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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------- ----------
BROADWAY FINANCIAL CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 95-4547287
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4800 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90010
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(323) 634-1700
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, $0.01 PER SHARE
---------------
(TITLE OF CLASS)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days. Yes /X/ No / /
Check if 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. / /
State issuer's revenues for its most recent fiscal year: $11,360,000.
State the aggregate market value of the voting stock held by
non-affiliates: $4,837,313, based on the average bid and asked prices of such
stock as of March 10, 2000 as quoted on The Nasdaq Stock Market.
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 10, 2000.
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 2000
annual Meeting of Shareholders are incorporated by reference into Part III.
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BROADWAY FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-KSB
PART I
<TABLE>
<CAPTION>
<S> <C> <C>
ITEM 1 DESCRIPTION OF BUSINESS.............................................................. 1
Broadway Financial Corporation....................................................... 1
Broadway Federal Bank, f.s.b.................................................. 1
General................................................................... 1
BankSmart, Inc................................................................ 1
Strategic Objectives................................................................. 2
Market Area and Competition.......................................................... 2
Lending Activities................................................................... 3
General....................................................................... 3
Loan Portfolio Composition.................................................... 3
Loan Maturity................................................................. 4
Origination, Purchase, Sale and Servicing of Loans............................ 5
One- to Four-Family Mortgage Lending.......................................... 6
Multi-Family Lending.......................................................... 7
Non-Residential Real Estate Lending........................................... 8
Consumer Lending.............................................................. 9
Loan Approval Procedures an Authority......................................... 9
Delinquencies and Classified Assets........................................... 9
Non-Performing Assets......................................................... 11
Allowance for Loan Losses..................................................... 12
Investment Activities................................................................ 14
Sources of Funds..................................................................... 15
General....................................................................... 15
Deposits...................................................................... 15
Borrowings.................................................................... 17
Personnel............................................................................ 17
Regulation........................................................................... 17
General....................................................................... 17
Deposit Insurance............................................................. 18
Capital Requirements.......................................................... 18
Loans to One Borrower......................................................... 20
Federal Home Loan Bank System................................................. 20
Liquidity..................................................................... 21
Community Reinvestment Act.................................................... 21
Qualified Thrift Lender....................................................... 21
Savings and Loan Holding Company Regulation................................... 21
Restrictions on Dividends and Other Capital Distributions..................... 22
Lending Standards............................................................. 22
Financial Modernization Legislation........................................... 22
Tax Matters.......................................................................... 23
Federal Income Tax............................................................ 23
General................................................................... 23
Bad Debt Reserve.......................................................... 23
California Tax................................................................ 23
ITEM 2 DESCRIPTION OF PROPERTY.............................................................. 24
ITEM 3 LEGAL PROCEEDINGS.................................................................... 24
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................. 24
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PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.............................................................................. 25
ITEM 6 MANAGEMENT DISCUSSION AND ANALYSIS................................................... 25
General.............................................................................. 25
Interest Rate Sensitivity..................................................... 26
Net Portfolio Value........................................................... 27
Market Risk................................................................... 27
Year 2000 Compliance.......................................................... 30
Average Balance Sheet......................................................... 30
Rate/Volume Analysis.......................................................... 32
Comparison of Operating Results for the Years Ended
December 31, 1999 and December 31, 1998....................................... 32
General....................................................................... 32
Interest Income............................................................... 32
Interest Expense.............................................................. 33
Provision for Loan Losses..................................................... 33
Non-Interest Income........................................................... 33
Non-Interest Expense.......................................................... 34
Income Taxes.................................................................. 34
Comparison of Financial Condition at December 31, 1999
And December 31, 1998......................................................... 34
Recent Developments........................................................... 35
Liquidity and Capital Resources............................................... 35
Impact of Inflation and Changing Prices....................................... 36
Recent Accounting Pronouncements.............................................. 36
ITEM 7 FINANCIAL STATEMENTS OF BROADWAY FINANCIAL
CORPORATION.......................................................................... 36
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................... 36
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
EXHCANGE ACT........................................................................ 36
ITEM 10 EXECUTIVE COMPENSATION............................................................... 36
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................................................... 37
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................... 37
ITEM 13 EXHIBITS, LISTS AND REPORTS ON FORM 8-K.............................................. 37
</TABLE>
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FORWARD-LOOKING STATEMENTS
Except for the historical information contained in this Form 10-KSB,
certain items herein, including without limitation, matters discussed under
"Management's Discussion and Analysis" in Part II, Item 6 of this Form 10-KSB
("MD&A") are forward-looking statements, within the meaning of Section 21E of
the Securities Exchange Act of 1934 and Section 27A of the Securities Act of
1933, that reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are subject to risks and
uncertainties, including those identified below, which could cause actual future
results to differ materially from historical results or from those anticipated.
Readers should not place undue reliance on these forward-looking statements,
which speak only as of their dates, or, if no date is provided, then such
statements speak only as of the date of this Form 10-KSB. The Company undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a results of new information, future events or otherwise.
The following factors could cause future results to differ materially
from historical results or those anticipated: (1) the level of demand for
mortgage loans, which is affected by such external factors as the level of
interest rates, the strength of various segments of the economy and demographics
of the Company's lending markets; (2) the direction of interest rates and the
relationship between interest rates and the cost of funds; (3) federal and state
regulation of the Company's lending operations or other regulatory actions; (4)
the actions undertaken by both current and potential new competitors; (5) the
possibility of adverse trends in the residential and non-residential real estate
markets; and (6) other risks and uncertainties detailed in this Form 10-KSB,
including MD&A.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BROADWAY FINANCIAL CORPORATION
Broadway Financial Corporation (the "Company"), was incorporated under
Delaware in 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 in January 1996.
The Company's principal business is serving as the holding company for
Broadway Federal and BankSmart, Inc. ("BankSmart"), each of which are direct
subsidiaries of the Company. The Company is subject to regulation and
examination by the Office of Thrift Supervision ("OTS") as a savings and loan
holding company. The executive offices of the Company are located at 4800
Wilshire Boulevard, Los Angeles, California 90010, telephone number (323)
634-1700. Shareholders, analysts and others seeking information about the
Company and its subsidiaries can visit the Company's website at
www.broadwayfed.com.
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 in Los Angeles and one banking office located in the
nearby City of Inglewood that 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 non-residential 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, 1999 the Bank was classified as "well-capitalized" under
applicable OTS and FDIC capital regulations.
BANKSMART, INC.
BankSmart, Inc. provides retail services to communities served by
Broadway Federal. In August 1999, BankSmart opened its first retail center
inside Broadway Federal's Exposition Park branch. It is scheduled to open a
second limited service facility inside Broadway Federal's Midtown branch
facility in the first half of the year 2000.
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BankSmart's principal business consists of providing retail copy and
postal services to the general public in the areas surrounding Broadway
Federal's branch locations. Services provided by BankSmart are marketed under
the name of SmartCopy and include a copy and postal center. SmartCopy customers
can rent mail boxes, order printing, perform desktop publishing, purchase office
supplies, wire money, send packages, purchase stamps and order business cards.
During the year 2000, it is anticipated that BankSmart will open a check-cashing
facility at Broadway Federal's Exposition Park branch that will be marketed
under the name SmartCash.
The strategy of offering ancillary retail services to Bank and other
customers within the communities serviced by Broadway Federal has several
intended benefits, including: (i) increasing the Bank's customer base and
traffic within each Bank facility; (ii) increasing in overall revenues for the
Company; and (iii) providing needed services within the under served communities
of Mid-City and South Central Los Angeles. The operations of BankSmart have
not to date been significant to the Company's financial position and results of
operations.
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, the Company seeks to maintain a strong net interest margin, maintain
asset quality, reduce expenses and non-performing assets and limit 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
Mid-City and South Central Los Angeles; (iii) primarily retaining in its
portfolio 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 under
served 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
primarily located in low and moderate income minority areas that have
historically been under served 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, statewide 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.
2
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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 loans on church
properties. Broadway Federal's borrowers often request small loan amounts that
result in 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 were beyond the control of the borrower and are not likely to reoccur.
LENDING ACTIVITIES
GENERAL. Broadway Federal emphasizes the origination of adjustable-rate
loans primarily for retention in its portfolio in order to increase the
percentage of loans with more frequent repricing, thereby reducing Broadway
Federal's exposure to interest rate risk. At December 31, 1999, approximately
86% 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 strategy to have a portion of it's
interest earning assets be assets that 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, 1999, Broadway Federal had
$2.5 million in loans classified as held-for-sale. These loans were primarily
adjustable-rate, multi-family loans with initial fixed interest rates.
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, 1999, Broadway Federal's gross loan portfolio totaled
$131.9 million, of which approximately 30.11% was secured by one- to four-family
residential properties, 52.83% was secured by multi-family properties and 16.10%
was secured by non-residential properties, with approximately 62% of such
non-residential properties being church properties. At that same date,
approximately 64.33% of Broadway Federal's one- to four-family mortgage loans,
99.35% of its multi-family residential mortgage loans, and 86.45% of its
non-residential mortgage loans had adjustable rates.
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The following table sets forth the composition of Broadway Federal's loan
portfolio in dollar amounts and as percentage of Broadway Federal's total loan
portfolio by loan type at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1999 1998
------------------------------- -----------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
---------------- -------------- -------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real Estate:
Residential:
One-to Four-Units.............. $ 39,714 30.11% $ 50,305 45.06%
Five or More Units............. 69,677 52.83% 41,162 36.87%
Non-residential.................. 21,240 16.10% 18,694 16.74%
Loans Secured by Savings Accounts... 877 0.66% 1,114 1.00%
Other............................... 379 0.30% 373 0.33%
--------------- -------------- -------------- ----------------
Gross Loans......................... 131,887 100.00% 111,648 100.00%
--------------- -------------- -------------- ----------------
Plus:
Premiums on Loans Purchased......... 14 107
Less:
Allowance for Loan Losses........... 1,439 1,151
Loans in Process.................... 143 218
Deferred Loan Fees, net............. 807 774
Unamortized Discounts............... 183 62
--------------- --------------
129,329 109,550
Less:
Loans Held for Sale................. 2,458 2,495
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Total Loans Held for Investment..... $ 126,871 $ 107,055
=============== ==============
</TABLE>
LOAN MATURITY. The following table sets forth the contractual maturities of
Broadway Federal's gross loans at December 31, 1999. The table does not reflect
the effect of scheduled principal repayments. Principal repayments on loans
totaled $18.4 million and $28.8 million for the years ended December 31, 1999
and 1998, respectively.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
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ONE-TO- FIVE SAVINGS GROSS
FOUR FAMILY OR MORE UNITS SECURED LOANS
NON-RESIDENTIAL AND OTHER RECEIVABLE
------------- -------------- ----------------- -------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amounts Due:
One year or less.............. $ 125 $ 317 $ 624 $ 1,236 $ 2,302
After one year:
After one to three years.... 206 111 1,921 -- 2,238
After three to five years... 419 236 1,024 -- 1,679
After five to ten years..... 2,060 10,523 1,577 20 14,180
After ten to twenty years... 8,269 14,508 15,036 -- 37,813
More than twenty years...... 28,635 43,982 1,058 -- 73,675
------------- -------------- ----------------- -------------- ----------------
Total due after one year.... 39,589 69,360 20,616 20 129,585
------------- -------------- ----------------- -------------- ----------------
Total Amounts Due................ $ 39,714 $ 69,677 $ 21,240 $ 1,256 $ 131,887
============= ============== ================= ============== ================
</TABLE>
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The following table sets forth the dollar amount of gross loans receivable
at December 31, 1999 which are contractually due after December 31, 2000, and
whether such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------
ADJUSTABLE FIXED TOTAL
------------ ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Real Estate Loans:
One- to four-units................. $ 25,212 $ 14,377 $ 39,589
Five or more units................. 68,907 453 69,360
Non-residential real estate........ 18,613 2,003 20,616
Other................................... -- 20 20
------------ ---------- ------------
Total............................ $ 112,732 $ 16,853 $ 129,585
============ ========== ============
</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 and liquidity needs and market opportunities. At December 31, 1999,
Broadway Federal had $2.5 million in loans categorized as held for sale
primarily consisting of ARM multi-family loans with initial fixed interest
rates. 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.
Broadway Federal retains the right to service most loans sold and 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, 1999, Broadway Federal was
servicing $18.1 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. Broadway Federal
did not purchase any loans during the year ended December 31, 1999; it purchased
$15.3 million of loans in 1998.
The following table provides information concerning Broadway Federal's
loan origination, purchase, sale and principal repayment activity for the
periods indicated.
5
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AT OR FOR THE YEAR
ENDED DECEMBER 31,
-----------------------
1999 1998
----------- ----------
(IN THOUSANDS)
Gross Loans:
Beginning Balance:..................... $ 111,648 $ 105,914
Loans Originated:
One-to Four-Units...................... 6,343 7,110
Five or More Units..................... 39,557 11,723
Non-residential........................ 3,623 2,020
Loans Secured by Savings
Accounts............................... 586 979
Other....................................... 702 289
----------- -----------
Total Loans Originated................. 50,811 22,121
Loans Purchased............................. -- 15,257
----------- -----------
Total New Loans........................ 50,811 37,378
----------- -----------
Less:
Transfer to REO............................. 603 444
Principal Repayments........................ 18,443 28,817
Sales of Loans.............................. 11,514 2,030
Loan Write-Offs, net........................ 12 353
----------- -----------
$ 131,887 $ 111,648
=========== ===========
ONE- TO FOUR-FAMILY MORTGAGE LENDING. Broadway Federal offers ARMs and
fixed-rate loans secured by one- to four-family residences, with maturities up
to 30 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, 1999, 36.52% were
fixed-rate loans and 63.48% were ARMs.
The interest rates for Broadway Federal's ARMs are indexed to the 11th
District Cost of Funds Index ("COFI"), and 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,
1999 and 1998 Broadway Federal had approximately $26.3 million and $20.5
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. At
December 31, 1999, Broadway Federal had one loan with an outstanding balance of
$103,000 in negative amortization status. No loans were in negative amortization
status at December 31, 1998.
Broadway Federal qualifies its ARM borrowers based upon the fully indexed
interest rate (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, 1999, the introductory discount rate offered by Broadway Federal on
ARMs that adjust monthly was 6.875%, which was below the fully indexed COFI rate
at that date (which was the COFI rate of 4.774% plus a margin of 2.875%). For
ARMs that adjust annually, the introductory rate offered by Broadway Federal at
December 31, 1999 was 1.97% below the fully-indexed rate based on the Treasury,
which was 5.970% at that date. As of December 31, 1999, the fully indexed rates
on ARMs that adjust annually and those that adjust monthly were 2.500% and
2.875%, respectively, above the Treasury and COFI. Broadway Federal's annual
ARMs adjust by a maximum of 2.00% 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
6
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that 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, 1999, Broadway Federal charged fees of up to 2.50% 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, 1999.
