UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2002
[ ] 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) (Zip Code)
(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 (including attached preferred stock purchase rights),
$0.01 par value 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 the 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 [ X ].
State issuer's revenues for its most recent fiscal year: $13,468,000
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates: $18,467,000, based on the average bid and asked prices
of such common equity as of February 28, 2003 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: 1,815,294 shares of Common
Stock at February 28, 2003.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 2003 Annual
Meeting of Shareholders are incorporated by reference into Part III.
BROADWAY FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-KSB
PART I
Item 1 DESCRIPTION OF BUSINESS.............................................1
Broadway Financial Corporation...................................1
Broadway Federal Bank, f.s.b.....................................1
General....................................................1
Market Area and Competition......................................1
Lending Activities...............................................2
General....................................................2
Loan Portfolio Composition.................................2
Loan Maturities............................................3
Origination, Purchase, Sale and Servicing of Loans.........4
One-to Four-Family Mortgage Lending........................5
Multi-Family Lending.......................................6
Non-Residential Real Estate Lending........................7
Consumer Lending...........................................8
Loan Approval Procedures and Authority.....................8
Delinquencies and Classified Assets........................8
Non-Performing Assets.....................................10
Allowance for Loan Losses.................................10
Investment Activities...........................................12
Sources of Funds................................................13
General...................................................13
Deposits..................................................13
Borrowings................................................14
Personnel.......................................................15
Regulation
General...................................................15
Capital Requirements......................................15
Loans to One Borrower.....................................17
Community Reinvestment Act................................17
Qualified Thrift Lender Test..............................17
Savings and Loan Holding Company Regulation...............17
Restrictions on Dividends and Other Capital Distributions.18
Financial Modernization Legislation.......................18
Tax Matters
Federal Income Tax........................................18
General.............................................18
Bad Debt Reserves...................................18
California Taxes..........................................19
Item 2 DESCRIPTION OF PROPERTY............................................19
Item 3 LEGAL PROCEEDINGS..................................................19
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................19
i
PART II
Item 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........20
Item 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General.........................................................20
Interest Rate Sensitivity.......................................21
Net Portfolio Value.......................................21
Critical Accounting Policies.................................22
Market Risk...............................................22
Average Balance Sheet.....................................25
Rate/Volume Analysis......................................26
Comparison of Operating Results for the Years
Ended December 31, 2002 and December 31,2001
General...................................................27
Interest Income...........................................27
Interest Expense..........................................27
Net Interest Income After Provision for (Recovery of)
Loan Losses.............................................27
Non-Interest Income.......................................27
Non-Interest Expense......................................27
Comparison of Financial Condition at December 31, 2002 and
December 31, 2001
Assets....................................................28
Liabilities...............................................28
Liquidity and Capital Resources...........................28
Impact of Inflation and Changing Prices...................29
Recent Accounting Pronouncements..........................29
Item 7 FINANCIAL STATEMENTS OF BROADWAY FINANCIAL CORPORATION.............29
Item 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...............................................29
PART III
Item 9 DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.....................29
Item 10 EXECUTIVE COMPENSATION.............................................29
Item 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS....................................29
Item 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................30
Item 13 EXHIBITS AND REPORTS ON FORM 8-K...................................30
Item 14 CONTROLS AND PROCEDURES............................................33
SECTION 302 CERTIFICATIONS.........................................34
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.........................36
ii
Forward-Looking Statements
Certain statements herein, including without limitation, matters discussed
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Part II, Item 6 of this Form 10-KSB 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 Broadway
Financial Corporation's current views with respect to future events and
financial performance. Forward-looking statements typically include the words
"anticipate," "believe," "estimate," "expect," "project," "plan," "forecast,"
"intend," and other similar expressions. 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 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 result of new information, future events or otherwise.
The following factors could cause future results to differ materially from
historical results or from those anticipated: (1) the level of demand for
mortgage loans, which is affected by such external factors as interest rate
levels, tax laws, 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 market interest rates and the yield on the
Company's interest-earning assets and the cost of interest-bearing liabilities;
(3) the rate of loan losses incurred by Broadway Federal, the level of loss
reserves maintained by Broadway Federal and management's judgments regarding the
collectibility of loans; (4) federal and state regulation of the Company's
lending and deposit operations or other regulatory actions; (5) the actions
undertaken by both current and potential new competitors; (6) the possibility of
adverse trends in the residential and non-residential real estate markets; (7)
the effect of changes in economic conditions; (8) the effect of geopolitical
uncertainties; and (9) other risks and uncertainties detailed in this Form
10-KSB, including Management's Discussion and Analysis of Financial Condition
and Results of Operations.
iii
PART I
Item 1. Description Of Business
Broadway Financial Corporation
Broadway Financial Corporation (the "Company") was incorporated under
Delaware law 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. 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. 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. The telephone number is (323) 634-1700. Shareholders,
analysts and others seeking information about the Company and its subsidiaries
can visit the Bank'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 three banking offices in Los Angeles and one banking office
located in the nearby City of Inglewood.
Broadway Federal's principal business consists of attracting retail
deposits from the general public in the areas surrounding its branch offices and
investing those deposits, together with funds generated from operations and
borrowings, primarily in multi-family and single-family residential mortgage
loans. To a lesser extent, Broadway Federal invests in non-residential real
estate loans, secured primarily by church properties and commercial properties,
and also invests in certain other types of loans. In addition, Broadway Federal
invests in securities issued by the federal government and agencies,
mortgage-backed securities, mortgage-related mutual funds and other investments.
