
------------------------------------
</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-27
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. 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.
12. EMPLOYEE BENEFIT PLANS
BROADWAY FEDERAL 401(k) PLAN
In 1995 Broadway Federal has 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 1998 and 1997, Broadway Federal's contribution amounted to $41,900
and $50,600, respectively.
F-28
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK INCENTIVE PLANS
RECOGNITION AND RETENTION PLAN (RRP)
Broadway Federal adopted the RRP as a method of providing non-employee
directors with a proprietary interest in the Company in a manner designed to
encourage such persons to remain with Broadway Federal. Under the RRP, awards
are granted in the form of shares of common stock held by the RRP. These
shares represent deferred compensation and are accounted for as a reduction
of stockholder's equity. Shares allocated vest over a period of five years
commencing one year from the date of grant. Awards are automatically vested
upon a change in control of the Company or Broadway Federal. In the event
that before reaching normal retirement, an officer or employee terminates
service with the Company or Broadway Federal, that person's nonvested awards
are forfeited. The expense related to the RRP for the fiscal years ended
December 31, 1998 and 1997 was immaterial.
PERFORMANCE EQUITY PROGRAM (PEP)
Broadway Federal adopted the PEP as a method of providing certain officers
and employees with a proprietary interest in the Company as an additional
incentive to perform in a superior manner and to promote Broadway Federal's
growth and profitability in the future. Under the PEP, awards are granted in
the form of shares of common stock held by the PEP. These shares represent
deferred compensation and are accounted for as a reduction of stockholder's
equity. In the event that before reaching normal retirement, an officer or
employee terminates service with the Company or Broadway Federal, that
person's nonvested awards are forfeited. The PEP provides for "Base Grants",
"Performance Grants" and "High Performance Grants." Employees under the PEP
are awarded Base Grants as determined under the plan. Shares allocated under
the Base Grants vest over a period of five years commencing one year from the
date of grant. Performance Grants and High Performance Grants are awarded to
eligible employees only upon attainment by Broadway Federal of certain
performance goals. Performance Grants and High Performance Grants are
forfeited and do not vest if the performance goals are not attained. The
expense related to the PEP for the fiscal years ended December 31, 1998 and
1997 was immaterial.
The table below reflects the RRP and PEP activity for the periods indicated:
F-29
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK PROGRAMS (CONTINUED)
<TABLE>
<CAPTION>
STOCK PROGRAMS
--------------------------------------------------------------
PEP RRP TOTAL
--------------------------------------------------------------
SHARES PRICE* SHARES PRICE* SHARES PRICE
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 1998 15,998 $ 11 4,872 $ 11 20,870 $ 11
Granted - - - - - -
Exercised - - - - - -
Forefeited (9,497) 11 - - (9,497) 11
--------------------------------------------------------------
Outstanding at December 31, 1998 6,501 $ 11 4,872 $ 11 11,373 $ 11
--------------------------------------------------------------
--------------------------------------------------------------
Outstanding at January 1, 1997 - - - - - -
Granted 15,998 $ 11 4,872 $ 11 20,870 $ 11
Exercised - - - - - -
Forfeited - - - - - -
--------------------------------------------------------------
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, 1998 and 1997, the outstanding balance of the loan was
$437,000 and $500,000, 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
F-30
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
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 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 $103,000 and $111,000 for the years ended December 31, 1998 and
1997, respectively, which is net of dividends of approximately $13,000 and
$15,600, respectively.
Of the 62,488 ESOP shares purchased during the years ended December 31, 1998 and
1997, 24,978 and 8,102 shares, respectively, were allocated, leaving an
unallocated balance of 42,615 and 48,137 shares at December 31, 1998 and 1997,
respectively, after giving effect to an 8% stock dividend received from the
Company in 1998. The fair value of unallocated ESOP shares totaled $296,000 and
$721,000 at December 31, 1998 and 1997, 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
F-31
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
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. 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. The
weighted average remaining contractual life of the options outstanding at
December 31, 1998 is 8.71 years. As of December 31, 1998, 8,781 of these
options are exercisable at a weighted average exercise price of $11.00 per
share, none had been exercised.