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 homeowners 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 primarily
located in Broadway Federal's 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, 1999 multi-family lending represented 52.83% of the Bank's gross
loan portfolio, compared to 36.87% at December 31, 1998.
During the year ended December 31, 1999, Broadway Federal significantly
increased its originations and sales of multi-family loans. Most of these
multi-family loans had adjustable rates, with an initial fixed interest rate
period. The fixed interest rate period for these loans ranges from one to five
years. The adjustable rate portion of these loans is primarily indexed to the
Treasury.
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 described 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 of 120% to 125%.
Properties securing a loan are appraised by an approved independent appraiser
and title insurance is required on all loans.
When evaluating the qualifications of the borrower for a multi-family
loan, Broadway Federal considers, among other things, the financial resources
and income level of the borrower, the borrower's experience in owning or
managing similar property, and Broadway Federal's lending experience with the
borrower. Broadway Federal's underwriting policies require that the borrower be
able to demonstrate strong management skills and the ability to maintain the
property from current rental income. The borrower is required to present
evidence of the ability to repay the mortgage and a history of making mortgage
payments on a timely basis. In making its assessment of the creditworthiness of
the borrower, Broadway Federal generally reviews the financial statements,
employment and credit history of the borrower, as well as other related
documentation.
Broadway Federal's largest multi-family loan at December 31, 1999 was a
loan totaling $1,576,000. The loan is secured by a 27-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 38-unit property located in Downey. At December 31, 1999, this
loan had an outstanding balance of $1,053,000, and was
7
<PAGE>
performing according to its terms. At December 31, 1999, Broadway Federal had
two other multi-family loans with balances exceeding $1.0 million; both loans
were performing according to their 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 may have
severe effects in Broadway Federal's primary market areas in Mid-City and South
Central Los Angeles, and result in declines in real estate values of
multi-family properties that are more pronounced than for single family
residential properties. Broadway Federal attempts to offset the risks associated
with multi-family lending through careful application of its underwriting
standards and procedures, and by generally making such loans with lower
loan-to-value ratios than the maximum ratios permitted for one- to four-family
loans. Economic events and government regulations, which are outside the control
of the borrower or lender, could impact the value of the security for the loan
or the future cash flow of the affected properties.
NON-RESIDENTIAL REAL ESTATE LENDING. Broadway Federal originates
non-residential real estate loans that are generally secured by properties used
for religious or for business purposes such as church buildings, schools, small
office buildings, health care facilities and retail facilities located in
Broadway Federal's primary market area. Broadway Federal has limited the
origination of non-residential real estate loans in recent years. Of the $21.2
million in non-residential real estate loans at December 31, 1999, $3.6 million
and $2.0 million were originated in 1999 and 1998, respectively.
Broadway Federal's non-residential 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. These loans may have amortization periods and maturity dates of up
to 30 years and are ARM's indexed to the COFI or the Treasury. Broadway
Federal's non-residential 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 non-residential real estate
loans have debt service coverage ratios of at least 135%. The underwriting
standards for non-residential loans secured by church properties are different
than for non-church non-residential real estate in that the ratios used in
evaluating the loan are based upon the level and history of church member
contributions as a repayment source rather than income generated by rents or
leases.
The largest non-residential loan in Broadway Federal's portfolio was
originated in 1999. It is secured by vacant land located in Big Sur, California
and had an outstanding balance at December 31, 1999 of $960,000. This loan is
currently performing according to its terms.
The second largest non-residential 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, 1999 of
$736,000. This loan is currently performing according to its terms. At December
31, 1999, Broadway Federal's portfolio contained three other non-residential
loans with outstanding balances exceeding $600,000. All three loans were secured
by church properties located in Los Angeles and all were performing according to
their terms.
Originating loans secured by church properties is a market niche in which
Broadway Federal has been active since its inception. Although Broadway Federal
does experience delinquencies on some of these loans and has made additions to
its allowance for loan losses as a result thereof, this product has produced
higher yields than the residential loan portfolio and Broadway Federal has
incurred no losses from foreclosures of these loans to date. Management of
Broadway Federal believes that the importance of church organizations in the
social and economic structure of the communities it serves makes church lending
an important aspect of its community orientation. Management further believes
that the importance of churches in the lives of the individual members of the
respective congregations encourages donations even in difficult economic times,
thereby providing somewhat greater assurance of financial resources to repay
loans than for residential or other types of non-residential properties.
Nonetheless, adverse economic conditions can result in risks to loan repayment
that are similar to those encountered in other types of non-residential 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 $13.9
million and $12.3 million at December 31, 1999 and 1998, respectively.
8
<PAGE>
Loans secured by non-residential real estate generally involve a greater
degree of risk than residential mortgage loans because payment on loans secured
by non-residential 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 with more restrictive
underwriting criteria and currently restricts such loans to its general market
area.
CONSUMER LENDING. Broadway Federal's consumer loans primarily consist of
loans secured by savings accounts. At December 31, 1999, loans secured by
savings accounts represented $877,000, or 0.66%, of Broadway Federal's total
gross 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
between 2% and 4% above the rate paid on the account, depending on the type of
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
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 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.
9
<PAGE>
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 non-residential 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 non-residential real estate loans are made on a
case-by-case basis. Broadway Federal may consider loan workout 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."
Broadway Federal established an allowance for loan losses in an amount
deemed prudent by management. General valuation allowances 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, 1999, there can be no assurance that
the OTS or the FDIC, in reviewing Broadway Federal's loan portfolio in
connection with periodic regulatory examinations, will not request Broadway
Federal to materially increase its allowance for loan losses based on such
agencies' evaluation of the facts available to the OTS or the FDIC at that time,
thereby negatively affecting Broadway Federal's financial condition and
earnings.
At December 31, 1999, Broadway Federal had $4.3 million of loans
classified as "Substandard," of which the largest had a principal balance of
$384,000 and was secured by a multi-family property. At December 31, 1999, no
10
<PAGE>
loans were classified as "Doubtful". However, eight loans were classified as
"Loss". As of December 31, 1999, loans designated as "Special Mention" consisted
of 27 loans totaling $2.1 million, which were so designated due to delinquencies
or other identifiable weaknesses. At December 31, 1999, the largest loan
designated as "Special Mention" had a principal balance of $563,000 and was
secured by a non-residential 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,
------------------------------------------------------------------------------------------------
1999 1998
---------------------------------------------- ------------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
---------------------- ---------------------- ---------------------- ------------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE OF NUMBER BALANCE OF NUMBER BALANCE OF NUMBER BALANCE OF
OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS
---------- ---------- --------- ----------- --------- ----------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four family.............. 1 $ 2 9 $ 550 7 $ 433 9 $ 876
Multi-family..................... -- -- 1 730 -- -- 1 214
Non-residential.................. -- -- -- 115 -- -- -- --
---------- ---------- --------- ----------- --------- ----------- ---------- ------------
Total................... 1 $ 2 10 $ 1,395 7 $ 433 10 $ 1,090
========== ========== ========= =========== ========= =========== ========== ============
Delinquent loans to total
gross loans...................... 0.00% 1.06% 0.39% 0.98 %
========== =========== =========== ============
</TABLE>
NON-PERFORMING ASSETS. Non-performing assets, consisting of non-accrual
loans and REO, increased from $1.3 million at December 31, 1998 to $1.9 million
at December 31, 1999. The $598,000 increase resulted from a $305,000 increase in
non-accrual loans and a $293,000 increase in REO. As a percentage of total
assets, non-performing assets were 1.15% at December 31, 1999, as compared to
0.90% at December 31, 1998. The allowance for loan losses was 103.15% of
non-performing loans at December 31, 1999, as compared to 105.60% at December
31, 1998.
11
<PAGE>
The following table includes information regarding Broadway Federal's
non-performing assets at the dates indicated. For the years ended December 31,
1999 and 1998, 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 $110,000 and $80,000, respectively, as compared with
the respective amounts actually received on non-accrual loans of $29,000 and
$22,000. Broadway Federal had no commitments to lend additional funds to
borrowers whose loans were on non-accrual status at December 31, 1999. No
accruing loans were contractually past due by 90 days or more at December 31,
1999.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------
1999 1998
------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual loans:
Residential real estate:
One- to four-family............................................ $ 550 $ 876
Multi-family................................................... 730 214
Non-residential................................................ 115 --
------------ ----------
Total non-performing loans................................. 1,395 1,090
REO................................................................... 515 222
------------ ----------
Total non-performing assets................................ $ 1,910 $ 1,312
============ ==========
Allowance for loan losses as a percentage of gross loans.............. 1.09% 1.03%
Allowance for loan losses as a percentage of total
non-performing loans............................................. 103.15% 105.60%
Allowance for losses as a percentage of total
non-performing loans............................................. 84.87% 98.09%
Non-performing loans as a percentage of gross loans................... 1.06% 0.98%
Non-performing assets as a percentage of total assets................. 1.15% 0.90%
Net charge-offs to average loans...................................... 0.01% 0.32%
Impaired loans as a percentage of gross loans......................... 0.91% 0.83%
</TABLE>
-----------------------------
(1) Allowance for losses includes valuation allowances on loans and REO.
At December 31, 1999, Broadway Federal's total recorded investment in
impaired loans was $1.2 million. Of this amount, $681,000 had a related
impairment allowance totaling $308,000 at December 31, 1999. 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, 1999, Broadway Federal's average investment in impaired
loans was $1.2 million, and its interest income recorded on impaired loans
during this period totaled $83,000. 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 that supports the adequacy of the
allowance for loan losses. The allowance is based upon a number of factors,
including current economic conditions, actual loss experience, industry trends,
asset classifications, levels of impaired loans, geographic concentrations,
estimated collateral values, management's assessment of the credit risk inherent
in the portfolio, historical loan loss experience and Broadway Federal's
underwriting policies. To determine the overall allowance, management
periodically reviews all loans by loan category (one- to four-family,
multi-family, non-residential real estate). 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 that 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.
12
<PAGE>
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 that 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, 1999, Broadway
Federal had $515,000 of REO, compared to $222,000 at December 31, 1998.
The following table sets forth Broadway Federal's allowances for loan and
real estate losses at the dates indicated:
DECEMBER 31,
---------------------------
1999 1998
------------- -------------
(IN THOUSANDS)
Allowance for loan losses:
Balance at beginning of year............ $ 1,151 $ 1,054
Charge-offs, net:
One- to four-family................... 12 287
Multi-family.......................... -- 64
Other................................. -- 2
------------- -------------
Total charge-offs, net ........... 12 353
Provision charged to earnings........... 300 450
------------- -------------
Balance at end of year............ $ 1,439 $ 1,151
============= =============
Allowance for REO
Balance at beginning of year............ 136 127
Provision for losses.................... 60 167
Charge-offs............................. (14) (158)
------------- -------------
Balance at end of year............ $ 182 $ 136
============= =============
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 in total loans.
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31,
--------------------------------------------------------------------------------------
1999 1998
----------------------------------------- -------------------------------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
ALLOWANCE TO LOANS IN EACH ALLOWANCE TO LOANS IN EACH
TOTAL CATEGORY TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
--------- ------------- --------------- ----------- -------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to Four-family.... $ 228 15.84% 30.11% $ 325 28.24% 45.06%
Multi-family........... 772 53.65% 52.83% 370 32.15% 36.87%
Non-residential........ 307 21.33% 16.10% 297 25.80% 16.74%
Other.................. 22 1.54% .96% 25 2.17% 1.33%
Unallocated............ 110 7.64% -- 134 11.64% --
--------- ------------- --------------- ----------- -------------- ---------------
Total allowance
for loan losses..... $ 1,439 100.00% 100.00% $ 1,151 100.00% 100.00%
========= ============= =============== =========== ============== ===============
</TABLE>
13
<PAGE>
The decrease in unallocated allowance at December 31, 1999 as compared to
December 31, 1998 is a result of an increase in the allocated allowance required
on multi-family and non-residential loans as a result of an increase in the
respective loan portfolios during the year.
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, 1999 and 1998, the Company had investment and mortgage-backed
securities in the aggregate amount of $23.8 million and $20.7 million,
respectively, with fair values of $23.2 million and $20.7 million, respectively.
All investment and mortgage-backed securities were categorized as
held-to-maturity at December 31, 1999 and 1998.
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,
-------------------------------------------------------
1999 1998
--------------------------- ---------------------------
CARRYING VALUE FAIR CARRYING VALUE FAIR
VALUE VALUE
--------------- ---------- --------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and Cash Equivalents:
Cash on hand and in banks............................. $ 3,135 $ 3,135 $ 4,605 $ 4,605
Federal funds sold.................................... -- -- 2,600 2,600
--------------- ---------- --------------- ----------
Total cash and cash equivalents.......................... $ 3,135 $ 3,135 $ 7,205 $ 7,205
=============== ========== =============== ==========
Investment and mortgage-backed securities:
Held to maturity:
Mortgage-Backed Securities.......................... $ 13,210 $ 12,852 $ 12,096 $ 12,079
U.S. Government and Federal Agency obligations...... 10,623 10,302 8,622 8,607
--------------- ---------- --------------- ----------
Total investment and mortgage-backed securities.......... $23,833 $23,154 $20,718 $20,686
=============== ========== =============== ==========
</TABLE>
14
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Company's
investments and mortgage-backed securities as of December 31, 1999.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
--------------------------------------------------------------------------------------
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>
Securities
Held to maturity:
Mortgage-Backed
Securities............ $-- 0.00% $ -- 0.00% $13,210 6.74% $13,210 6.74%
U.S. Government &
Federal Agency
obligations........... -- 0.00% 7,500 4.64% 3,123 6.41% 10,623 5.16%
--------- --------- --------- --------- --------- --------- --------- ---------
Total securities............. $-- 0.00% $7,500 4.64% $16,333 6.68% $23,833 6.04%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposits are a primary source of Broadway Federal's funds used
for lending and other investment activities and general business purposes. In
addition to deposits, Broadway Federal derives funds from loan 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, 1999,
out-of-state deposits totaled $14.2 million or 10.60% 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,
-----------------------
1999 1998
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deposits......................... $ 289,023 $ 279,690
Withdrawals...................... 285,440 267,037
---------- ---------
Net deposits .................... 3,583 12,653
Interest credited on deposits.... 4,403 3,478
---------- ---------
Total increase in deposits....... $ 7,986 $ 16,131
========== =========
</TABLE>
15
<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,
-----------------------------------------------------------------------
1999 1998
----------------------------------- -----------------------------------
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.............. $ 4,881 3.72% 1.86% $ 4,562 3.89% 1.84%
Passbook deposits.................. 28,857 22.00% 1.50% 28,063 23.94 1.81%
NOW and other demand deposits...... 17,201 13.12% 0.57% 14,130 12.05 0.48%
---------- ---------- ---------- ----------
Total.............................. 50,939 38.84% 46,755 39.88
---------- ---------- ---------- ----------
Time Deposits:.....................