Broadway Federal originates and purchases loans for investment and for
sale. In most instances, Broadway Federal retains the servicing rights with
respect to loans sold. Broadway Federal's revenues are derived principally from
interest on its mortgage loans and interest and dividends on its investments.
Broadway Federal's principal expenses are interest paid on deposits and
borrowings, together with general and administrative expenses. Broadway
Federal's primary sources of funds are deposits, principal and interest payments
on loans and mortgage-backed securities, and Federal Home Loan Bank borrowings.
The Bank is regulated by the Federal Deposit Insurance Corporation ("FDIC")
and the OTS. The Bank's deposits are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF") of the FDIC. The Bank is also a
member of the Federal Home Loan Bank ("FHLB") of San Francisco. See
"-Regulation."
At December 31, 2002, the Bank was classified as "well-capitalized" under
applicable OTS and FDIC capital regulations.
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 as well as from institutions with internet-based programs. 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."
1
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 has been relatively few retail banking offices of other
financial institutions located in Broadway Federal's primary market area. This
fact, coupled with our observation that the deposit needs and preferences of the
Bank's customers tend to be for passbook or other transactional accounts, rather
than higher cost certificates of deposit, has enabled Broadway Federal to
maintain a higher proportion of its deposit funding in such "core deposit"
accounts. Management believes that this results in Broadway Federal realizing a
substantially higher interest rate spread and margin than many other savings
institutions.
With respect to its lending activities, Broadway Federal also tailors its
business strategy to the communities it serves. Broadway Federal's loan
originations consist primarily of loans on multi-family properties, loans on
one- to four-family properties, loans on church properties and commercial
properties. Broadway Federal's borrowers often request small loan amounts that
result in loans with relatively low loan-to-value ratios. To facilitate
single-family loans to low and moderate-income borrowers, Broadway Federal
utilizes flexible credit underwriting standards in that the Bank accepts various
forms of alternative documentation substantiating the prospective borrower's
credit worthiness. In addition, Broadway Federal accepts 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 ("ARMs") and hybrid ARM loans (ARM loans having an initial fixed rate
period) 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, 2002, approximately
89.74% 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 its 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 and hybrid 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, 2002,
Broadway Federal had 19 loans held for sale with a principal balance of $3.8
million. The loans consist of six single-family loans and 13 multi-family loans.
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, 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.
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, 2002, Broadway Federal's gross loan portfolio totaled
$146.5 million, of which approximately 20.55% was secured by one- to four-family
residential properties, 65.39% was secured by multi-family properties and 11.56%
was secured by non-residential properties, with approximately 49.62% of such
non-residential properties being church properties. At that same date,
approximately 56.07% of Broadway Federal's one- to four-family mortgage loans,
99.71% of its multi-family residential mortgage loans, and 92.11% of its
non-residential mortgage loans had adjustable rates.
2
The following table sets forth the composition of Broadway Federal's loan
portfolio in dollar amounts and as a percentage of Broadway Federal's total loan
portfolio (held for investment and held for sale) by loan type at the dates
indicated.
December 31,
------------------------------------------------------
2002 2001
------------------------------------------------------
Amount Percentage Amount Percentage
------------ ------------ ------------ ------------
(Dollars in thousands)
Real Estate:
Residential:
One-to Four-Units $ 30,092 20.55% $ 33,715 23.42%
Five or More Units 95,770 65.39% 89,777 62.35%
Construction
1,726 1.18% - -
Non-residential 16,924 11.56% 18,383 12.77%
Loans Secured by Savings Accounts 350 0.24% 897 0.62%
Other 1,593 1.08% 1,206 0.84%
------------ ------------ ------------ ------------
Gross Loans 146,455 100.00% 143,978 100.00%
------------ ============ ------------ ============
Plus:
Premiums on Loans Purchased 1 4
Less:
Allowance for Loan Losses 1,429 1,571
Loans in Process 568 16
Deferred Loan Fees, net 431 683
Unamortized Discounts 173 413
------------ ------------
143,855 141,299
Less:
Loans Held for Sale 3,770 7,362
------------ ------------
Total Loans Held for Investment $ 140,085 $133,937
============ ============
Loan Maturities. The following table sets forth the contractual maturities
of Broadway Federal's gross loans at December 31, 2002. The table does not
reflect the effect of scheduled principal repayments. Principal repayments on
loans totaled $28.8 million and $19.6 million for the years ended December 31,
2002 and 2001, respectively.
December 31, 2002
-----------------------------------------------------------------------------------------
One-to- Five or Savings Gross
Four More Non- Secured & Loans
Family Units Construction residential Other Receivable
--------- --------- ------------ ----------- ----------- --------------
(In thousands)
Amounts Due:
One year or less $ 185 $ 178 $ 906 $ 414 $ 1,533 $ 3,216
After one year:
After one to three years 120 16 820 153 395 1,504
After three to five years 247 1,940 0 279 15 2,481
After five to ten years 2,196 15,359 0 5,736 - 23,291
After ten to twenty years 12,368 2,468 0 9,525 - 24,361
More than twenty years 14,976 75,809 0 817 - 91,602
--------- --------- ------------ ----------- ----------- -----------
Total due after one year 29,907 95,592 820 16,510 410 143,239
--------- --------- ------------ ----------- ----------- -----------
Total Amounts Due $ 30,092 $ 95,770 $ 1,726 $ 16,924 $ 1,943 $ 146,455
========= ========= ============ =========== =========== ===========
3
The following table sets forth the dollar amount of gross loans receivable,
excluding loans held for sale, at December 31, 2002 which are contractually due
after December 31, 2003, and whether such loans have fixed interest rates or
adjustable interest rates.