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. 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. The weighted average
remaining contractual life of the options outstanding at December 31, 1998 is
8.71 years. As of December 31, 1998, 3,453 of these options are exercisable
at a weighted average exercise price of $11.00 per share, none had been
exercised.
<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, 1998 43,909 $ 11 17,264 $ 11 61,173 $ 11
Granted - - - - - -
Exercised - - - - - -
Expired or canceled - - - - - -
----------------------------------------------------------------
Outstanding at December 31, 1998 43,909 $ 11 17,264 $ 11 61,173 $ 11
----------------------------------------------------------------
----------------------------------------------------------------
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>
F-32
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
12. 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. Based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's
proforma net earnings and net earnings per diluted share for 1998 would have
been $184,000 and $0.16, respectively.
F-33
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
13. COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
The Company, through Broadway Federal, has operating leases on 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
$160,000 in 1998 and $82,000 in 1997. Annual minimum lease commitments
attributable to long-term leases at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
PREMISES EQUIPMENT TOTAL
----------------------------------------------------
<S> <C> <C> <C>
Year ending December 31:
1999 $ 102,000 $ 63,000 $ 165,000
2000 41,000 42,000 83,000
2001 41,000 30,000 71,000
2002 41,000 30,000 71,000
2003 41,000 11,000 52,000
Thereafter through 2013 369,000 - 369,000
----------------------------------------------------
$ 635,000 $ 176,000 $811,000
----------------------------------------------------
----------------------------------------------------
</TABLE>
Broadway Federal had commitments to originate loans of approximately $2.4
million and $1.0 million, respectively, at December 31, 1998 and 1997.
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 no commitments to sell or purchase loans at December 31,
1998. At December 31, 1997, Broadway Federal had commitments to sell $222,000 in
loans and no commitments to purchase loans.
F-34
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
CONTINGENT LIABILITIES
At December 31, 1998 two unrelated legal proceedings arising out of alleged
fraudulent endorsements by Broadway Federal customers are pending against
Broadway Federal. One proceeding involves a complaint filed against Broadway
Federal for fraud, conversion, declaratory relief and injunctive relief. The
complaint seeks damages of $95,000, as well as punitive damages. The second
proceeding involves a complaint for breach of transfer and presentment
warranties. This complaint seeks damages of $182,000. The Company is presently
evaluating both complaints and is considering filing cross-complaints in each
case.
In the ordinary course of business, the Company and Broadway Federal are
defendants in various litigation matters, other than the ones discussed above.
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,
results of operations or cash flows.
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, 1998
and 1997, Broadway Federal was in compliance with such capital requirements.
F-35
<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 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
F-36
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
14. REGULATORY CAPITAL (CONTINUED)
(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, 1998 and 1997, 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 FDICIA at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
MINIMUM MINIMUM
FOR CAPITAL ADEQUACY AMOUNT
ACTUAL PURPOSES REQUIRED TO BE WELL
CAPITALIZED
---------------------------------------------------------------------
(Dollars in Thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998:
Leverage/Tangible Ratio $ 11,208 7.62% $ 5,817 4.0% $ 7,271 5.0%
Tier I Risk-based ratio 11,208 13.08 3,427 4.0 5,141 6.0
Total Risk-based ratio 11,904 13.90 6,855 8.0 8,568 10.0
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
</TABLE>
The table below presents Broadway Federal's capital ratios as compared to the
requirements under FIRREA at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Risk-based
Tangible capital Core capital capital
----------------- ----------------- -----------------
(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998:
Actual $11,208 7.62% $11,208 7.62% $11,904 13.90%
Required 2,167 1.50 4,334 3.00 6,855 8.00
------- ----- ------- ----- ------- ------
Excess $ 9,041 6.12% $ 6,874 4.62% $ 5,049 5.90%
------- ----- ------- ----- ------- ------
------- ----- ------- ----- ------- ------
December 31, 1997:
Actual $10,708 8.63% $10,708 8.63% $11,587 14.79%
Required 1,861 1.50 3,722 3.00 6,266 8.00
------- ----- ------- ----- ------- ------
Excess $ 8,847 7.13% $ 6,986 5.63% $ 5,321 6.79%
------- ----- ------- ----- ------- ------
------- ----- ------- ----- ------- ------
</TABLE>
F-37
<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 and mortgage-backed 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-38
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
are judgmentally determined using available market information and specific
borrower information.
15. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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 borrowings were estimated using current market rates of
interest for similar borrowings.
The fair values of commitments to extend credit are based on rates for similar
transactions as of the reporting date. These fair values are not material.
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
CARRYING OR
NOTIONAL FAIR
DECEMBER 31, 1998 VALUE VALUE
-------------------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 7,205,000 $ 7,205,000
Investment securities 8,622,000 8,607,000
Mortgage-backed securities 12,096,000 12,079,000
Loans receivable 109,550,000 117,902,000
Federal Home Loan Bank stock 987,000 987,000
Liabilities:
Deposits 125,998,000 122,994,000
Federal home Loan Bank advances 4,500,000 4,467,000
</TABLE>
F-39
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
15. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
CARRYING OR
NOTIONAL FAIR
DECEMBER 31, 1997 VALUE VALUE
-----------------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 4,831,000 $ 4,831,000
Investment securities 5,999,000 5,983,000
Mortgage-backed securities 3,208,000 3,237,000
Loans receivable 103,911,000 108,713,000
Federal Home Loan Bank stock 931,000 931,000
Liabilities:
Deposits 109,867,000 110,186,000
</TABLE>
16. 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 exchanged its
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 the Series A Preferred stock and 3.000%
(26,781 shares) were for 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. There were no stocks repurchased
or exchanged during the year ended December 31, 1998.
17. EARNINGS PER SHARE
For the years ended December 31, 1998
F-40
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
17. EARNINGS PER SHARE (CONTINUED)
and 1997, basic earnings per share are computed based on earnings and the
weighted average number of shares for each respective year.
The Company's stock-based compensation awards were considered outstanding as of
the grant date for purposes of computing diluted EPS in accordance with SFAS No.
128 at December 31, 1998 and 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 basic and diluted earnings per share. The
number of shares have been adjusted for all periods presented to reflect the
effect of the 8% stock dividend issued in August 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
-----------------------------------------------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net earnings $ 209,000 - - $ 559,000 - -
Less: Preferred stock dividends (28,000) - - (41,000) - -
-----------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE-BASIC
Income available to common
stockholders $ 181,000 932,494 $ 0.19 $ 517,000 921,054 $ 0.56
EFFECT OF DILUTIVE SECURITIES
Stock Programs - 39,131 - - 7,203 -
Stock Option Programs - - - - 1,432 -
-----------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE-DILUTED
Income available to common
stockholders plus assumed
conversions $ 181,000 971,625 $ 0.19 $ 517,000 929,689 $ 0.56
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
</TABLE>
F-41
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
18. UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Interest income $ 2,327 $ 2,511 $ 2,252 $ 2,595 $ 9,685
Interest expense 1,045 1,093 1,088 1,158 4,384
Net interest income 1,282 1,418 1,164 1,437 5,301
Provision for loan losses 75 75 225 75 450
Income before taxes 250 143 (228) 186 351
Net earnings (loss) 145 84 (134) 114 209
Basic earnings (loss) per share .16 .09 (.16) .12 .19
Diluted earnings (loss) per share (1) .16 .09 (.16) .11 .19
Market range:
High bid 13.75 13.00 11.87 8.75 13.75
Low bid 12.50 10.87 8.25 6.75 6.75
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
Income before taxes 111 249 176 426 962
Net earnings 63 145 102 249 559
Earnings per share of common stock (1) .07 .16 .11 .27 .56
Earnings per share - assuming diluted (1) .07 .16 .11 .27 .56
Market range:
High bid 11.25 11.25 11.50 13.38 13.38
Low bid 9.25 10.75 10.50 11.13 9.25
</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 diluted earnings per share, 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 1998, and year-to-date 1998.
F-42
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
19. PARENT COMPANY FINANCIAL INFORMATION
This information should be read in conjunction with the other notes to the
consolidated financial statements. The parent company's principal business is
serving as a holding company for Broadway Federal. The parent company's primary
sources of funds are interest income on investments and bank deposits; its
primary uses are for the payment of dividends and normal shareholder expenses.