Three months or less 2,080 1.59% 5.47% 1,971 1.68 3.78%
Over three months through six
months........................... 9,239 7.04% 3.93% 8,925 7.61 4.85%
Over six through twelve months..... 14,443 11.01% 5.12% 11,892 10.14 5.20%
Over one to three years............ 17,332 13.21% 4.72% 19,663 16.77 5.39%
Over three to five years........... 6,407 4.89% 5.70% 3,961 3.39 5.81%
Over five to ten years............. 272 0.21% 6.90% 1,568 1.34 5.99%
Certificates over $100,000......... 30,447 23.21% 4.65% 22,503 19.19 5.00%
---------- ---------- ---------- ----------
Time Deposits...................... 80,220 61.16% 4.76% 70,483 60.12 5.07%
---------- ---------- ---------- ----------
Total deposits..................... $ 131,159 100.00% 3.38% $ 117,238 100.00% 3.61%
========== ========== ========== ==========
</TABLE>
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, 1999.
<TABLE>
<CAPTION>
PERIOD TO MATURITY AT DECEMBER 31, 1999
--------------------------------------------------------------------
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%.............................. $ 1,514 $ -- $ -- $ -- $ 1,514
4.01 to 5.00%........................... 23,450 2,432 175 162 26,219
5.01 to 6.00%........................... 10,278 1,064 405 1,098 12,845
6.01 to 7.00%........................... 3,931 675 290 1,047 5,943
7.01 to 10.00%.......................... 82 -- -- -- 82
----------- ------------- -------------- ------------ -------------
Total............................. $ 39,255 $ 4,171 $ 870 $ 2,307 $ 46,603
----------- ------------- -------------- ------------ -------------
Certificate Accounts $100,000 and Greater:
0 to 4.00%.............................. $ 3,503 $ -- $ -- $ 3,838 $ 7,341
4.01 to 5.00%........................... 7,026 307 201 149 7,683
5.01 to 6.00%........................... 14,569 1,201 500 1,667 17,937
6.01 to 7.00%........................... 1,839 930 168 99 3,036
7.01 to 10.00%.......................... -- -- -- -- --
----------- ------------- -------------- ------------ -------------
Total............................. 26,937 2,438 869 5,753 35,997
----------- ------------- -------------- ------------ -------------
Grand Total................... $ 66,192 $ 6,609 $ 1,739 $ 8,060 $ 82,600
=========== ============= ============== ============ =============
</TABLE>
16
<PAGE>
The following table presents, by various rate categories, the amounts of
certificate accounts outstanding at December 31, 1999 and 1998.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------
1999 1998
-------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
0 to 4.00%............... $ 8,855 $ 9,990
4.01 to 5.00%............ 33,902 27,726
5.01 to 6.00%............ 30,782 31,706
6.01 to 7.00%............ 8,979 6,620
7.01 to 10.00%........... 82 --
-------------- -------------
Total................. $ 82,600 $ 76,042
============== =============
</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, 1999 and 1998 Broadway Federal had $16.9
million and $4.5 million, respectively, outstanding advances from the FHLB and
no other borrowings. Broadway Federal's outstanding advances at December 31,
1999 were secured by mortgage loans and mortgage-backed securities.
The following table sets forth certain information regarding Broadway
Federal's borrowed funds at or for the periods indicated:
AT OR FOR THE YEAR
ENDED
DECEMBER 31,
--------------------
1999 1998
---------- --------
(DOLLARS IN THOUSANDS)
FHLB advances:
Average balance outstanding.......................... $12,286 $2,607
Maximum amount outstanding at any month-end $18,800 $5,500
Balance outstanding at end of period................. $16,900 $4,500
Weighted average interest rate during the period..... 4.70% 5.67%
Weighted average interest rate at end of period...... 5.60% 5.05%
PERSONNEL
At December 31, 1999, Broadway Federal had 45 full-time employees and 15
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,
17
<PAGE>
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.
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 FDIC may impose emergency special assessments on 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.
FDIC deposit insurance premiums are 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, currently
ranging up to 0.31%. During 1999, Broadway Federal's assessment rate was 0.03%.
CAPITAL REQUIREMENTS
The capital regulations of the OTS (the "Capital Regulations") require
savings institutions to meet three regulatory 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 individual minimum capital requirements for a
savings institution on a case-by-case basis 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.
18
<PAGE>
The core capital requirement currently requires a savings institution to
maintain "core capital" of not less than 4% of adjusted total assets. "Core
capital" includes common stockholders' equity (including retained earnings),
non-cumulative 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 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 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, 1999 and 1998, Broadway Federal's general valuation allowance included in
supplementary capital was $1,047,000 and $891,000, 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.
Following is a reconciliation of Broadway Federal's equity capital to the
minimum Federal regulatory capital requirements as of December 31, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999 AS OF DECEMBER 31, 1998
------------------------------------------ --------------------------------------
RISK RISK-
TANGIBLE CORE BASED TANGIBLE CORE BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
--------------- ----------- ------------ ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Equity Capital-Broadway Federal..... $11,693 $11,693 $11,693 $11,208 $11,208 $11,208
Additional supplementary capital:
General valuation allowance......... -- -- 1,047 -- -- 891
Assets required to be deducted...... -- -- (196) -- -- (195)
--------------- ----------- ------------ ----------- ----------- ------------
Regulatory capital amounts.......... 11,693 11,693 12,544 11,208 11,208 11,904
Minimum requirement................. 2,475 6,600 9,957 2,167 4,334 6,855
--------------- ----------- ------------ ----------- ----------- ------------
Excess over requirement............. $ 9,218 $ 5,093 $ 2,587 $ 9,041 $ 6,874 $ 5,049
=============== =========== ============ =========== =========== ============
</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.
Under the OTS regulations implementing the PCA provisions, 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. 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).
19
<PAGE>
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, 1999, Broadway Federal was a well-capitalized institution.
The table below presents Broadway Federal's capital ratios at December 31,
1999 and 1998:
ACTUAL
-------------------
AMOUNT RATIOS
--------- --------
(DOLLARS IN THOUSANDS)
December 31, 1999:
Leverage/Tangible Ratio................. $ 11,693 7.09%
Tier I Risk-based ratio................. $ 11,693 9.39%
Total Risk based ratio.................. $ 12,544 10.08%
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%
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, 1999, the maximum amount that
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, 1999, the largest aggregate amount of loans that 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 greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans,
20
<PAGE>
home purchase contracts and similar obligations at the end of each calendar
year, or 5% of its outstanding FHLB advances (borrowings).
LIQUIDITY
Current 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, 1999, the
liquidity ratio for Broadway Federal was 18.36%, which exceeded the new
requirement. Broadway Federal's liquidity includes its investments in investment
and mortgage-backed securities.
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 in general 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 limitations on new investments
and activities, and the imposition of the restrictions on branching and the
payment of dividends that apply to national banks. At December 31, 1999,
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
21
<PAGE>
subsidiaries, unless the affiliate is engaged only in activities which the
Federal Reserve Board has determined to be permissible for bank holding
companies and which the OTS has not disapproved.
A savings and loan holding company that controls only one savings
institution is exempt, if the institution meets its QTL test, from restrictions
on the conduct of unrelated business activities that are applicable to other
savings and loan holding companies and that are similar to the restrictions on
the conduct of unrelated business activities that are applicable to bank holding
companies under the Bank Holding Company Act.
RESTRICTIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
Savings institution subsidiaries of holding companies generally are
required to provide at least a 30-day advance notice of any dividends proposed
to be paid on the institution's stock. Dividends declared in violation of this
notice requirement are invalid.
In general, the prompt corrective action regulations prohibit an
OTS-regulation institution from declaring any dividends, making any other
capital distribution, or paying a management fee to a controlling person, such
as its parent holding company, if, following the distribution or payment, the
institution would be within any of the three undercapitalized categories. In
addition to the prompt corrective action restriction on paying dividends, OTS
regulations limit certain "capital distributions" by savings associations.
Capital distributions are defined to include, among other things, dividends and
payments for stock repurchases and cash-out mergers.
Under capital distribution regulations, a savings association that is a
subsidiary of a savings and loan holding company must notify the OTS of an
association capital distribution at least 30 days prior to the declaration of
the capital distribution, the 30-day period provides the OTS an opportunity to
object to the proposed dividend if it believes that the dividend would not be
advisable.
An application to the OTS for approval to pay a dividend is required if:
(a) the total of all capital distributions made during that calendar year
(including the proposed distribution) exceeds the sum of the institution's
year-to-date net income and its retained income for the preceding two years; (b)
the institution is not entitled under OTS regulations to "expedited treatment"
(which is generally available to institutions the OTS regards as well run and
adequately capitalized); (c) the institution would not be at least "adequately
capitalized" following the proposed capital distribution; or (d) the
distribution would violate an applicable statute, regulation, agreement, or
condition imposed on the institutions by the OTS.
In addition, Broadway Federal's ability to pay dividends to the Company is
also subject to the restriction arising from the existence of a 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.
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.
FINANCIAL MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "G-L-B Act"), that is expected to have far-reaching
impacts on the financial services industry. The G-L-B Act authorizes
affiliations between banking securities and insurance firms that were previously
not permitted and authorizes bank
22
<PAGE>
holding companies and national banks to engage in a variety of new financial
activities. Among the new activities permitted to bank holding companies and
national bank subsidiaries are securities and insurance brokerage, securities
underwriting and certain forms of insurance underwriting. Bank holding companies
will have broader insurance underwriting powers than national banks and may
engage in merchant banking activities after the adoption of implementing
regulations. Merchant banking activities may also become available to national
bank subsidiaries after five years. The Federal Reserve Board, in consultation
with the Department of Treasury, may approve additional financial activities.
The G-L-B Act, however, prohibits future affiliations between existing unitary
savings and loan holding companies and firms that are engaged in non-financial
activities and prohibits the formation of new unitary holding companies by
non-financial companies.
The G-L-B Act imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer
has been given the opportunity to object and has not objected to such
disclosure. Financial institutions, however, will be required to comply with
state laws if they are more protective of customer privacy than the G-L-B Act.
The G-L-B Act makes significant revisions to the FHLB System. The G-L-B Act
imposes new capital requirements on the Federal Home Loan Banks and authorizes
them to issue two classes of stock with differing dividend rates and redemption
requirements. The G-L-B Act deletes the current requirement that the Federal
Home Loan Banks annually contribute $300 million to pay interest on certain
government obligations in favor of a 2% of net earning formula. The G-L-B Act
also makes membership in the Federal Home Loan Bank voluntary for federal
savings associations.
The G-L-B Act contains a variety of other provisions, including, a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and the amount of the fee. The G-L-B Act also imposes
certain reporting requirements on depository institutions that make payments to
non-governmental entities in connection with the Community Reinvestment Act.
TAX MATTERS
FEDERAL INCOME TAX
GENERAL. The Company and its subsidiaries 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. Broadway Federal has qualified under provisions of the
Code that in the past allowed qualifying savings institutions to establish
reserves for bad debts, and to make additions to such reserves, using certain
preferential methodologies. Under the relevant provisions of the Code as
currently in effect, 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 its actual loss experience.
A portion 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%. Under
California regulations, bad debt
23
<PAGE>
deductions are available in computing California franchise taxes using a three
or six year average loss experience method.
ITEM 2. DESCRIPTION OF PROPERTY
Broadway Federal conducts its business through five branch offices.
Broadway Federal's loan origination and service operations are also conducted
from one of its branch offices. Broadway Federal's administrative and corporate
operations are conducted from the Company's corporate facility located at 4800
Wilshire Boulevard, Los Angeles, which also houses it's fifth branch office.
Broadway Federal closed its branch office at 3555 West Slauson, Los Angeles in
June 1999 and all deposits were consolidated into Broadway Federal's Inglewood
branch.
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.
<TABLE>
<CAPTION>
NET BOOK VALUE
ORIGINAL OF PROPERTY OR
DATE DATE LEASEHOLD
LEASED OR LEASED OR OF LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ADMINISTRATIVE/BRANCH OFFICE:
4800 Wilshire Blvd. Owned 1997 -- $ 1,974,000
Los Angeles, CA
BRANCH OFFICES:
4835 West Venice Blvd. (2) Building Owned on 1965 2013 $ 129,000
Los Angeles, CA Leased Land
10920 S. Central Ave. (3) Leased 1998 (3) $ 65,000
Los Angeles, CA
BRANCH OFFICE/LOAN ORIGINATION AND
SERVICE CENTER:
170 N. Market Street Owned 1996 -- $ 909,000
Inglewood, CA
4429 West Adams Blvd.(1)
Los Angeles, CA Owned 1993 -- $ 196,000
4001 South Figueroa Street
Los Angeles, CA Owned 1996 -- $ 2,327,000
</TABLE>
----------------------------------
(1) 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.
(2) 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.
(3) Final lease terms including the expiration date of the lease have not
yet been determined.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the Company and Broadway Federal are
defendants in various litigation matters. 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.
24
<PAGE>
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 10, 2000, 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>
1999 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High................... $7 $7 5/8 $7 $8 1/4
Low.................... $4 5/8 $5 1/8 $6 $6 1/2
1998
----------------------------------------------------------------------------------------
High................... $8 1/4 $11 7/8 $13 $13 1/4
Low.................... $6 1/4 $8 1/4 $10 7/8 $12 1/2
</TABLE>
During 1999 and 1998, the Company paid quarterly dividends on its Common
Stock at the rate of $0.05 per share. During 1998 the Company also issued an 8%
stock dividend, which increased total shares outstanding by 69,047 to 932,494.
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 the Company's 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. Thirty days' prior notice to the OTS is
required before any capital distribution is made.
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
non-withdrawable 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, as Preferred Stock, 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 Treasury shares in exchange for
35,874 shares of the Company's Preferred Stock, which was retired. Dividends on
the Preferred Stock are noncumulative. At December 31, 1999, a total of 55,199
shares of Preferred Stock are outstanding.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Broadway Financial Corporation was incorporated under Delaware law in 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 in
January 1996. See "Description of Business--Broadway Financial Corporation."
The Company's principal business is serving as the holding company for
Broadway Federal and BankSmart. 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.
25
<PAGE>
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. As of and for the year ended December
31, 1999, the operations of BankSmart are insignificant to the Company.
For the years ended December 31, 1999 and 1998, the Company recorded net
earnings of $358,000, or $.35 per diluted share, and $209,000, or $.19 per
diluted share, respectively. At December 31, 1999 and 1998, respectively, the
Company had total consolidated assets of $166.3 million and $145.7 million;
total deposits of $134.0 million and $126.0 million; and stockholders' equity of
$13.8 million and $13.6 million, representing 8.30% and 9.31% of assets. Each of
the Bank's regulatory capital ratios exceeded regulatory requirements at
December 31, 1999 and 1998, with tangible and core capital each at 7.09% and
7.62% and risk-based capital at 10.08% and 13.90%, 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 lesser 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, benefited Broadway Federal
primarily due to the effect of the lagging market index which has resulted in
the interest income earned on loans declining at a slower rate than interest
expense paid on deposits. This effect of the lagging index, however, has been
partially offset by the increase in refinancings of portfolio loans to lower
yielding loans.