December 31, 2002
------------------------------------------
Adjustable Fixed Total
------------ --------- ------------
(In thousands)
Real Estate Loans:
One-to four-units $ 16,727 $ 13,180 $ 29,907
Five or more units 95,314 278 95,592
Construction 820 - 820
Non-residential real estate 15,576 934 16,510
Other 376 34 410
---------- --------- ------------
Total $ 128,813 $ 14,426 $ 143,239
========== ========= ============
Origination, Purchase, Sale and Servicing of Loans. Broadway Federal
originates and purchases loans for investment and for sale. Loan sales are made
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 single-family
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, 2002, Broadway Federal had six fixed rate loans secured by single-family
properties totaling $586,000 and thirteen adjustable rate loans secured by
multi-family properties totaling $3.2 million that were categorized as held for
sale. Broadway Federal typically retains the servicing rights associated with
loans sold. If material, the servicing rights are recorded as assets based upon
the relative fair values of the servicing rights and the underlying loans and
are amortized over the period of the related loan servicing income stream. At
December 31, 2002, the Bank had $11,000 of capitalized servicing rights.
Broadway Federal receives monthly loan servicing fees on loans sold and
serviced for others 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, 2002 and 2001, Broadway Federal
was servicing $11.0 million and $12.7 million, respectively, of loans serviced
for others.
From time to time, Broadway Federal purchases 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, among other
factors, the financial condition of the borrower, the location of the underlying
property and the appraised value of the property. Broadway Federal purchased
$820,000 of loans during the year ended December 31, 2002 and $8.0 million
during the year ended December 31, 2001.
4
The following table provides information concerning Broadway Federal's loan
origination, purchase, sale and principal repayment activity for the periods
indicated.
At or For the Year Ended
December 31,
---------------------------------
2002 2001
-------------- -------------
(In thousands)
Gross Loans:
Beginning Balance: $ 143,978 $ 129,241
Loans Originated:
One-to Four-Units 5,840 4,327
Five or More Units 21,819 19,078
Non-residential 2,251 924
Loans Secured by Savings Accounts 245 456
Other 1,150 1,888
-------------- -------------
Total Loans Originated 31,305 26,673
-------------- -------------
Loan Purchased:
One-to-Four Units - 58
Five or More Units - 8,211
Construction 820 -
-------------- -------------
Total Loans Purchased 820 8,269
-------------- -------------
Less:
Transfer to real estate owned ("REO") 107 -
Principal Repayments 28,811 19,605
Sales of Loans 730 600
-------------- -------------
$ 146,455 $ 143,978
============== =============
One- to Four-Family Mortgage Lending. Broadway Federal offers ARMs and
fixed-rate loans secured by one- to four-family ("single-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, 2002, 43.93% were fixed-rate loans and 56.07% were ARMs.
The interest rates for Broadway Federal's single-family ARMs are indexed to
the 11th District Cost of Funds Index ("COFI"), the 1-year Treasury Index
("Treasury") the 12-month average of the Treasury index ("12 MTA") and the
six-month LIBOR Index. Broadway Federal currently offers loans with interest
rates that adjust monthly, semi-annually, and annually. Borrowers are required
to make monthly payments under the terms of such loans. At December 31, 2002 and
2001 Broadway Federal had approximately $22.0 million and $24.2 million,
respectively, in mortgage loans that permit negative amortization. Broadway
Federal has discontinued its loan programs that permit negative amortization.
During periods of high interest rates negative amortization may involve a
greater risk to Broadway Federal because 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. The loans it currently
holds that permit negative amortization have been outstanding for substantial
periods without default. No loans were in negative amortization status at
December 31, 2002 and 2001.
Broadway Federal qualifies its ARM borrowers based upon the fully indexed
interest rate (COFI or other index plus an 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 may be discounted to a rate determined by
Broadway Federal to adjust for market and other competitive factors. The ARMs
offered by Broadway have a lifetime adjustment limit that is set at the time the
loan is approved. Because of interest rate caps and floors, market rates may
exceed and/or go below the respective maximum or minimum rates payable on
Broadway Federal's ARMs.
Broadway Federal offers fixed-rate mortgage loans with terms that primarily
are 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. Broadway Federal generally sells long-term
fixed-rate mortgages in the secondary market.
5
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. Broadway Federal may originate loans based on other parameters for
loans that are originated for committed sales to other investors. 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 primary
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.
Most multi-family loans are originated with maturities of up to 30 years.
Multi-family loans amounted to $95.8 and $89.8 million at December 31, 2002 and
2001, respectively. At December 31, 2002, Broadway Federal's multi-family
lending represented 65.39% of the Bank's gross loan portfolio, compared to
62.35% at December 31, 2001.
Multi-family lending is a significant part of the Company's strategy to
focus on loan program offerings in less competitive markets resulting in
higher-yielding assets. The small multi-family loan (generally under $500,000)
on properties in Broadway Federal's market area has been a successful niche for
Broadway Federal. Most of these multi-family loans had adjustable rates, with an
initial fixed interest rate period. The fixed interest rate period for these
loans generally ranges from three to seven years. The adjustable rate portion of
these loans is primarily indexed to the Treasury Index. In the fourth quarter of
2002, Broadway Federal introduced the LIBOR Index and the Prime Rate Index.
The Company believes that the risks associated with multi-family loans
described below are mitigated by underwriting requirements, which include
conservative loan-to-value ratios and 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%.
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,
where applicable. 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, 2002 was a
loan totaling $1.26 million. The loan is secured by a 28-unit property located
in Torrance, California. This loan is currently performing according to its
terms. Broadway Federal's second largest multi-family loan totaling $1.12
million at that date was secured by a 30-unit property located in Los Angeles,
California. This loan is currently performing according to its terms. At
December 31, 2002, Broadway Federal had one other multi-family loan with a
balance exceeding $1.0 million and was secured by a 33-unit property located in
Downey, California and is currently performing according to its terms.