Since inception there have been no dividends paid to the parent company by
Broadway Federal Bank.
Statements of Financial Condition
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-----------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash $ 1,226 $ 1,530
Investment securities held-to-maturity 1,000 1,000
Accrued interest 22 22
Investment in subsidiaries 11,208 10,901
Other assets 152 3
-----------------------
$ 13,608 $13,456
-----------------------
-----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 55 $ 17
Stockholders' equity 13,553 13,439
-----------------------
$ 13,608 $13,456
-----------------------
-----------------------
</TABLE>
F-43
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
19. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
Statements of Earnings
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
-----------------
(IN THOUSANDS)
<S> <C> <C>
Interest income $ 84 $ 98
Other income 2 12
Other expense 258 182
Income tax benefit (73) (29)
------------------
Earnings before equity in undistributed earnings of subsidiaries
(99) (43)
Equity in undistributed earnings of subsidiaries 308 602
------------------
Net earnings $ 209 $ 559
------------------
------------------
Statements of Cash Flows
YEAR ENDED DECEMBER 31
1998 1997
-----------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net earnings $ 209 $ 559
Adjustments to reconcile net earnings to cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries (308) (602)
Decrease in interest receivable - 1
Decrease (increase) in other assets (148) 114
Increase (decrease) in other liabilities 38 (51)
Amortization and others - 1
-----------------
Total adjustments (418) (537)
-----------------
Net cash (used in) provided by operating activities (209) 22
-----------------
</TABLE>
F-44
<PAGE>
Broadway Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
19. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
1998 1997
------------------
(IN THOUSANDS)
<S> <C> <C>
INVESTING ACTIVITIES
Proceeds from maturity of investment securities held to
maturity $ - $ 1,488
------------------
Net cash provided by investing activities - 1,488
------------------
FINANCING ACTIVITIES
ESOP payments 113 121
Dividends paid (208) (212)
Treasury stock acquired - (673)
------------------
Net cash used in financing activities (95) (764)
------------------
Net (decrease) increase in cash and cash equivalents (304) 746
Cash and cash equivalents, beginning of year 1,530 784
------------------
Cash and cash equivalents, end of year $ 1,226 $ 1,530
------------------
------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Common stock exchanged for preferred stock $ - $ (355)
</TABLE>
F-45
<PAGE>
The Board of Directors
Broadway Financial Corporation:
We consent to incorporation by reference in the registration statement (No.
333-17331) on Form S-8 of Broadway Financial Corporation of our report dated
March 12, 1999, relating to the consolidated balance sheet of Broadway
Financial Corporation and subsidiary as of December 31, 1998 and the related
consolidated statements of earnings, changes in stockholders' equity and cash
flows for the year then ended, which report appears in the December 31, 1998,
annual report on Form 10-KSB of Broadway Financial Corporation.
KPMG LLP
Los Angeles, California
April 23, 1999
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,352
<INT-BEARING-DEPOSITS> 253
<FED-FUNDS-SOLD> 2,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 20,718
<INVESTMENTS-MARKET> 20,688
<LOANS> 110,701
<ALLOWANCE> (1,151)
<TOTAL-ASSETS> 145,651
<DEPOSITS> 125,998
<SHORT-TERM> 4,500
<LIABILITIES-OTHER> 1,600
<LONG-TERM> 0
0
552
<COMMON> 9,092
<OTHER-SE> (755)
<TOTAL-LIABILITIES-AND-EQUITY> 145,651
<INTEREST-LOAN> 8,630
<INTEREST-INVEST> 996
<INTEREST-OTHER> 59
<INTEREST-TOTAL> 9,685
<INTEREST-DEPOSIT> 4,236
<INTEREST-EXPENSE> 4,384
<INTEREST-INCOME-NET> 5,301
<LOAN-LOSSES> 450
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 0
<INCOME-PRETAX> 351
<INCOME-PRE-EXTRAORDINARY> 351
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 209
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
<YIELD-ACTUAL> 0.074
<LOANS-NON> 1,089
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (1,054)
<CHARGE-OFFS> 353
<RECOVERIES> 0
<ALLOWANCE-CLOSE> (1,151)
<ALLOWANCE-DOMESTIC> (1,151)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 134
</TABLE>