The principal objective of the Company's interest rate risk management
function is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the level of risk appropriate given the Company's business
focus, operating environment, capital and liquidity requirements and performance
objectives, establish prudent asset concentration guidelines and manage the risk
consistent with Board approved guidelines. Through such management, the Company
seeks to reduce the vulnerability of its operations to changes in interest rates
and to manage the ratio of interest rate sensitive assets to interest rate
sensitive liabilities within specified maturities or repricing dates. The
Company, through Broadway Federal, achieves these objectives primarily by the
marketing and funding of 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 an
Asset/Liability Committee, which is responsible for reviewing the Company's
asset/liability policies and interest rate risk position. The Committee
generally meets quarterly, or more often as deemed necessary 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
26
<PAGE>
recommended by the Company's 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. Net portfolio value is the difference between the
present value of expected cash flows of the Company's assets and liabilities
under various interest rate scenarios. The present value of these cash flows is
calculated by discounting them using interest rates for that scenario. The
following tables present Broadway Federal's NPV as of December 31, 1999 and 1998
as calculated by the OTS for the foregoing purposes based on information
provided to the OTS by Broadway Federal. This 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 AS OF DECEMBER 31, 1999
----------------------------------------------------------------------------------------------------------------
CHANGE IN INTEREST NPV CHANGE IN NPV AS PERCENT
RATES IN BASIS POINTS DOLLAR PERCENT CHANGE OF PRESENT
(RATE SHOCK) AMOUNT CHANGE (1) VALUE OF ASSETS
----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
300 $15,741 $ (2,609) (14)% (1.28)%
200 $16,838 $ (1,512) (8)% (0.72)%
100 $17,744 $ (605) (3)% (0.28)%
Zero $18,349 $ -- -- 0.00%
(100) $18,621 $ 272 1% 0.10%
(200) $19,113 $ 763 4% 0.31%
(300) $19,754 $ 1,404 8% 0.59%
NET PORTFOLIO VALUE AS OF DECEMBER 31, 1998
----------------------------------------------------------------------------------------------------------------
CHANGE IN INTEREST NPV CHANGE IN NPV AS PERCENT
RATES IN BASIS POINTS DOLLAR PERCENT CHANGE OF PRESENT
(RATE SHOCK) AMOUNT CHANGE (1) VALUE OF ASSETS
----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
300 $17,469 $ 444 3% 0.43%
200 $17,524 $ 499 3% 0.41%
100 $17,294 $ 269 2% 0.22%
Zero $17,025 $ -- -- --%
(100) $17,049 $ 24 -- (0.04)%
(200) $17,236 $ 211 1% 0.01%
(300) $17,622 $ 597 4% 0.17%
</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 at December 31, 1999 and 1998, Broadway Federal would experience
a (8%) decrease and a 3% increase, respectively, in NPV in a rising rate
environment and a 4% and 1%, respectively, increase in NPV in a declining rate
environment. Between December 31, 1998 and 1999, Broadway Federal's risk profile
changed. This change results primarily from an increase in the level of
multi-family loans from 36.87% of the total loan portfolio at December 31, 1998
to 52.83% at December 31, 1999. 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. The Company
believes that the risks associated with multi-family loans are mitigated by more
stringent underwriting requirements. See "---Lending Activities - Multi-Family
Lending."
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, 1999 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, 1999. 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
27
<PAGE>
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 the Company's investment securities
portfolio is comprised of callable government agency securities.
28
<PAGE>
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
FISCAL YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------------
2000 2001 2002 2003
------------------ ------------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST EARNINGS ASSETS:
Loans receivable (1)(2)(3)(4)
Fixed................................ $ 5,029 $ 2,896 $ 2,104 $ 1,794
Average interest rate.............. 9.69% 9.65% 9.46% 9.36%
Adjustable........................... $ 13,895 $ 10,637 $ 9,695 $ 8,862
Average interest rate.............. 7.51% 7.52% 7.54% 7.56%
Investment securities (5)............... $ 9,623 $ 1,000
Average interest rate................ 5.11% 5.63%
Mortgage backed securities (6)(7)
Fixed................................ $ 1,083 $ 971 $ 870 $ 777
Average interest rate.............. 6.92% 6.92% 6.91% 6.91%
Adjustable........................... $ 546 $ 460 $ 387 $ 325
Average interest rate.............. 6.30% 6.30% 6.30% 6.30%
Interest bearing deposits............... $ 102
Average interest rate................ 5.50%
FHLB stock (8).......................... $ 1,229
Average interest rate................ 5.19%
Total interest earning assets........... $ 31,507 $ 14,964 $ 13,056 $ 12,758
INTEREST BEARING LIABILITIES:
Savings accounts
NOW accounts (9)..................... $ 2,006 $ 1,665 $ 1,382 $ 1,147
Average interest rate.............. 1.00% 1.00% 1.00% 1.00%
Passbook accounts (10)............... $ 4,973 $ 4,127 $ 3,426 $ 2,843
Average interest rate.............. 1.26% 1.26% 1.26% 1.26%
Certificate accounts (11)............ $ 66,192 $ 6,609 $ 1,739 $ 5,641
Average interest rate.............. 4.64% 5.30% 5.30% 4.27%
Money Market deposits (12)........... $ 1,720 $ 1,152 $ 2,340
Average interest rate.............. 2.00% 2.00% 2.00%
Federal Home Loan Bank advances
Fixed rate borrowing................. $ 12,000 $ 1,250
Average interest rate.............. 5.59% 6.75%
Variable rate borrowing.............. $ 3,650
Average interest rate.............. 5.21%
Total interest bearing liabilities...... $ 90,541 $ 13,553 $ 10,137 $ 9,631
<CAPTION>
EXPECTED MATURITY DATE
FISCAL YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------------------
2004 THEREAFTER TOTAL FAIR VALUE
-------------- ---------------- ------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Earnings Assets:
Loans receivable (1)(2)(3)(4)
Fixed................................ $ 1,251 $ 5,543 $ 18,617 $ 19,630
Average interest rate.............. 9.09 % 8.21% 9.15%
Adjustable........................... $ 8,125 $ 62,056 $ 113,270 $ 106,784
Average interest rate.............. 7.57 % 7.63% 7.59%
Investment securities (5)............... $ 10,623 $ 10,302
Average interest rate................ 5.16%
Mortgage backed securities (6)(7)
Fixed................................ $ 697 $ 5,465 $ 9,863 $ 9,529
Average interest rate.............. 6.91 % 6.88% 6.89%
Adjustable........................... $ 274 $ 1,355 $ 3,347 $ 3,323
Average interest rate.............. 6.30 % 6.30% 6.30%
Interest bearing deposits............... $ 102 $ 102
Average interest rate................ 5.50%
FHLB stock (8).......................... $ 1,229 $ 1,229
Average interest rate................ 5.19%
Total interest earning assets........... $ 10,347 $ 74,419 $ 157,051 $ 150,899
INTEREST BEARING LIABILITIES:
Savings accounts
NOW accounts (9)..................... $ 5,599 $ 11,799 $ 11,799
Average interest rate.............. 1.00 % 1.00%
Passbook accounts (10)............... $ 2,360 $ 11,521 $ 29,250 $ 29,250
Average interest rate.............. 1.26 % 1.26% 1.26%
Certificate accounts (11)............ $ 2,419 $ 82,600 $ 82,836
Average interest rate.............. 5.28 % 4.70%
Money Market deposits (12)........... $ 5,212 $ 5,212
Average interest rate.............. 2.00%
Federal Home Loan Bank advances
Fixed rate borrowing................. $ 13,250 $ 13,250
Average interest rate.............. 5.70%
Variable rate borrowing.............. $ 3,650 $ 3,650
Average interest rate.............. 5.21%
Total interest bearing liabilities...... $ 10,378 $ 11,521 $ 145,761 $ 145,997
</TABLE>
29
<PAGE>
(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 15% for
adjustable rate loans, and 6.5% to 27% for fixed rate loans. For other
loans, assumes annual amortization and balloon maturity, where
appropriate. For non-residential loans, assumes the prepayment rate is
6%.
(3) Approximately 67% 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 $1.9 million are categorized as maturing in
1999.
(5) As of December 31, 1999, the securities have maturities ranging from 2002
to 2005. 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 7% to 13%.
(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 15%.
(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.
YEAR 2000 COMPLIANCE. The concern over the Year 2000 ("Y2K") issue
resulted from computer programs being written using two digits rather than four
digits to identify a year in the date field. Throughout the world there was
concern that this issue could cause computer systems to fail or create erroneous
results at the Year 2000 date change.
Beginning in 1998, the Company took various steps to mitigate the
potential impact of a Y2K problem. In general, these actions were designed to
identify, assess and design an action plan to mitigate the risks that the
Company might have encountered relative to the Y2K problem.
The total cost of the Company's plan to address the Y2K issue was
$486,000. The major part of the costs incurred relates to the replacement of
hardware and software that have been capitalized in accordance with Company
policies. These capitalized costs are being depreciated over their estimated
useful lives in accordance with the Company's policies. All other costs were
expensed as incurred. The total amount expensed during 1999 and 1998 related to
the Y2K issue was $34,000 and $20,000, respectively.
On and subsequent to December 31, 1999, the Company experienced no
problems relative to the Y2K issue that had a material adverse impact on the
Company's financial condition, results of operations or liquidity. The Company
will continue to monitor its significant vendors with respect to Y2K problems
they may encounter as those issues may adversely effect the Company's ability to
continue operations. The Company does not believe at this time that any
potential problems relative to the Y2K issue will materially impact the Company
in the future. However, no assurance can be given that this will be the case.
AVERAGE BALANCE SHEET. The following table sets forth certain information
relating to the Company's average balance sheets for the years ended December
31, 1999 and 1998. The yields and costs are derived by dividing
30
<PAGE>
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 that are considered adjustments to yields.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1999 1998
-------------------------------- -------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------- ---------- --------- ---------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS:
Interest-earning deposits................. $ 155 $ 8 5.16% $ 148 $ 4 2.70%
Federal Funds sold and other short-term
investments............................. 725 25 3.45% 2,638 113 4.28%
Investment securities, (1)................ 10,081 619 6.14% 8,689 541 6.23%
Loans receivable(2)(3).................... 120,561 9,785 8.12% 106,535 8,630 8.10%
Mortgage-backed securities (1)............ 14,047 867 6.17% 5,650 338 5.98%
FHLB stock................................ 1,079 56 5.19% 963 59 6.13%
----------- ---------- ---------- ---------
TOTAL INTEREST-EARNING ASSETS............. 146,648 $ 11,360 7.75% 124,623 $ 9,685 7.77%
========== =========
NON-INTEREST-EARNING ASSETS............... 12,081 10,645
----------- ----------
TOTAL ASSETS..................... $ 158,729 $ 135,268
=========== ==========
LIABILITIES AND RETAINED EARNINGS
INTEREST-BEARING LIABILITIES:
Money market deposits..................... $ 4,881 $ 91 1.86% $ 4,562 $ 84 1.84%
Passbook deposits......................... 28,857 431 1.50% 28,063 508 1.81%
NOW and other demand deposits............. 17,201 99 0.57% 14,130 67 0.48%
Certificate accounts...................... 80,220 3,817 4.76% 70,483 3,577 5.07%
----------- ---------- ---------- ---------
TOTAL DEPOSITS............................ 131,159 4,438 3.38% 117,238 4,236 3.61%
FHLB advances............................. 12,286 578 4.70% 2,607 148 5.67%
----------- ---------- ---------- ---------
TOTAL INTEREST-BEARING LIABILITIES........ 143,445 $ 5,016 3.50% 119,845 $ 4,384 3.66%
----------- ========== ---------- =========
Non-interest-bearing liabilities.......... 1,599 1,868
Retained earnings......................... 13,685 13,555
----------- ----------
TOTAL LIABILITIES AND RETAINED EARNINGS... $ 158,729 $ 135,268
=========== ==========
NET INTEREST RATE SPREAD(4)............... $ 6,344 4.25% $ 5,301 4.11%
NET INTEREST MARGIN(5).................... 4.33% 4.25%
RATIO OF INTEREST-EARNING ASSETS TO
INTEREST-BEARING LIABILITIES............ 102.23% 103.99%
RETURN ON AVERAGE ASSETS.................. 0.24% 0.15%
RETURN ON AVERAGE EQUITY.................. 2.84% 1.54%
AVERAGE EQUITY TO AVERAGE ASSETS RATIO.... 8.62% 10.02%
</TABLE>
- - -----------------
(1) All investment and mortgage-backed securities were categorized as
held-to-maturity.
(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.
31
<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 total 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, 1999 YEAR ENDED DECEMBER 31, 1998
COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------------- --------------------------------------
INCREASE (DECREASE) IN NET INCREASE (DECREASE) IN NET
-------------------------------------- --------------------------------------
DUE TO DUE TO DUE TO DUE TO
VOLUME RATE TOTAL VOLUME RATE TOTAL
------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-earning deposits........... $ -- $ 4 $ 4 $ (2) $ -- $ (2)
Federal funds sold and other........ (17) (34) (51)
Short term investments............ (82) (6) (88)
Investment securities, net.......... 87 (9) 78 44 101 145
Loans receivable, net............... 1,136 19 1,155 774 (498) 276
Mortgage backed securities, net..... 502 27 529 218 (21) 197
FHLB stock.......................... 7 (10) (3) 4 (4) --
------------ ------------ ------------ ------------ ------------ ------------
TOTAL INTEREST-EARNING ASSETS....... 1,650 25 1,675 1,021 (456) 565
------------ ------------ ------------ ------------ ------------ ------------
INTEREST-BEARING LIABILITIES:
Money market deposits............... 6 1 7 3 (7) (4)
Passbook deposits................... 14 (94) (80) (9) (50) (59)
NOW and other demand deposits....... 15 15 30 21 (21) --
Certificate accounts................ 494 (249) 245 486 (154) 332
FHLB advances....................... 549 (119) 430 68 62 130
------------ ------------ ------------ ------------ ------------ ------------
TOTAL INTEREST-BEARING LIABILITIES.. 1,078 (446) 632 569 (170) 399
------------ ------------ ------------ ------------ ------------ ------------
CHANGE IN NET
INTEREST INCOME.................. $ 572 $ 471 $ 1,043 $ 452 $ (286) $ 166
============ ============ ============ ============ ============ ============
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND
DECEMBER 31, 1998
GENERAL
The Company recorded net earnings of $358,000 or $0.35 per diluted share,
for the year ended December 31, 1999, compared to net earnings of $209,000 or
$0.19 per diluted share, for the year ended December 31, 1998. The $149,000
increase in net earnings for 1999 was impacted by the net effect of offsetting
factors, which included higher net interest income, a lower provision for loan
losses, higher non-interest income and higher non-interest expense. Non-interest
income for the year included a pretax gain from casualty insurance reimbursement
of $680,000.