Multi-family loans are generally viewed as exposing the lender to a greater
risk of loss than single-family residential loans and typically involve higher
loan principal amounts than loans secured by single-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 that have severe effects in
Broadway Federal's primary market areas in Mid-City and South Central Los
6
Angeles, may 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 single-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 $16.9
million in non-residential real estate loans at December 31, 2002, $2.3 million
and $924,000 were originated in 2002 and 2001, respectively.
Broadway Federal's non-residential real estate loans are generally made in
amounts up to 75% 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 ARMs or hybrid ARMs indexed to the COFI, the Treasury Index,
the LIBOR Index or the Prime Rate Index. 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 2001. It is an unsecured line of credit for $1.8 million
guaranteed by a non-profit organization, and had an outstanding balance at
December 31, 2002 of $1.14 million. This loan is currently performing according
to its terms.
The second largest non-residential loan in Broadway Federal's portfolio was
originated in 2002. It is a $906,000 construction loan participation secured by
a residential apartment project located in San Pedro, California, and had an
outstanding balance at December 31, 2002 of $280,000. This loan is currently
performing according to its terms. At December 31, 2002, Broadway Federal's
portfolio contained nine other non-residential loans with an outstanding balance
exceeding $500,000. These loans are currently 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 they serve makes church lending
an important aspect of Broadway Federal's 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 such church loans compared to 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 church 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 $8.4 million and $10.8 million at December 31, 2002 and 2001,
respectively.
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 residential loans, to adverse conditions in the real
estate market or the economy. Additionally, recessionary economic conditions in
the Bank's primary lending market area could 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
generally restricts such loans to its general market area.
7
Consumer Lending. Broadway Federal's consumer loans primarily consist of
loans secured by savings accounts. At December 31, 2002, loans secured by
savings accounts represented $350,000, or 0.24%, 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 Bank's Board of Directors
establishes its lending policies. The Loan Committee, which is comprised of at
least three members of the Board of Directors, one of whom is the President and
Chief Executive Officer, is primarily responsible for establishing and
monitoring the lending policies of Broadway Federal.
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
$300,700 or less, 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 $300,701 to $499,999,
the new loan must be approved by one Loan Committee member, in addition to the
Senior Vice President-Chief Loan Officer; if the total of the borrower's
existing loans and the loan under consideration is from $500,000 up to $999,999,
the new loan must be approved by two Loan Committee members, in addition to the
Senior Vice President/Chief Loan Officer; and if the total of existing loans and
the loan under consideration is $1.0 million or more, the Board of Directors
must approve the new loan. In addition, it is the practice of Broadway Federal
that all loans approved only by management be reported the following month to
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 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 naming Broadway
Federal as a loss payee 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 performs a monthly review
of all delinquent loans and reports quarterly to the Asset Review Committee of
the Board of Directors. 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. The procedures followed
by Broadway Federal with respect to delinquencies vary depending on the nature
of the loan and the period of delinquency. In the case of residential mortgage
loans, Broadway Federal generally sends the borrower a written notice of
nonpayment promptly after the loan becomes past due. In the event payment is not
received promptly thereafter, additional letters and telephone calls are made.
If the loan is still not brought current and it becomes necessary for Broadway
Federal to take legal action, Broadway Federal generally commences foreclosure
proceedings against all real property that secures the loan.
Broadway Federal ceases to accrue interest on all loans that are 90 days
past due. When a loan first becomes 90 days past due, all previously accrued but
unpaid interest is deducted from interest income. In the event a non-accrual
loan subsequently becomes current, which would require that the borrower pay all
past due payments, late charges and any other delinquent fees owed, all income
is recognized by Broadway Federal and the loan is returned to accrual status.
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 the lower of estimated fair value less the costs estimated to be
necessary to sell the property, or cost.
8
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 has 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 it has established adequate loan loss allowances, actual
losses are dependent upon future events. Accordingly, 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, 2002, 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, 2002 Broadway Federal had $984,000 of loans classified as
"Substandard," of which the largest had a principal balance of $508,000 and was
secured by a multi-family property. At December 31, 2002, no loans were
classified as "Doubtful" and no loans were classified as "Loss". As of December
31, 2002, loans designated as "Special Mention" consisted of seven loans
totaling $1.5 million, which were so designated due to delinquencies or other
identifiable weaknesses. At December 31, 2002, the largest loan designated as
"Special Mention" had a principal balance of $1.1 million and was unsecured.
The following table sets forth delinquencies in Broadway Federal's loan
portfolio as of the dates indicated:
December 31,
2002 2001
60-89 Days 90 Days or More 60-89 Days 90 Days or More
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
(In thousands)
One- to four family - $ - 2 96 - $ - 4 257
Multi-family - - - - - - - -
Non-residential - - 1 39 - - 1 211
Total - $ - 3 135 - $ - 5 468
Delinquent loans to
total gross loans 0.00% 0.09% 0.00% 0.33%
9
Non-Performing Assets. Non-performing assets, consisting of non-accrual
loans and REO, decreased from $468,000 at December 31, 2001 to $135,000 at
December 31, 2002. The $333,000 decrease resulted from a decrease in non-accrual
loans. During December 2002, $142,000 of non-accrual loans were paid in full. As
a percentage of total assets, non-performing assets were 0.07% at December 31,
2002, as compared to 0.26% at December 31, 2001.