INTEREST INCOME
Interest income increased by $1.7 million, or 17.29%, from $9.7 million
for the year ended December 31, 1998 to $11.4 million for the same period in
1999. This increase was primarily the result of an increase in average
interest-earning assets of $22.0 million, to $146.6 million for the year ended
December 31, 1999 from $124.6 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 7.77%
during the year ended December 31, 1998 to 7.75% during the year ended December
31, 1999. Interest income from loans, which accounted for approximately 86% of
total interest income in
32
<PAGE>
1999, increased by $1.2 million, or 13.38%, due to a $14.0 million, or 13.17%,
increase in the average balance of loans. Interest income from mortgage-backed
securities increased $529,000, or 156.71%, from $338,000 in 1998 to $867,000 in
1999, primarily due to a $8.4 million, or 148.62%, increase in the average
balance of mortgage-backed securities, and a 19-basis point increase in the
average yield on such securities from 5.98% during 1998 to 6.17% during 1999.
Interest income from investment securities increased $78,000 or 14.42%, from
$541,000 in 1998 to $619,000 in 1999, primarily due to a 9 basis point decrease
in the average yield on investment securities to 6.14% during 1999 from 6.23%
during 1999, coupled with a $1.4 million, or 16.02% increase in the average
balance of investment securities to $10.1 million during 1999, from $8.7 million
during 1998.
INTEREST EXPENSE
Interest expense includes interest on savings deposits and on borrowings.
Interest expense increased $632,000, or 14.42%, for the year ended December 31,
1999, to $5.0 million, from $4.4 million for the same period a year ago. This
increase was primarily the result of an increase in average interest-bearing
liabilities of $23.6 million, to $143.4 million for the year ended December 31,
1999 from $119.8 million for the same period a year ago. Interest on savings
deposits, which accounted for approximately 88% of interest expense in 1999,
increased by $202,000 or 4.77%, due to a $13.9 million, or 11.87%, increase in
the average balance of savings deposits offset by a 23 basis point decrease in
the average cost of deposits from 3.61% for 1998 to 3.38% for 1999. The decrease
in the average cost of savings deposits also reflects impact of the lower rate
paid passbook accounts, such rate was decreased 75-basis points during 1998 and
the Bank's ability to maintain its core deposit portfolio mix and increase its
NOW and passbook account portfolio from $44.8 million at December 31, 1998 to
$46.1 million at December 31, 1999.
Net interest spread ("NIS"), which represents the difference between the
average yield on interest earning assets and the average cost of interest
bearing liabilities, increased from 4.11% at December 31, 1998 to 4.25% at
December 31, 1999. This 14-basis point increase in NIS primarily results from
lower cost of deposits and borrowings, offset by slightly lower yields on
interest-earning assets between 1998 and 1999. Management continues to take
steps that are intended to stabilize core earnings, which include (i) increasing
loan originations, specifically multi-family originations, which have higher
yields and larger margins over the stated index; (ii) increasing the level of
non-interest bearing checking deposits; and (iii) attempting to hold deposit
rates on jumbo and other certificate accounts to levels which are less than or
equal to related Federal Home Loan Bank borrowing rates.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased by $150,000, or 33.33%, from
$450,000 for the year ended December 31, 1998 to $300,000 for the year ended
December 31, 1999. The lower 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,
1999 loan charge-offs totaled $12,000, as compared to $353,000 for the same
period in 1998.
Total non-performing assets, consisting of non-accrual loans and REO,
increased by $649,000, from $1.3 million at December 31, 1998 to $2.0 million at
December 31, 1999. The increase consisted of $305,000 increase in non-accrual
loans, coupled with a $344,000 increase in REO. As a percentage of total assets,
non-performing assets were 1.18% at December 31, 1999, compared to 0.90% at
December 31, 1998. The allowance for loan losses was 103.15% of non-performing
loans at December 31, 1998, compared to 105.60% at December 31, 1998.
Non-accrual loans at December 31, 1999 included eight loans totaling $550,000
secured by one- to four-unit properties, three loans totaling $730,000 secured
by multi-family properties and one loan for $115,000 secured by commercial
property. REO at December 31, 1999 included three single family properties with
a book value of $433,000 and one parcel of land having a book value of $133,000.
Subsequent to December 31, 1999, one multi-family non-accrual loan with a
balance of $467,000 was paid off when the property securing the loan was sold at
foreclosure, and one REO, with a book value of $96,000, was also sold.
NON-INTEREST INCOME
Non-interest income increased by $329,000, or 38.48%, to $1.2 million for
the year ended December 31, 1999, from $855,000 for the same period a year ago.
The increase is due to a number of offsetting factors. Gain on sale of mortgage
loans decreased $178,000, from a $14,000 gain in 1998 to ($164,000) loss in 1999
due to losses
33
<PAGE>
incurred on the sale of loans designated as held for sale during the year. The
losses were due to fluctuations in market interest rates, resulting in a
diminution in the value of such assets. Gain on casualty insurance reimbursement
increased from $199,000 in 1998 to $680,000 in 1999 due to the recognition of
insurance proceeds resulting from the destruction of Broadway Federal's main
branch office in April 1992. The $680,000 was the final payment to be received
as a result of this casualty loss.
NON-INTEREST EXPENSE
Non-interest expense increased by $1.3 million, or 23.75%, to $6.6
million for the year ended December 31, 1999, from $5.4 million for the same
period a year ago. The increase in non-interest expense was primarily due to
increases in branch losses, compensation and benefits, professional services,
litigation settlements and other expenses, offset primarily by a decrease in net
real estate operations expenses.
Branch losses increased by $460,000 to $530,000 for the year ended
December 31, 1999. The increase was principally due to increases in savings
losses during the year. To reduce these losses, the Company has hired a senior
level executive from a major thrift institution with over 20 years of retail
banking experience as the Company's Chief Savings Officer. The Company has
enhanced internal controls, increased internal audits of the Savings department,
improved deposit account opening procedures, including enhanced credit and
background reviews of new customers, increased monitoring and senior level
review of large transactions, coordinated efforts with outside vendors to
increase security oversight, enhanced credit and background reviews of new
hires, and utilized independent security consultants to review and recommend
security and internal control initiatives.
Compensation and benefits increased by $271,000 for the year ended
December 31, 1999, as compared to the same period a year ago. The increase
results from the accrual of vested stock awards, the payment of severance
benefits related to a third quarter staff reduction and the cost of replacing
key personnel.
Professional services includes audit, legal and other consulting service
expenses. Professional services increased by $178,000 for the year ended
December 31, 1999, as compared to the same period a year ago, primarily due to
attorney fees and computer system consulting expenses incurred during the year.
Litigation settlement expenses totaled $232,000 during the year ended December
31, 1999 as the Company settled or paid all known legal claims for which it
reasonably believed that a liability might exist. See "-- Legal Proceedings".
Other non-interest expense increased by $140,000 from $266,000 in 1998 to
$406,000 in 1999. The increase resulted primarily from a $139,000 loss on loans
previously classified as held-for-sale that were reclassified as
portfolio loans. The losses were due to fluctuations in market interest rates
resulting in a diminution in the value of such assets.
INCOME TAXES
Income taxes increased by $101,000 for the year ended December 31, 1999,
from $142,000 for the same period in 1998. The Company's effective tax rate was
approximately 40% for 1999 and 1998.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 AND DECEMBER 31,
1998
Total assets at December 31, 1999 were $166.3 million, as compared to
$145.7 million at December 31, 1998, an increase of $20.6 million, or 14.20%.
Net loans receivable, including loans held-for-sale, increased $19.8 million to
$129.3 million at December 31, 1999, as compared to $109.6 million at December
31, 1998. The increase in net loans resulted from $50.8 million in loan
originations, offset primarily by $18.4 million in principal repayments and
$11.5 million in loan sales. Investment and mortgage-backed securities increased
$3.1 million, from $20.7 million at December 31, 1998 to $23.8 million at
December 31, 1999. The increase in investment and mortgage-backed securities
resulted from the purchase of U. S. Government federal agency and
mortgage-backed securities during the year. Office properties and equipment
increased $1.2 million, to $6.5 million at December 31, 1999, primarily as a
result of construction costs incurred on the Bank's Exposition park branch. In
September 1999 construction of the facility was completed and the Bank's
Broadway Boulevard branch, housed in a modular facility, was relocated into the
new branch. The vacated branch had been operated from the modular facility since
the main office was destroyed in the 1992 civil disturbance in Los Angeles.
34
<PAGE>
Total liabilities at December 31, 1999 were $152.5 million, as compared
to $132.1 million at December 31, 1998. The $20.4 million increase is primarily
attributable to a $12.4 million increase in advances from the FHLB and an $8.0
million increase in savings deposits. These increases were used to fund the
increase in total assets.
Total capital at December 31, 1999 was $13.8 million, as compared to
$13.6 million at December 31, 1998, representing an increase of $277,000.
Capital decreased due to the payment of $214,000 in dividends during the year.
This decrease was offset by net earnings of $358,000 for the year and a $103,000
Employee Stock Ownership Plan ("ESOP") repayment.
RECENT DEVELOPMENTS
On March 28, 2000, the Company announced that its Board of Directors
authorized the repurchase of up to 10%, or 93,249 shares, of its outstanding
Common Stock. The repurchases are to be made from time to time over a one year
period in the open market depending on market conditions and growth requirements
of the Company.
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 14.86% for the years ended December 31, 1999 and 1998, 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. At December 31, 1999 and 1998,
FHLB advances totaled $16.9 million and $4.5 million, respectively. During the
years ended December 31, 1999 and 1998, 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 provided by (or used in) operating activities were $1.5
million and $(2.0) million for the years ended December 31, 1999 and 1998,
respectively. Loans originated for sale, net of refinances, totaled $11.5
million and $4.3 million for the years ended December 31,1999 and 1998,
respectively. Proceeds from the sale of loans receivable held-for-sale totaled
$11.4 million and $2.0 million for the years ended December 31, 1999 and 1998,
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
$39.4 million and $33.0 million for the years ended December 31, 1999 and 1998,
respectively. Proceeds from loan principal repayments were $18.4 million and
$28.8 million for the years ended December 31, 1999 and 1998, respectively.
Purchases of investment securities and mortgage-backed securities held to
maturity were $9.1 million and $25.2 million for the years ended December 31,
1999 and 1998, respectively. Proceeds from the sale, maturity or redemption and
principal payments of mortgage-backed and investment securities were $5.9
million and $13.7 million for the years ended December 31, 1999 and 1998,
respectively. Capital expenditures for office properties and equipment for the
years ended December 31, 1999 and 1998 totaled $1.6 million and $1.7 million,
respectively. Net cash provided by financing activities was derived from an
increase in savings deposits and advances from the FHLB. The net increase in
savings deposits for the year totaled $8.0 million.
At December 31, 1999, the Company had outstanding commitments to
originate loans of $3.6 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 that have
contractual maturities of one year or less from December 31, 1999, totaled $66.2
million. If a significant portion of the maturing certificates is not renewed at
35
<PAGE>
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 result in an
increased cost of funds. Historically, the Company has retained 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.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements 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
For a discussion on recent accounting pronouncements, see Footnote 2 of
the Notes to the Consolidated Financial Statements.
ITEM 7. FINANCIAL STATEMENTS OF BROADWAY FINANCIAL CORPORATION
See Index to Financial Statements of Broadway Financial Corporation on
Page 40 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 accountants,
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 adopted 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.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this Item is incorporated herein by reference
to the definitive Proxy Statement, under the captions "Director's and Executive
Officers" and "Voting Securities and Principal Holders Thereof",
to be filed with the Securities and Exchange Commission in connection with the
Company's 2000 Annual Meeting of Shareholders (the "Company's 2000 Proxy
Statement").
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the Company's 2000 Proxy Statement, under the caption "Executive Compensation
Benefits and Related Matters".
36
<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 2000 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 filed with Amendment No. 2
to Registration Statement on Form S-1, No. 33-96814, filed by the Registrant on November 13, 1995.)
3.2 Form of Bylaws of the Company (contained in Exhibit 2.1 filed with Amendment
No. 2 to Registration Statement on Form S-1, No. 33-96814, filed by the Registrant on November 13, 1995.)
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
None
37
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BROADWAY FINANCIAL CORPORATION
By: /s/ Paul C. Hudson
---------------------------------------
Paul C. Hudson
CHIEF EXECUTIVE OFFICER AND PRESIDENT
Date: March 27, 2000
In accordance with the Exchange Act, this report has been signed below by
the following persons in the capacities and on the date indicated.
/s/ Paul C. Hudson Date: March 27, 2000
- - ---------------------------------------------
Paul C. Hudson
Chief Executive Officer, President
and Director
(Principal Executive Officer)
/s/ Bob Adkins Date: March 27, 2000
- - ---------------------------------------------
Bob Adkins
Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ Elbert T. Hudson Date: March 27, 2000
- - ---------------------------------------------
Elbert T. Hudson
Chairman of the Board
/s/ Kellogg Chan Date: March 27, 2000
- - ---------------------------------------------
Kellogg Chan
Director
/s/ Dr. Willis K. Duffy Date: March 27, 2000
- - ---------------------------------------------
Dr. Willis K. Duffy
Director
/s/ Rosa M. Hill Date: March 27, 2000
- - ---------------------------------------------
Rosa M. Hill
Director
38
<PAGE>
/s/ A. Odell Maddox Date: March 27, 2000
- - ---------------------------------------------
Director
/s/ Lyle A. Marshall Date: March 27, 2000
- - ---------------------------------------------
Lyle A. Marshall
Director
/s/ Larkin Teasley Date: March 27, 2000
- - ---------------------------------------------
Larkin Teasley
Director
/s/ Daniel A. Medina Date: March 27, 2000
- - ---------------------------------------------
Daniel A. Medina
Director
39
<PAGE>
Consolidated Financial Statements
BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1999 AND 1998
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Broadway Financial Corporation and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1999 and 1998
CONTENTS
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
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Broadway Financial Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Broadway
Financial Corporation and Subsidiaries (the "Company") as of December 31, 1999
and 1998, and the related consolidated statements of earnings, changes in
stockholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Broadway Financial
Corporation and Subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
KPMG LLP
Los Angeles, California
February 16, 2000
F-1
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------------ -------------------
<S> <C> <C>
ASSETS
Cash ......................................................... $ 3,135,000 $ 4,605,000
Federal funds sold............................................ -- 2,600,000
Investment securities held-to-maturity (fair value of
$10,302,000 at December 31, 1999 and $8,607,000 at
December 31, 1998).......................................... 10,623,000 8,622,000
Mortgage-backed securities held-to-maturity (fair value
of $12,852,000 at December 31, 1999 and $12,079,000
at December 31, 1998)....................................... 13,210,000 12,096,000
Loans receivable, net......................................... 126,871,000 107,055,000
Loans receivable held for sale, at lower of cost or
fair value ................................................ 2,458,000 2,495,000
Accrued interest receivable................................... 1,013,000 888,000
Real estate acquired through foreclosure, net................. 515,000 222,000
Federal Home Loan Bank stock, at cost......................... 1,229,000 987,000
Office properties and equipment, net.......................... 6,533,000 5,360,000
Other assets.................................................. 717,000 721,000
----------------------------------------
Total assets $ 166,304,000 $ 145,651,000
========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits...................................................... $ 133,984,000 $ 125,998,000
Advances from Federal Home Loan Bank.......................... 16,900,000 4,500,000
Advance payments by borrowers for taxes and insurance......... 192,000 205,000
Deferred income taxes......................................... 605,000 772,000
Other liabilities............................................. 822,000 623,000
----------------------------------------
Total liabilities................................... 152,503,000 132,098,000
Commitments and contingent liabilities -- --
Stockholders' equity:
Preferred non-convertible, non-cumulative, and non-voting
stock, $.01 par value, authorized 1,000,000 shares; issued
and outstanding 55,199 shares at December 31, 1999 and 1998,
respectively................................................ 1,000 1,000
Common stock, $.01 par value, authorized 3,000,000 shares;
issued and outstanding 932,494 shares at December 31, 1999
and 1998, respectively...................................... 10,000 10,000
Additional paid-in capital.................................... 9,674,000 9,633,000
Retained earnings - substantially restricted.................. 4,809,000 4,664,000
Treasury stock - 29,241 shares, at cost....................... (318,000) (318,000)
Unearned ESOP shares.......................................... (375,000) (437,000)
----------------------------------------
Total stockholders' equity................................ 13,801,000 13,553,000
----------------------------------------
Total liabilities and stockholders' equity................ $ 166,304,000 $ 145,651,000
========================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-2
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998
------------------ -------------------
<S> <C> <C>
Interest on loans receivable..................................... $ 9,785,000 $ 8,630,000
Interest on investment securities held-to-maturity............... 619,000 541,000
Interest on mortgage-backed securities held-to-maturity.......... 867,000 338,000
Other interest income............................................ 89,000 176,000
------------------ -------------------
Total interest income............................... 11,360,000 9,685,000
Interest on deposits............................................. 4,438,000 4,236,000
Interest on borrowings........................................... 578,000 148,000
------------------ -------------------
Total interest expense.............................. 5,016,000 4,384,000
Net interest income before provision for loan losses............. 6,344,000 5,301,000
Provision for loan losses........................................ 300,000 450,000
------------------ -------------------
Net interest income after provision for loan losses. 6,044,000 4,851,000
Non-interest income:
Service charges............................................... 501,000 414,000
Gain (loss) on sale of loans receivable held for sale......... (164,000) 14,000
Gain on casualty insurance reimbursement...................... 680,000 199,000
Other ........................................................ 167,000 228,000
------------------ -------------------
Total non-interest income........................... 1,184,000 855,000
------------------ -------------------
Non-interest expense:
Compensation and benefits..................................... 2,874,000 2,603,000
Occupancy expense, net........................................ 1,190,000 1,148,000
Advertising and promotional expense........................... 219,000 208,000
Professional services......................................... 444,000 266,000
Federal deposit insurance premiums............................ 112,000 103,000
Insurance bond premiums....................................... 98,000 111,000
Real estate operations, net................................... 77,000 182,000
Contracted security services.................................. 155,000 149,000
Litigation settlements........................................ 232,000 --
Telephone and postage......................................... 175,000 122,000
Stationary, printing and supplies............................. 115,000 127,000
Branch losses................................................. 530,000 70,000
Other ........................................................ 406,000 266,000
------------------ -------------------
Total non-interest expense.......................... 6,627,000 5,355,000
------------------ -------------------
Earnings before income taxes..................................... 601,000 351,000
Income taxes .................................................... 243,000 142,000
------------------ -------------------
Net earnings ....................................... $ 358,000 $ 209,000
================== ===================
Earnings applicable to common shareholder:
Net earnings.................................................. $ 358,000 $ 209,000
Dividends paid on preferred stock............................. (28,000) 28,000
------------------ -------------------
$ 330,000 $ 181,000
================== ===================
Earnings per share - basic....................................... $ 0.35 $ 0.19
================== ===================
Earnings per share - diluted..................................... $ 0.35 $ 0.19
================== ===================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
F-3
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN CAPITAL
----------------- ------------------- ------------------
<S> <C> <C> <C>
Balance, at December 31, 1997................$ 1,000 9,000 8,820,000
Net earnings for the year ended
December 31, 1998....................... -- -- --
Stock dividends........................... -- 1,000 763,000
Cash dividends paid - 2% common stock..... -- -- --
Cash dividends paid - 5% preferred stock.. -- -- --
Employee Stock Ownership Plan payments.... -- -- 50,000
----------------- ------------------- ------------------
Balance at December 31, 1998........ 1,000 10,000 9,633,000
NET EARNINGS FOR THE YEAR ENDED
DECEMBER 31, 1999....................... -- -- --
CASH DIVIDENDS PAID - 2% COMMON
STOCK................................... -- -- --
CASH DIVIDENDS PAID - 5% PREFERRED
STOCK................................... -- -- --
EMPLOYEE STOCK OWNERSHIP PLAN
PAYMENTS................................ -- -- 41,000
----------------- ------------------- ------------------
BALANCE, AT DECEMBER 31, 1999.........$ 1,000 10,000 9,674,000
================= =================== ==================
</TABLE>
<TABLE>
<CAPTION>
RETAINED
EARNINGS TOTAL
(SUBSTANTIALLY UNEARNED ESOP STOCKHOLDERS'
RESTRICTED) TREASURY STOCK SHARES EQUITY
---------------- ----------------- --------------- ------------------
<S> <C> <C> <C> <C>
Balance, at December 31, 1997................ 5,427,000 (318,000) (500,000) 13,439,000
Net earnings for the year ended
December 31, 1998....................... 209,000 -- -- 209,000
Stock dividends........................... (764,000) -- -- --
Cash dividends paid - 2% common stock..... (180,000) -- -- (180,000)
Cash dividends paid - 5% preferred stock.. (28,000) -- -- (28,000)
Employee Stock Ownership Plan payments.... - -- 63,000 113,000
---------------- ----------------- --------------- ------------------
Balance at December 31, 1998........ 4,664,000 (318,000) (437,000) 13,553,000
NET EARNINGS FOR THE YEAR ENDED
DECEMBER 31, 1999....................... 358,000 -- -- 358,000
CASH DIVIDENDS PAID - 2% COMMON
STOCK................................... (185,000) -- -- (185,000)
CASH DIVIDENDS PAID - 5% PREFERRED
STOCK................................... (28,000) -- -- (28,000)
EMPLOYEE STOCK OWNERSHIP PLAN
PAYMENTS................................ -- -- 62,000 103,000
---------------- ----------------- --------------- ------------------
BALANCE, AT DECEMBER 31, 1999......... 4,809,000 (318,000) (375,000) 13,801,000
================ ================= =============== ==================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998
------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 358,000 $ 209,000
Adjustments to reconcile net earnings to net cash (used in)
provided by operating activities:
Depreciation and amortization........................................ 395,000 188,000
Amortization of discounts and premiums on loans purchased............ 79,000 (29,000)
Amortization of net deferred loan origination fees................... 29,000 (47,000)
Amortization of discounts and premiums on investment securities and
mortgage-backed securities......................................... 118,000 13,000
Amortization of deferred compensation................................ 103,000 113,000
Gain on sale of real estate acquired through foreclosure............. (13,000) (28,000)
Loss (gain) on sale of loans receivable held for sale ............... 164,000 (14,000)
Gain on sale of office properties and equipment...................... (2,000) (7,000)
Provision for loan losses............................................ 300,000 450,000
Provision for write-downs and losses on real estate.................. 60,000 167,000
Lower of cost or fair value adjustment on loans ..................... 139,000 --
Loans originated for sale, net of refinances......................... (11,477,000) (4,302,000)
Proceeds from sale of loans receivable held for sale................. 11,350,000 2,043,000
Changes in operating assets and liabilities:
Accrued interest receivable........................................ (125,000) (54,000)
Deferred income tax liability...................................... (167,000) 53,000
Other assets....................................................... 4,000 (458,000)
Other liabilities.................................................. 180,000 (302,000)
------------------ ----------------
Total adjustments................................................ 1,137,000 (2,214,000)
------------------ ----------------
Net cash provided by (used in) operating activities 1,496,000 (2,005,000)
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated, net of refinances....................................... (39,409,000) (17,744,000)
Loans purchased........................................................... -- (15,257,000)
Principal repayment on loans.............................................. 18,443,000 28,817,000
Proceeds from sale of office properties and equipment..................... 3,000 134,000
Purchases of investment securities held-to-maturity....................... (4,500,000) (14,619,000)
Purchases of mortgage-backed securities held-to-maturity.................. (4,595,000) (10,580,000)
Proceeds from maturities and repayments of investment securities
held-to-maturity...................................................... 2,500,000 11,995,000
Proceeds from maturities and repayments of mortgage-backed
securities held-to-maturity............................................ 3,362,000 1,680,000
Federal Home Loan Bank stock dividend.................................... (242,000) (56,000)
Capital expenditures for office properties and equipment.................. (1,569,000) (1,681,000)
Proceeds from sale of real estate acquired through foreclosure............ 282,000 1,261,000
------------------ ----------------
Net cash used in investing activities..................................... (25,725,000) (16,050,000)
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998
------------------ -----------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits................................................ $ 7,986,000 $ 16,131,000
Increase in advances from the Federal Home Loan Bank.................... 12,400,000 4,500,000
Dividends paid.......................................................... (213,000) (208,000)
Increase (decrease) in advance payments by borrowers for taxes (13,000) 6,000
and insurance...........................................................
------------------ -----------------
Net cash provided by financing activities............................... 20,160,000 20,429,000
------------------ -----------------
Net increase (decrease) in cash and cash equivalents.................... (4,070,000) 2,374,000
Cash and cash equivalents at beginning of year.......................... 7,205,000 4,831,000
------------------ -----------------
Cash and cash equivalents at end of year................................ $ 3,135,000 $7,205,000
================== =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest ................................................. $ 4,893,000 $ 4,458,000
================== =================
Cash paid for income taxes.............................................. $ 315,000 $ 312,000
================== =================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Transfer of loans to real estate acquired through foreclosure........... $ 616,000 $ 444,000
Transfer of loans from loans receivable held for sale to loans
receivable.............................................................. $ 3,584,000 $ --
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 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, 1999, Broadway
Federal operated five 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.
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 subsidiaries, Broadway Federal and Banksmart
Inc. 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 1999 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.
BUSINESS SEGMENTS
Accounting standards establish requirements to disclose financial
information about reportable segments in annual financial statements and require
reporting of selected information about those segments in interim reports to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers.
The Company's management considers its operations to be segregated into two
operating segments - (i) banking, through Broadway Federal and (ii) retail
services, through its newly established subsidiary, BankSmart, Inc.
("BankSmart"). BankSmart includes a postal and copy center. In August 1999,
BankSmart opened its first center inside Broadway Federal's Exposition Park
branch. As of December 31, 1999, the operations of BankSmart are insignificant
to the operations of the Company and as such, under the applicable accounting
standards do not constitute a separately reportable segment.
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 and the amount of the write-down is included in earnings.
F-7
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 non-accrual status. Whenever the
accrual of interest is stopped, previously accrued but uncollected interest
income is reversed. Loans are returned to accrual status when all contractual
principal and interest amounts are reasonably assured of repayment.
The allowance for loan losses is maintained at an amount management
considers adequate to cover estimable and probable losses on loans receivable.
The allowance is reviewed and adjusted based upon a number of factors, including
current economic trends, industry experience, historical loss experience, the
borrowers' ability to repay and repayment performance, probability of
foreclosure, estimated collateral values and management's assessment of credit
risk inherent in the portfolio. Loans which are deemed uncollectible are charged
off against the allowance for loan losses. The provision for loan losses and
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 non-accrual status.
When loans held for sale are sold, existing deferred loan fees are netted
against the gain or loss on sale.
LOANS HELD FOR SALE
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. The Company 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 held for sale
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. 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.
F-8
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LOAN SALES AND SERVICING
The Company from time to time sells mortgage loans and loan participations
from originations or portfolios identified as held for sale. A sale is
recognized at time of closing when control over the loans is surrendered and
consideration other than beneficial interests in the loans sold is received.
Cash proceeds from loan sales are 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, the Company 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 generally accepted accounting principles, 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 loan 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 loans are
recognized against income using the interest method over the estimated life of
the loans, adjusted for prepayments.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure represents real estate received in
satisfaction of real estate secured 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 of 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-9
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 available to common stockholders by the
average number of shares of common stock outstanding, while diluted earnings per
share is determined by dividing net income available to common stockholder' by
the average number of shares of common stock outstanding adjusted for the
dilutive effect of common stock equivalents. Earnings per share for prior
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 the
Company's financial instruments is concentrated in Broadway Federal's loan
portfolio. Broadway Federal has established a system for monitoring the level of
credit risk in its loan portfolio.
The market risk of a financial instrument is the possibility that changes
in market prices may reduce the value of a financial instrument or increase the
contractual obligations of Broadway Federal. Broadway Federal's market risk is
concentrated in its portfolios of loans and real estate acquired through
foreclosure. When a borrower fails to meet the contractual requirements of the
loan agreement, Broadway Federal is subject to the market risk of the collateral
securing the loan. Likewise, Broadway Federal is subject to the volatility of
real estate prices with respect to real estate acquired through foreclosure.
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 BASED COMPENSATION
The Company applies the intrinsic value method to account for stock based
compensation and records compensation expense only when the option's exercise
price is less than the market value of the related stock on the grant date.
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
F-10
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 adjustment to paid-in capital. During 1999 and 1998, 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.
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, 2000. Early
implementation is permitted under this statement. The Company has not adopted
early implementation and management has not yet determined the impact of
implementing this statement on its financial condition or results of operations.
3. INVESTMENT SECURITIES HELD-TO-MATURITY
At December 31, 1999 and 1998, 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.