The following table provides information regarding Broadway Federal's
non-performing assets at the dates indicated. For the years ended December 31,
2002 and 2001, 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 $13,000 and $58,000, respectively, as compared with
the respective amounts actually received on non-accrual loans of $13,000 and
$57,000. Broadway Federal had no commitments to lend additional funds to
borrowers whose loans were on non-accrual status at December 31, 2002. No
accruing loans were contractually past due by 90 days or more at December 31,
2002.
At December 31,
---------------------------------
2002 2001
--------------- --------------
(In thousands)
Non-accrual loans:
Residential real estate:
One- to four-family $ 96 $ 257
Multi-family - -
Non-residential 39 211
--------------- --------------
Total non-performing loans 135 468
REO - -
--------------- --------------
Total non-performing assets $ 135 $ 468
=============== ==============
Allowance for loan losses as a percentage of gross loans 0.98% 1.10%
Allowance for loan losses as a percentage of total non-performing loans 1,058.52% 335.68%
Allowance for losses as a percentage of total non-performing assets 1,058.52% 335.68%
Non-performing loans as a percentage of gross loans 0.09% 0.33%
Non-performing assets as a percentage of total assets 0.07% 0.26%
Net charge-offs to average loans - -
Impaired loans as a percentage of gross loans 0.03% 0.15%
At December 31, 2002, Broadway Federal's total recorded investment in
impaired loans was $39,000 and was fully reserved. All provisions for losses and
any related recoveries are recorded as part of the provision for loan losses in
the accompanying consolidated statements of operations and comprehensive
earnings. During the year ended December 31, 2002, Broadway Federal's average
investment in impaired loans was $147,000, and its interest income recorded on
impaired loans during this period totaled $5,000. The accrual of interest income
on impaired loans is discontinued when the loan becomes impaired, and previously
accrued but uncollected interest income is reserved. Interest income on impaired
loans is recognized on a cash basis. During December 2002, certain fully
reserved, non-accrual, unsecured loans amounting to $142,000 were paid in full,
and accordingly, the related specific valuation allowances of $142,000 were
reversed into income.
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 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).
10
The Bank also maintains an allowance for impaired loans as a component of
its allowance for loan losses. The Bank reviews all loans with principal
balances of less than $250,000 for impairment on a collective basis. Loans with
balances of $250,000 and greater are evaluated for impairment on an individual
basis 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, the Bank measures impairment for all collateral dependent
loans at the fair value of the collateral.
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 and
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 also may be increased if management becomes aware of factors
elevating the risk in that loan category.
Broadway Federal seeks to anticipate problems and take appropriate steps to
resolve them through its internal asset review procedures. Such procedures
include a review of all loans on which full collectibility may not be reasonably
assured, and consideration of, among other factors, debt service coverage
ratios, vacancy rates, the estimated value of the underlying collateral,
economic conditions, historical loan loss experience and other factors that
warrant recognition in providing for an adequate loan loss allowance. Broadway
Federal monitors and modifies its allowance for loan losses as conditions
dictate. Although Broadway Federal maintains its allowance at a level 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, 2002 and 2001,
Broadway Federal had no REO.
The following table sets forth Broadway Federal's allowances for loan
losses at the dates indicated:
December 31,
-------------------------
2002 2001
------------ -----------
(In thousands)
Allowance for loan losses:
Balance at beginning of year $ 1,571 $1,421
Charge-offs - -
Recoveries (142) -
Provision charged to earnings - 150
------------ -----------
Balance at end of year $1,429 $1,571
============ ===========
11
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.
Allocation of the Allowance for Loan Losses at December 31,
----------------------------------------------------------------------
2002 2001
------------ -------------------- ----------- ---------------------
Percentage of Loans Percentage of Loans
in Each Category to in Each Category to
Amount Total Loans Amount Total Loans
------------ -------------------- ----------- ---------------------
(Dollars in thousands)
One-to-four family $ 129 20.55% $ 142 23.42%
Multi-family 855 65.39% 733 62.35%
Non-residential 282 11.56% 399 12.77%
Construction 19 1.18% - -
Other 86 1.32% 243 1.46%
Unallocated 58 - 54 -
------------ -------------------- ----------- ---------------------
Total allowance for loan losses $ 1,429 100.00% $ 1,571 100.00%
============ ==================== =========== =====================
The Company periodically evaluates the allocation of the allowance for loan
losses to each category of loans. This evaluation takes into consideration
quantitative and qualitative factors. The reduction in the allocation to the
Other category in the table above from December 31, 2001 to December 31, 2002 is
primarily attributable to the reduction of impaired loans and the related
impairment allowance. Qualitative factors include credit concentration, economic
and business conditions, changes in lending programs and lending management and
staff, and geopolitical risks and uncertainties that impact business.
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. Historically, Broadway Federal has maintained liquid assets at levels
management believes to be adequate to support its normal daily activities.
The investment policy of the Company is to provide a source of liquidity
for deposit contraction, borrowings repayment and loan fundings, and to generate
a favorable return on investments without incurring undue interest-rate and
credit risk. The Company's investment policy generally permits investments in
money market instruments such as Federal Funds Sold, certificates of deposit of
insured banks and savings institutions, direct obligations of the U. S.
Treasury, Federal Agency securities, Agency-issued securities and
mortgage-backed securities, mutual funds, municipal obligations, collateralized
mortgage obligations, corporate bonds and marketable equity securities. At
December 31, 2002 and 2001, the Company had investment and mortgage-backed
securities in the aggregate amount of $45.4 million and $18.5 million,
respectively, with fair values of $46.1 million and $18.8 million, respectively.
Mortgage-backed securities consist principally of Fannie Mae and Freddie Mac
securities backed by 30-year amortizing loans, structured with a fixed interest
rate for a period of five or seven years, after which time the securities
convert to a one-year or six-month adjustable rate mortgage. Such loans are
referred to as hybrid ARMs.
12
The following table sets forth information regarding the amortized cost and
fair values of the Company's investment and mortgage-backed securities at the
dates indicated.
December 31,
---------------------------------------------------
2002 2001
------------------------ ------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
----------- ---------- ---------- -----------
(Dollars in thousands)
Investment and mortgage-backed securities:
Held to maturity:
Mortgage-backed securities $ 10,843 $ 11,317 $ 13,931 $ 14,23
Federal Agency debentures 2,000 2,046 - -
Available for sale:
Mortgage-backed securities 27,603 27,697 - -
Mutual Funds 5,002 5,007 4,500 4,504
----------- ---------- ---------- -----------
Total investment and mortgage-backed securities $ 45,448 $ 46,067 $ 18,431 $ 18,735
=========== ========== ========== ===========
The table below sets forth certain information regarding the amortized
cost, weighted average yields and contractual maturities of the Company's
investments and mortgage-backed securities as of December 31, 2002.
At December 31, 2002
--------------------------------------------------------------------------------------------------------------
Less Than One Year One to Five Years Five to Ten Years More Than Ten Years Total
--------------------- ---------------------- ------------------- ------------------- ---------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
--------- ---------- ----------- --------- --------- -------- --------- -------- --------- ----------
(Dollars in thousands)
Held to maturity:
Mortgage-backed
securities $ - - % $ - - % $ - - % $ 10,843 6.48% $ 10,843 6.48%
Federal Agency
debentures - - % - - % - % 2,000 4.25% 2,000 4.25%
Available for sale:
Mortgage-backed
securities - -% - - % - - % 27,603 4.67% 27,603 4.67%
Mutual funds 5,002 2.60% - - % - - % - - 5,002 2.60%
--------- ----------- --------- ---------- ---------
$ 5,002 2.60% - % - % $ - -% $ 40,446 5.13% $ 45,448 4.85%
========= ========== =========== ========= ========= ======== ========== ========= ========= ==========
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 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. 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.
13
The following table sets forth the distribution of Broadway Federal's
deposit accounts by category of account for the years indicated and the weighted
average balances and interest rates on each category of deposits presented.
Year Ended December 31,
-----------------------------------------------------------------
2002 2001
------------------------------ ---------------------------------
Weighted Weighted
Average Percentage Average Average Percentage Average
Balance of Total Rate Balance of Total Rate
-------- ---------- -------- --------- ----------- --------
(Dollars in thousands)
Money market deposits $ 8,030 5.22% 1.48% $ 5,567 3.83% 1.91%
Passbook deposits 28,665 18.62% 0.81% 27,835 19.14% 1.04%
NOW and other demand deposits 24,070 15.63% 0.18% 20,216 13.90% 0.38%
Time deposits 93,223 60.53% 3.60% 91,797 63.13% 5.67%
-------- ---------- --------- -----------
Total Deposits $153,988 100.00% 2.42% $145,415 100.00% 3.90%
======== ========== ========= ===========
The following table presents the amount and weighted average rate of time
deposits equal to or greater than $100,000 at December 31, 2002, maturing within
the next twelve months.
December 31, 2002
-------------------------------------
Weighted Average
Amount Rate
----------------- ----------------
(Dollars in thousands)
Three months or less $ 18,818 2.41%
Over three through six months 5,982 2.30%
Over six through 12 months 6,442 2.83%
----------------- ----------------
Total $ 31,242 2.48%
================= ================
Borrowings. From time to time Broadway Federal has obtained advances from
the FHLB and will do so in the future as an alternative to retail deposit funds.
FHLB advances are used 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 and
mortgage-backed securities. 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 of the FHLB. At December 31, 2002 and 2001 Broadway Federal had $28.7
million and $11.0 million, respectively, in outstanding advances from the FHLB.
During December 2002, Broadway Federal refinanced $4.5 million in 6.64% advances
due in September 2003 and incurred a prepayment fee of $185,000, which was
charged to interest expense. The new advances had maturities ranging from one to
three years and had a weighted average interest rate of 2.17%.
On January 17, 2003 the Company entered into an unsecured $5.0 million
revolving line of credit agreement with First Federal Bank of California.
Interest is at the prime rate if the loan proceeds are used for CRA lending, and
at prime plus one percent if the loan proceeds are used for any other purpose.
The line of credit is renewable annually, and may be converted to a four-year
term loan at the same rate of interest.
14
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
-------------------------
2002 2001
------------ -----------
(Dollars in thousands)
FHLB Advances:
Average balance outstanding $ 15,088 $ 8,788
Maximum amount outstanding at any month-end period $ 30,664 $ 11,000
Balance outstanding at end of period $ 28,724 $ 11,000
Weighted average interest rate during the period 5.41% 6.60%
Weighted average interest rate at end of period 2.67% 4.93%
Personnel
At December 31, 2002, Broadway Federal had 64 employees, 49 of whom are
full-time employees and 15 of whom are 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 in that capacity 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 Savings
Association Insurance Fund, which is one of two deposit insurance funds managed
by the FDIC. The Bank is subject to examination and regulation by the OTS with
respect to most of its business activities, including, among other things,
capital standards, general investment authority, deposit taking and borrowing
authority, mergers, establishment of branch offices, and permitted subsidiary
investments and activities. It is also subject to regulation by the FDIC. 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 adverse environmental conditions thereof. The
potential liabilities under federal and state environmental legislation may
affect the Bank's decision whether to foreclose on real property that secures
its loans and on the actions the Bank may take with respect to its borrowers
preceding foreclosure. Liability for environmental remediation costs may be
imposed under federal and state laws without regard to whether an entity
actually caused the environmental condition and may, under certain
circumstances, be imposed on a real property lender if the lender is deemed to
exercise control over the borrower that is the owner of the real property. If
the Bank forecloses on property containing hazardous substances, the Bank could
become subject to additional environmental statutes, regulations and common law
relating to such matters as asbestos abatement, lead-based paint abatement,
hazardous substance investigation and remediation, waste water discharges,
hazardous waste management, and third party claims for personal injury and
property damage.