The following table provides a summary of investment securities
held-to-maturity with a comparison of carrying and fair values:
<TABLE>
<CAPTION>
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAIN LOSS VALUE
--------------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999:
FHLB DEBENTURES.............. $ 5,623,000 $ -- $ 184,000 $ 5,439,000
FNMA DEBENTURES.............. 5,000,000 -- 137,000 4,863,000
--------------- -------------- ----------------- ---------------
$ 10,623,000 $ -- $ 321,000 $ 10,302,000
=============== ============== ================= ===============
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
=============== ============== ================= ===============
</TABLE>
The remaining contractual maturities for investment securities
held-to-maturity at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CONTRACTUAL MATURITY
-------------------------------------------------
AFTER
ONE THROUGH AFTER
FIVE YEARS FIVE YEARS TOTAL
--------------- -------------- ----------------
<S> <C> <C> <C>
December 31, 1999:
FHLB debentures................. $ 4,500,000 $ 1,123,000 $ 5,623,000
FNMA debentures................. 3,000,000 2,000,000 5,000,000
--------------- -------------- ----------------
$ 7,500,000 $ 3,123,000 $ 10,623,000
=============== ============== ================
</TABLE>
At December 31, 1999 and 1998, the Company had accrued interest
receivable on investment securities held-to-maturity of $172,000 and $78,000,
respectively. During the years ended December 31, 1999 and 1998, the Company had
no sales of investment securities.
F-11
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY
At December 31, 1999 and 19998, 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, 1999
FNMA......................... $ 8,147,000 $ -- $ 164,000 $ 7,983,000
GNMA......................... 3,862,000 -- 170,000 3,692,000
FHLMC........................ 1,201,000 -- 24,000 1,177,000
---------------- ------------- --------------- ----------------
$ 13,210,000 $ -- $ 358,000 $ 12,852,000
================ ============= =============== ================
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
================ ============= =============== ================
</TABLE>
The remaining contractual maturities for mortgage-backed securities
held-to-maturity at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CONTRACTUAL MATURITY
------------------------------------------------
WITHIN ONE AFTER
YEAR FIVE YEARS TOTAL
--------------- ---------------- --------------
<S> <C> <C> <C>
December 31, 1999
FNMA........................... $ -- $ 8,147,000 $ 8,147,000
GNMA........................... -- 3,862,000 3,862,000
FHLMC.......................... -- 1,201,000 1,201,000
--------------- ---------------- --------------
$ -- $ 13,210,000 $ 13,210,000
=============== ================ ==============
</TABLE>
At December 31, 1999 and 1998, the Company had accrued interest
receivable on mortgage-backed securities held-to-maturity of $81,000 and
$75,000, respectively.
During the years ended December 31, 1999 and 1998, the Company had no
sales of mortgage-backed securities.
F-12
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LOANS RECEIVABLE, NET
The following is a summary of loans receivable, net:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
---------------- --------------
<S> <C> <C>
Held for investment:
Real estate:
Residential:
One to four units....................................... $ 39,552,000 $ 47,810,000
Five or more units...................................... 67,381,000 41,162,000
Non-residential........................................... 21,240,000 18,694,000
Loans secured by deposit accounts........................... 877,000 1,114,000
Other....................................................... 379,000 373,000
---------------- --------------
129,429,000 109,153,000
Plus:
Premium on loans purchased................................ 14,000 107,000
Less:
Loans in process.......................................... 143,000 218,000
Allowance for loan losses................................. 1,439,000 1,151,000
Deferred loan fees, net................................... 807,000 774,000
Unamortized discounts..................................... 183,000 62,000
---------------- --------------
Loans receivable, net.......................................... 126,871,000 107,055,000
================ ==============
Loans receivable held for sale:
Residential:
One to four units........................................ 162,000 2,495,000
Five or more units........................................ 2,296,000 --
---------------- --------------
Loans receivable held for sale................................. $ 2,458,000 $ 2,495,000
================ ==============
Weighted average interest rate on total loans.................. 7.81% 8.03%
================ ==============
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------------- --------------
<S> <C> <C>
Balance at beginning of year................................... $ 1,151,000 $ 1,054,000
Provision for loan losses...................................... 300,000 450,000
Charge-offs, net of recoveries................................. (12,000) (353,000)
---------------- --------------
Balance at end of year.............................. $ 1,439,000 $ 1,151,000
================ ==============
</TABLE>
At December 31, 1999 and 1998, Broadway Federal had accrued interest
receivable on loans of $760,000 and $713,000, respectively.
Broadway Federal serviced loans for others totaling $18.1 million and
$8.1 million at December 31, 1999 and 1998, respectively.
At December 31, 1999 and 1998, Broadway Federal had loans to senior
officers and directors amounting to $681,000 and $135,000, respectively. The
terms of these loans are based upon the normal market for such loans.
F-13
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of Broadway Federal's non-accrual loans by
loan type at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------- --------------
<S> <C> <C>
Residential real estate............................................. $ 1,280,000 $ 1,090,000
Other............................................................... 115,000 --
-------------- --------------
Total non-accrual loans $ 1,395,000 $ 1,090,000
============== ==============
</TABLE>
The Bank had no restructured loans or accruing loans which are
contractually past due 90 days or more or at December 31, 1999 and 1998.
The gross amount of interest income that would have been recorded during
the years ended December 31, 1999 and 1998, if non-accrual loans had been
current in accordance with their original terms, was $110,000 and $80,000,
respectively. For the years ended December 31, 1999 and 1998, $29,000 and
$22,000, respectively, was actually received on non-accrual 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 non-accrual at December 31, 1999 and 1998.
At December 31, 1999 and 1998, the total recorded investment in impaired
loans was approximately $1.2 million and $926,000, respectively. Of these
amounts, $681,000 and $214,000 had a related impairment allowance totaling
$308,000 and $148,000 at December 31, 1999 and 1998, 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, 1999
and 1998, Broadway Federal's average investment in impaired loans was unchanged
at $1.2 million, and interest income recorded on impaired loans during these
periods totaled $83,000 and $68,000 respectively, none of which was recorded
utilizing the accrual basis method of accounting. At December 31, 1999, all
impaired loans were measured using the fair value of the collateral held. All
impaired loans were collateralized by multi-family residential real estate at
December 31, 1999 and 1998.
Substantially all of Broadway Federal's real estate loans are secured by
properties located in Southern California. At December 31, 1999 and 1998,
approximately 85% and 83%, respectively, of the real estate portfolio consisted
of loans secured by residential real estate. In addition, approximately 16% and
17% of the loan portfolio at December 31, 1999 and 1998, respectively, was
secured by non-residential real estate. Loans secured by church real estate
represented 62% and 66% of nonresidential real estate loans at December 31, 1999
and 1998, respectively.
6. REAL ESTATE ACQUIRED THROUGH FORECLOSURE, NET
The following is a summary of real estate acquired through foreclosure,
net:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
---------------- ---------------
<S> <C> <C>
Real estate acquired through foreclosure:
One to four residential units.................................. $ 432,000 $ --
Non-residential.............................................. -- 93,000
Land......................................................... 265,000 265,000
---------------- ---------------
697,000 358,000
Less: valuation allowance......................................... 182,000 136,000
---------------- ---------------
Real estate acquired through foreclosure, net..................... $ 515,000 $ 222,000
================ ===============
</TABLE>
F-14
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Activity in the allowance for losses on real estate acquired through
foreclosure during the years ended December 31, 1999 and 1998, is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
----------------- -------------------
<S> <C> <C>
Balance at beginning of year.................... $ 136,000 $ 127,000
Provision for losses............................ 60,000 167,000
Charge-offs..................................... (14,000) (158,000)
----------------- -------------------
Balance at end of year................. $ 182,000 $ 136,000
================= ===================
</TABLE>
Real estate operations, net, are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------------- --------------------
<S> <C> <C>
Net loss from operations of foreclosed
real estate.................................. $ (30,000) $ (43,000)
Net gain on sales of foreclosed real estate..... 13,000 28,000
----------------- --------------------
(17,000) (15,000)
Provision for losses............................ (60,000) (167,000)
----------------- --------------------
Real estate operations, net..................... $ (77,000) $ (182,000)
================= ====================
</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, 1999 and 1998, of
$1,229,000 and $987,000, respectively.
8. OFFICE PROPERTIES AND EQUIPMENT, NET
Office properties and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------
1999 1998
------------------- ---------------
<S> <C> <C>
Land........................................... $ 1,918,000 $ 1,918,000
Office buildings and improvements.............. 3,865,000 2,816,000
Furniture, fixtures and equipment.............. 1,531,000 1,687,000
------------------- ---------------
7,314,000 6,421,000
Less accumulated depreciation.................. (782,000) (1,061,000)
------------------- ---------------
Office properties and equipment, net........... $ 6,533,000 $ 5,360,000
=================== ===============
</TABLE>
9. DEPOSITS
A summary of deposits by type of account and interest rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
----------------------------- --------------------------
RATE* AMOUNT RATE* AMOUNT
------------- --------------------------- --------------
<S> <C> <C> <C> <C>
Balance by account type:
NOW account and other
demand deposits................ 0.60% $ 16,922,000 0.53% $ 16,262,000
Money market deposits.......... 2.00 5,212,000 2.11 5,140,000
Passbook....................... 1.26 29,250,000 1.50 28,554,000
Fixed index time deposits 4.94 52,726,000 5.07 48,691,000
Negotiable time deposits....... 4.56 29,874,000 4.79 27,351,000
-------------- -----------------
$ 133,984,000 $ 125,998,000
============== =================
</TABLE>
F-15
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
*Weighted average interest rate.
The aggregate amount of time deposits equal to or exceeding $100,000
totaled $35,997,000 and $29,007,000 at December 31, 1999 and 1998, respectively.
The weighted average interest rate on total deposits was 3.38% and 3.61%
for the years ended December 31, 1999 and 1998, respectively. At December 31,
1999 and 1998, the weighted average interest rate on total deposits was 3.39%
and 3.49%, respectively.
Deposit account maturities at December 31, 1999, are summarized as
follows:
MATURITY AMOUNT
------------------------------------- ---------------------
No stated maturity................... $ 54,707,000
2000................................. 62,869,000
2001................................. 6,609,000
2002................................. 1,739,000
2003................................. 5,640,000
Thereafter........................... 2,420,000
----------------------
$ 133,984,000
======================
10. ADVANCES FROM THE FEDERAL HOME LOAN BANK
There were $16.9 million and $4.5 million in borrowings outstanding with
the FHLB as of December 31, 1999 and 1998, respectively. The outstanding
borrowings at December 31, 1999 and 1998 had weighted average interest rates of
5.60% and 5.05%, respectively. Pursuant to collateral agreements with the FHLB,
advances are secured by loans totaling $28.5 million and $15.0 million as of
December 31, 1999 and 1998, respectively, and by mortgage-backed securities
totaling $3.6 million and $-0- as of December 31, 1999 and 1998, respectively.
As of December 31, 1999, available borrowing capacity with the FHLB approximates
$27.5 million and $13.0 million as of December 31, 1999 and 1998, respectively.
As of December 31, 1999 $12.0 million in fixed-rate advances and $3.6 million in
variable-rate advances, had contractual maturities of less than one year, and
$1.3 million had contractual maturities of one to three years.
11. INCOME TAXES
The following is a summary of the provision for income tax expense:
1999 1998
--------------- ----------------
Current taxes:
Federal income................. $ 407,000 $ 87,000
State franchise................ 3,000 2,000
--------------- ----------------
410,000 89,000
--------------- ----------------
Deferred taxes:
Federal income................. (185,000) 44,000
State franchise 18,000 9,000
--------------- ----------------
(167,000) 53,000
--------------- ----------------
$ 243,000 $ 142,000
=============== ================
F-16
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
1999 1998
--------------- ----------------
<S> <C> <C>
Computed "expected" federal taxes................. $ 204,000 $ 119,000
Increases to taxes resulting from:
California franchise tax , net of federal..... 14,000 8,000
income tax...................................
Other.......................................... 25,000 15,000
--------------- ----------------
$ 243,000 $ 142,000
=============== ================
</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.
Retained earnings at December 31, 1999 and 1998, is substantially
restricted for tax purposes and includes a $3,013,000 tax bad debt reserve 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,
1999 and 1998, are presented below:
<TABLE>
<CAPTION>
1999 1998
------------------- ---------------
<S> <C> <C>
Deferred tax assets:
Loan valuation allowances deferred for tax...................... $ 573,000 $ 396,000
Allowance for loss.............................................. 38,000 60,000
REO............................................................. -- 1,000
Other........................................................... 60,000 82,000
------------------- ---------------
Net deferred tax assets............................................ 671,000 539,000
------------------- ---------------
Deferred tax liabilities:
Basis difference on fixed assets................................ (382,000) (411,000)
Deferred loan fees.............................................. (299,000) (297,000)
FHLB stock dividend............................................. (330,000) (322,000)
Other........................................................... (265,000) (281,000)
------------------- ---------------
Total gross deferred tax liabilities............................... (1,276,000) (1,311,000)
------------------- ---------------
Net deferred tax liability......................................... $ (605,000) $ (772,000)
=================== ===============
</TABLE>
Deferred tax assets are initially recognized for differences between the
financial statement carrying amount and the tax bases of assets and liabilities,
which will result in future deductible amounts and operating loss and tax credit
carryforwards. A valuation allowance is then established to reduce that deferred
tax asset to the level at which it is "more likely than not" that the tax
benefits will be realized. Realization of tax benefits of deductible temporary
differences and operating loss or credit carryforwards depends on having
sufficient taxable income of an appropriate character within the carryback and
carryforward periods. Sources of taxable income that may allow for the
realization of tax benefits include (i) taxable income in the current year or
prior years that is available through carrybacks, (ii) future taxable income
that will result from the reversal of existing taxable temporary differences,
and (iii) future taxable income generated by future operations. Based on an
evaluation of the realizability of its gross deferred tax assets, management
believes that it is more likely than not that Broadway Federal will realize the
tax benefit related to these assets.
F-17
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS
STOCK INCENTIVE PLANS
BROADWAY FEDERAL 401(k) PLAN
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 at least six months 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 1999 and 1998, Broadway Federal's contribution amounted to $32,000
and $41,900, respectively.
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
stockholders' 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 non-vested awards are forfeited. The
expense related to the RRP for the fiscal years ended December 31, 1999 and 1998
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, in the event that before
reaching normal retirement an officer or employee terminates service with the
Company or Broadway Federal, that person's non-vested 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 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, 1999 and 1998 was immaterial.
The table below reflects the RRP and PEP activity for the periods
indicated:
<TABLE>
<CAPTION>
STOCK PROGRAMS
----------------------------------------------------------------------
PEP RRP TOTAL
--------------------- ------------------ ---------------------
Shares Price* Shares Price* Shares Price
--------------------- ------------------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 1999.... 6,501 $ 11 4,872 $ 11 11,373 $ 11
Granted........................... -- -- -- -- -- --
Exercised......................... -- -- -- -- --
Forfeited......................... (929) 11 -- -- (929) --
----------- ------- -------- ------- ------ -----------
Outstanding at December 31, 1999 5,572 $ 11 4,872 $ 11 10,444 $ 11
Outstanding at January 1, 1998.... 15,998 $ 11 4,872 $ 11 20,870 $ 11
Granted........................... -- -- -- -- -- --
Exercised......................... -- -- -- -- -- --
Forfeited......................... (9,947) 11 -- -- (9,947) 11
----------- ------- -------- ------- ------ -----------
Outstanding at December 31, 1998 6,501 $ 11 4,872 $ 11 11,373 $ 11
=========== ======= ======== ======= ====== ===========
</TABLE>
*At date of grant.