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 subsidiary. 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 subsidiary.
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.
15
A savings institution that fails to meet one or more of the applicable
capital requirements is subject to various regulatory limitations and sanctions,
including a prohibition on growth and the issuance of a capital directive by the
OTS Director requiring one or more of the following: an increase in capital; a
reduction of rates paid on savings accounts; cessation of or limitations on
operational expenditures; an increase in liquidity; and such other actions as
may be deemed necessary or appropriate by the OTS Director. In addition, a
conservator or receiver may be appointed under appropriate circumstances.
The core capital requirement generally 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.
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, 2002 and 2001, Broadway Federal's general valuation allowance included in
supplementary capital was $1,429,000 and $1,361,000, 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 OTS regulatory capital requirements as of December 31, 2002 and December
31, 2001:
As of December 31,
--------------------------------------------------------------
2002 2001
------------------------------- -----------------------------
(In thousands)
Risk- Risk-
Tangible Core based Tangible Core based
Capital Capital Capital Capital Capital Capital
--------- -------- --------- --------- -------- --------
Equity capital-Broadway Federal $14,504 $14,504 $14,504 $12,826 $12,826 $12,826
Additional supplementary capital:
General valuation allowance - - 1,429 - - 1,361
Assets required to be deducted (157) (157) (157) (103) (103) (103)
--------- -------- --------- --------- -------- --------
Regulatory capital balances 14,347 14,347 15,776 12,723 12,723 14,084
Minimum requirement 3,069 8,185 9,599 2,679 7,145 9,318
--------- -------- --------- --------- -------- --------
Excess over requirement $11,278 $ 6,162 $ 6,177 $10,044 $ 5,578 $ 4,766
========= ======== ========= ========= ======== ========
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."
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
16
institutions). 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, 2002, Broadway Federal was a well-capitalized
institution.
The table below presents Broadway Federal's capital ratios at December 31,
2002 and 2001:
Actual
-------------------- Well Capitalized
Amount Ratios Requirement
--------- ------ ----------------
(Dollars in thousands)
December 31, 2002:
Leverage/Tangible Ratio $ 14,347 7.01% 5.0%
Tier 1 Risk based ratio $ 14,347 11.96% 6.0%
Total Risk based ratio $ 15,776 13.15% 10.0%
December 31, 2001:
Leverage/Tangible Ratio $ 12,723 7.12% 5.0%
Tier I Risk based ratio $ 12,723 10.92% 6.0%
Total Risk based ratio $ 14,084 12.09% 10.0%
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. At December 31,
2002, the maximum amount that Broadway Federal could lend to any one borrower
(including related persons and entities) under the current loans to one borrower
regulatory limit was $2.1 million. The Bank's internal policy limits loans to
one borrower at $1.8 million. At December 31, 2002, the largest aggregate amount
of loans that Broadway Federal had outstanding to any one borrower was $1.3
million.
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 those communities. The CRA also
requires the OTS to assess, the performance of the institution in meeting the
credit needs of its communities as part of its examination of a savings
institution, 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 assigns ratings
of "outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance." Broadway Federal was rated "outstanding" in its most recent CRA
examination.
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, 2002, 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
that is not a subsidiary of the Company.
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.
17
Restrictions on Dividends and Other Capital Distributions. In general, the
prompt corrective action regulations prohibit an OTS-regulated 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 the OTS 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.
Financial Modernization Legislation. On November 12, 1999, President
Clinton signed into law the Gramm-Leach-Bliley Act (the "G-L-B Act") that
significantly reforms various aspects of 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 holding companies and
national banks to engage in a variety of new 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 also 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, except under certain
conditions permissible or mandated by law, 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 also makes membership in the Federal Home Loan Bank voluntary
for federal savings associations.
Tax Matters
Federal Income Taxes
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 Reserves. Broadway Federal has qualified under provisions of the
Internal Revenue Code (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 debts, under which additions to reserves are based on the
institution's six-year average 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.
18
California Taxes
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 deductions are available in computing
California franchise taxes using a three or six year average loss experience
method.
Item 2. Description of Property
Broadway Federal conducts its business through four branch offices.
Broadway Federal's loan service operation is 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 one of its branch offices.
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 believes that Broadway
Federal's facilities are adequate to meet the present needs of Broadway Federal
and the Company.
Net Book Value
Original of Property or
Date Date Leasehold
Leased or of Lease Improvements at
Location Leased or Owned Acquired Expiration December 31, 2002
Administrative/Branch Office/
Loan Origination Center:
4800 Wilshire Blvd Owned 1997 - $1,956,000
Los Angeles, CA
Branch Offices:
4835 West Venice Blvd. Building Owned 1965 2013 $ 128,000
Los Angeles, CA on Leased Land
Branch Office/Loan Service Center:
170 N. Market Street Owned 1996 - $ 839,000
Inglewood, CA
4001 South Figueroa Street (1) Owned 1996 - $2,281,000
Los Angeles, CA
------------
(1) In April 2002, Broadway Federal entered into a three-year agreement to
sublease approximately 400 square feet to an attorney at $500.00 per month.