F-18
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE STOCK OWNERSHIP PLAN
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 an
original $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, 1999 and 1998, the outstanding balance of the loan was $375,000 and
$437,000, respectively, which is shown as Unearned ESOP shares in the equity
section of the balance sheets.
Shares purchased with the loan proceeds are held in a suspense account
for allocation among participants as the loan is repaid. Contributions to the
ESOP and shares released from the suspense account are allocated among
participants on the basis of compensation, as described in the Plan, in the year
of allocation. Benefits generally become 100% vested after seven years of
credited service, with 20% of the shares vesting each year commencing with the
participant's completion of the third year of credited service under the ESOP.
Prior to the completion of seven years of credited service, a participant who
terminates employment for reasons other than death, retirement, disability, or a
change in control of Broadway Federal or the Company, will not receive any
benefit if such termination is prior to the participant's completion of three
years of credited service. Forfeitures will be reallocated among the remaining
participating employees in the same 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 $94,000
and $103,000 for the years ended December 31, 1999 and 1998, respectively, which
is net of dividends of approximately $9,000 and $13,000, respectively.
During the year ended December 31, 1999 and 1998, 32,382 and 24,978 shares,
respectively, were allocated, leaving an unallocated balance of 35,211 and
42,615 shares at December 31, 1999 and 1998, respectively, after giving effect
to an 8% stock dividend received from the Company in 1998. The fair value of
unallocated ESOP shares totaled $169,000 and $296,000 at December 31, 1999 and
1998, 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,
the "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 non-qualified stock option plan, designed to attract and
retain qualified personnel in key positions to provide officers and key
employees with a proprietary interest in the Company as an incentive to
contribute to the success of the Company and to reward key employees for
outstanding performance. Options granted under the LTIP will entitle the
recipients to purchase specified numbers of shares of the Company's common stock
at a fixed price and are exercisable for up to 10 years from the date of grant.
Such options will become vested and exercisable at the rate of twenty percent
(20%) annually commencing one year from the date of grant. An aggregate of
62,488 options are available for issuance under the plan. On September 17, 1997,
options to purchase 43,909 shares at $11.00 per share were granted which was the
fair market value at the date of grant. The weighted average remaining
contractual life of the options outstanding at December 31, 1999 is 7.71 years.
As of December 31, 1999 and 1998, 15,378 and 8,781, respectively, of these
options are exercisable at a weighted average exercise price of $11.00 per
share.
The purpose of the Stock Option Plan is to promote the growth and
profitability of the Company and Broadway Federal by providing Outside Directors
with an incentive to achieve long-term objectives of the Company. This plan is
also intended to assist in retaining and attracting non-employee directors of
outstanding competence by providing such outside directors with an opportunity
to acquire an equity interest in the Company. 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
F-19
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
purchase 17,264 shares at $11.00 per share were granted which was the fair
market value at the date of grant. The weighted average remaining contractual
life of the options outstanding at December 31, 1999 is 7.71 years. As of
December 31, 1999 and 1998, 6,905 and 3,453, respectively, of these options are
exercisable at a weighted average exercise price of $11.00 per share. As of
December 31, 1999 none had been exercised.
The table below reflects activity on the stock option plans for the
periods indicated:
<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, 1999... 43,909 $ 11 17,264 $ 11 61,173 $ 11
Granted.......................... -- -- -- -- -- --
Exercised........................ -- -- -- -- -- --
Expired or canceled (5,463) 11 -- 11 (5,463) 11
----------- ------------ ---------- ------------- ----------- ----------
Outstanding at
December 31, 1999............. 38,446 $ 11 17,264 $ 11 55,710 $ 11
=========== ============ ========== ============= =========== ==========
Outstanding at January 1, 1998... 43,909 $ 11 17,264 $ 11 61,173 $ 11
Granted.......................... -- -- -- -- -- --
Exercised........................ -- -- -- -- -- --
Expired or canceled.............. -- -- -- -- -- --
----------- ------------ ---------- ------------- ----------- ----------
Outstanding at 43,909 $ 11 17,264 $ 11 61,173 $ 11
December 31, 1998.............. =========== ============ ========== ============= =========== ==========
</TABLE>
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.
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 1999 and 1998 would have been as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Proforma net earnings.................................... $ 312,000 $ 184,000
Proforma diluted earnings per share...................... 0.33 0.16
</TABLE>
F-20
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
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 $165,000 in 1999 and $160,000 in 1998. Annual minimum lease
commitments attributable to long-term leases at December 31, 1999, are as
follows:
<TABLE>
<CAPTION>
PREMISES EQUIPMENT TOTAL
-------------------------------------------------------
<S> <C> <C> <C>
Year ending December 31:
2000 42,000 71,000 113,000
2001 42,000 61,000 103,000
2002 42,000 61,000 103,000
2003 42,000 42,000 84,000
2004 42,000 -- 42,000
Thereafter through 2012 293,000 -- 293,000
-------------------------------------------------------
$ 503,000 $ 235,000 $738,000
=======================================================
</TABLE>
Broadway Federal had commitments to originate loans of approximately $3.6
million and $2.4 million, respectively, at December 31, 1999 and 1998.
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 had commitments to sell $161,000 in
loans and no commitment to purchase loans at December 31, 1999. Broadway Federal
had no commitments to sell or purchase loans at December 31, 1998.
CONTINGENT LIABILITIES
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, 1999
and 1998, Broadway Federal was in compliance with such capital requirements.
The leverage limit adopted by the OTS Director under the Capital
Regulations requires a savings institution to maintain "core capital" of not
less than 4% of adjusted total assets, which is the minimum amount required by
FIRREA. "Core capital" generally includes common stockholders' equity (including
retained earnings), non-cumulative 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
F-21
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 (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, 1999 and 1998, 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, 1999 and 1998:
<TABLE>
<CAPTION>
MINIMUM
MINIMUM AMOUNT
FOR CAPITAL ADEQUACY REQUIRED TO BE WELL
ACTUAL PURPOSES CAPITALIZED
------------------------ ---------------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----------- ----------- ------------ ----------- ------------
<S>
December 31, 1999: <C> <C> <C> <C> <C> <C>
Leverage/Tangible Ratio....... $ 11,693 7.09% $6,600 4.0% $8,251 5.0%
Tier I Risk-based ratio....... $ 11,693 9.39% $4,979 4.0% $7,468 6.0%
Total Risk-based ratio........ $ 12,544 10.08% $9,957 8.0% $12,447 10.0%
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%
</TABLE>
F-22
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The table below presents Broadway Federal's capital ratios as compared to
the requirements % under FIRREA at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL
--------------------- ------------------------ ------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ---------- ----------- ----------- ---------- ------------
December 31, 1999:
<S> <C> <C> <C> <C> <C> <C>
Actual.................... $ 11,693 7.09% $ 11,693 7.09% $ 12,544 10.09%
Required.................. 2,475 1.50% 6,600 4.00% 9,957 8.00%
---------- ---------- ----------- ----------- ---------- ------------
Excess.................... $ 9,218 5.59% $ 5,093 3.09% $ 2,587 2.08%
========== ========== =========== =========== ========== ============
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%
========== ========== =========== =========== ========== ============
</TABLE>
15. FAIR VALUES OF FINANCIAL INSTRUMENTS
Pursuant to applicable accounting standards, 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. 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 non-performing 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 non-performing 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 are judgmentally determined using available market
information and specific borrower information. The fair values of deposits are
estimated based upon the type of deposit product. Demand and money market
deposits are presumed to have equal book and fair values. The estimated fair
values of time deposits are determined by discounting the cash flows of segments
of deposits having similar maturities and rates, utilizing a yield curve that
approximates the rates offered as of the reporting date.
The fair values of borrowings were estimated using current market rates of
interest for similar borrowings.
The fair values of off-balance-sheet commitments to extend credit are based
on rates for similar transactions as of the reporting date. These fair values
are not material.
F-23
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1999 and 1998.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 CARRYING VALUE FAIR VALUE
-------------------- ----------------------
<S> <C> <C>
Assets:
Cash and cash equivalents.............. $ 3,135,000 $ 3,135,000
Investment securities.................. 10,623,000 10,302,000
Mortgage-backed securities............. 13,210,000 12,852,000
Loans receivable....................... 126,871,000 123,956,000
Loans receivable held for sale......... 2,458,000 2,458,000
Federal Home Loan Bank stock........... 1,229,000 1,229,000
Liabilities:
Deposits............................... 133,984,000 134,220,000
Federal Home Loan Bank advances........ 16,900,000 16,900,000
DECEMBER 31, 1998 CARRYING VALUE FAIR VALUE
-------------------- ----------------------
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....................... 107,055,000 115,407,000
Loans receivable held for sale......... 2,495,000 2,495,000
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>
16. EARNINGS PER SHARE
For the years ended December 31, 1999 and 1998, basic earnings per share
are computed based on earnings and the weighted average number of shares for
each respective year.
F-24
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's stock-based compensation awards were considered outstanding
as of the grant date for purposes of computing diluted EPS at December 31, 1999
and 1998. 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------
1999 1998
---------------------------------------- ----------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net earnings ...................... $ 358,000 -- -- $ 209,000 -- --
Less: Preferred stock dividends.... (28,000) -- -- (28,000) -- --
EARNINGS PER COMMON
SHARE-BASIC
Income available to common $ 330,000 932,494 $ 0.35 $ 181,000 932,494 $ 0.19
Stockholders....................
Effect of dilutive securities
Stock Programs..................... -- -- -- -- -- --
Stock Option Programs.............. -- -- -- -- -- --
EARNINGS PER COMMON
SHARE-DILUTED
Income available to common $ 330,000 932,494 $ 0.35 $ 181,000 932,494 $ 0.19
stockholders plus assumed
Conversions........................
</TABLE>
17. UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
--------------- ------------- --------------- --------------- -------------
1999
<S> <C> <C> <C> <C> <C>
Interest income......................... $ 2,642 $ 2,746 $ 2,974 $ 2,998 $ 11,360
Interest expense........................ 1,140 1,197 1,339 1,340 5,016
Net interest income..................... 1,502 1,549 1,635 1,658 6,344
Provision for loan losses............... 75 75 75 75 300
Income before taxes..................... 148 (112) 542 23 601
Net earnings (loss)..................... 87 (65) 320 16 358
Basic earnings (loss) per share ........ .09 (.08) .34 .00 .35
Diluted earnings (loss) per share (1)... .09 (.08) .33 .01 .35
Market range:
High bid................................ 8.75 7.00 7.63 7.00 8.75
Low bid................................. 6.50 6.00 5.13 4.63 4.63
</TABLE>
F-25
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1998 QUARTER QUARTER QUARTER QUARTER YEAR
--------------- -------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
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....................... 145 84 (134) 16 209
Earnings per share of common
stock (1)......................... .16 .09 (.16) .01 .19
Earnings per share -
assuming diluted (1)............... .16 .09 (.16) .01 .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
</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 that
are dilutive under the Company's stock-based compensation plans.
18. 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 and BankSmart, Inc. 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 or Banksmart, Inc.
F-26
<PAGE>
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
---------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Assets
Cash........................................................ $ 848 $ 1,226
Investment securities held-to-maturity...................... 1,000 1,000
Accrued interest............................................ 21 22
Investment in subsidiaries.................................. 11,752 11,208
Other assets................................................ 237 152
-------------------------------------
$ 13,858 $ 13,608
=====================================
Liabilities and stockholders' equity
Other liabilities........................................... $ 57 $ 55
Stockholders' equity ....................................... 13,801 13,553
-------------------------------------
$ 13,858 $ 13,608
=====================================
STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31
----------------------------------
1999 1998
---------------- ----------------
(IN THOUSANDS)
Interest income............................................. $ 71 $ 84
Other income................................................ -- 2
Other expense............................................... 218 258
Income tax benefit.......................................... (62) (73)
----------------------------------
Loss before equity in undistributed earnings of subsidiaries (85) (99)
Equity in undistributed earnings of subsidiaries............ 443 308
----------------------------------
Net earnings ............................................... $ 358 $ 209
==================================
</TABLE>
F-27
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998
---------------------------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ...................................................... $ 358 $ 209
Adjustments to reconcile net earnings to cash used in operating
activities:
Equity in undistributed earnings of subsidiaries................ (443) (308)
Increase in other assets........................................ (85) (148)
Increase in other liabilities................................... 2 38
--------------- ---------------
Total adjustments.................................................. (526) (418)
--------------- ---------------
Net cash used in operating activities.............................. (168) (209)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Banksmart, Inc.................................... (100) --
--------------- ---------------
Net cash used in investing activities......................... (100) --
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
ESOP payments...................................................... 103 113
Dividends paid..................................................... (213) (208)
--------------- ---------------
Net cash used in financing activities.............................. (110) (95)
--------------- ---------------
Net decrease in cash and cash equivalents.......................... (378) (304)
Cash and cash equivalents, beginning of year....................... 1,226 1,530
--------------- ---------------
Cash and cash equivalents, end of year............................. $ 848 $ 1,226
=============== ===============
</TABLE>
F-28
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
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
February 16, 2000, relating to the consolidated balance sheets of Broadway
Financial Corporation and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statement of earnings, changes in stockholders' equity and
cash flows for the years then ended, which report appears in the December 31,
1999 annual report on Form 10-KSB of Broadway Financial Corporation.
KPMG LLP
Los Angeles, California
March 30, 2000
<TABLE> <S> <C>
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,135
<INT-BEARING-DEPOSITS> 102
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 23,833
<INVESTMENTS-MARKET> 23,154
<LOANS> 130,768
<ALLOWANCE> (1,439)
<TOTAL-ASSETS> 166,304
<DEPOSITS> 133,984
<SHORT-TERM> 16,900
<LIABILITIES-OTHER> 1,619
<LONG-TERM> 0
0
552
<COMMON> 9,133
<OTHER-SE> (693)
<TOTAL-LIABILITIES-AND-EQUITY> 166,304
<INTEREST-LOAN> 9,785
<INTEREST-INVEST> 1,486
<INTEREST-OTHER> 89
<INTEREST-TOTAL> 11,360
<INTEREST-DEPOSIT> 4,438
<INTEREST-EXPENSE> 5,016
<INTEREST-INCOME-NET> 6,344
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 0
<INCOME-PRETAX> 601
<INCOME-PRE-EXTRAORDINARY> 601
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 358
<EPS-BASIC> 0.35
<EPS-DILUTED> 0.35
<YIELD-ACTUAL> 0.074
<LOANS-NON> 1,395
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (1,151)
<CHARGE-OFFS> 12
<RECOVERIES> 0
<ALLOWANCE-CLOSE> (1,439)
<ALLOWANCE-DOMESTIC> (1,439)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 110
</TABLE>