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.
19
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
February 28, 2003, 1,815,294 shares of Common Stock were outstanding and held by
approximately 426 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 (adjusted for stock split) sets forth for the end of
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.
2002 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
High $ 10.16 $ 8.35 $ 8.00 $ 6.40
Low $ 7.79 $ 6.45 $ 6.25 $ 6.20
2001
High $ 6.30 $ 6.55 $ 5.75 $ 4.72
Low $ 4.63 $ 4.99 $ 3.88 $ 3.44
The Company paid quarterly dividends on its Common Stock at the rate of
$0.025 per share during 2001 and the first three quarters of 2002. The Company
increased its quarterly dividend to $0.0375 per share during the fourth quarter
of 2002. The Company may pay dividends out of funds legally available therefore
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. A 30-day 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. The Series A Preferred Stock has a par value of $0.01 per share and a
liquidation preference of $10.00 per share. The Series A 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 use them 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
Series A Preferred Stock. On December 30, 2002, the Company issued 100,000
shares of non-cumulative, non-voting Series B Preferred Stock with a liquidation
preference of $10 per share to Fannie Mae for gross proceeds of $1.0 million.
Both the Series A and the Series B Preferred Stock have non-cumulative annual
dividend rates of 5% of their liquidation preference, are non-voting and
non-convertible, and are subordinate to all indebtedness of the Company,
including customer accounts. Both series of preferred stock were issued without
registration under the Securities Act of 1933 pursuant to the registration
exemption provided by Section 4(2) thereof .
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 and Broadway Federal's results of operations are dependent
primarily on net interest income after provisions for loan losses, which is the
difference between the interest income earned on interest-earning assets, such
as loans and investments, and the interest expense on interest-bearing
liabilities, such as deposits and borrowings, less provisions for loan losses.
20
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 and
occupancy expenses. More generally, the results of operations of thrift and
banking institutions are also affected by prevailing economic conditions,
competition, and the monetary and fiscal policies of governmental agencies.
For the years ended December 31, 2002 and 2001, the Company recorded net
earnings of $1,441,000 or $0.77 per diluted common share, and $685,000, or $0.37
per diluted common share, respectively. At December 31, 2002 and 2001,
respectively, the Company had total assets of $204.9 million and $178.9 million;
total deposits of $156.1 million and $151.2 million; and stockholders' equity of
$16.9 million and $14.6 million, representing 8.26% and 8.18% of assets,
respectively. Each of the Bank's regulatory capital ratios exceeded regulatory
requirements at December 31, 2002 and 2001, with tangible and core capital each
at 7.01% and 7.12% and risk-based capital at 13.15% and 12.09%, respectively.
The Company's level of non-performing assets, comprised of non-accrual
loans and REO, declined to $135,000 or 0.07% of total assets at December 31,
2002, from $468,000 or 0.26% at December 31, 2001.
Interest Rate Sensitivity. Interest rate risk is the exposure of Broadway
Federal's current and future earnings and equity capital arising from adverse
movements in interest rates. 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 the Company's interest-earning assets as
compared with its interest-bearing liabilities. Broadway Federal's loan
portfolio is predominantly comprised of ARMs tied to COFI, the Treasury Index or
the 12 MTA. During 2002, these ARMs have generally repriced at a slower rate
than the repricing of the Bank's interest-bearing liabilities. A portion of the
Bank's adjustable rate loans have reached their floors, thus contributing to the
slower rate of repricing on the loan portfolio. However, the benefit of this lag
effect has been partially offset by the increase in refinancings of portfolio
loans resulting in loan pay-offs. Additionally, new loan originations have been
recorded at lower rates than the rates for loans paid off.
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, 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 impact on its net
interest income and market value of equity. The Company, through Broadway
Federal, achieves these objectives primarily by the marketing and funding of
ARMs, which, other than hybrid ARMs, generally reprice at least annually and are
indexed to COFI, the Treasury Index, the 12 MTA or, more recently, LIBOR. The
hybrid ARMs have fixed rates of interest for a period of time, generally three
to seven years before adjusting.
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
Investment 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
recommended by the Company's Investment 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 ("NPV") is the difference between
the present value of expected future cash flows of the Bank's assets and
liabilities under various interest rate scenarios. The present value of these
cash flows is calculated by discounting the cash flows using the interest rates
for the various scenarios. Under current OTS regulations and practice, the
effect on NPV must be calculated for immediate, parallel, and sustained interest
rate changes of plus or minus 100 basis points, and plus 200 and 300 basis
points.
21
The following tables present Broadway Federal's NPV as of December 31,
2002. This information is provided solely to illustrate the current application
of the above-described regulation to Broadway Federal and is based upon data and
assumptions about how interest rate changes may affect Broadway Federal's
interest-earning assets and interest-bearing liabilities. Actual results may
vary.
Net Portfolio Value as of December 31, 2002
------------------------------------------------------------------------
Change in Interest NPV Percent Change in NPV as
Rates in Basis Points Dollar Change Percent of Present
(Rate Shock) Amount Change (1) Value of Assets
--------------------- ------- ---------- -------- -------------------
(In thousands)
300 $21,493 $ 1,668 8% 1.20%
200 $20,736 $ 911 5% 0.71%
100 $20,512 $ 687 3% 0.45%
Zero $19,825 $ - - -
(100) $18,849 $ (976) (5)% (0.58)%
-----------
(1) Percentage changes less than 1% not shown. The above table suggests that in
the event of an immediate, parallel, and sustained 100 basis point change in
interest rates at December 31, 2002, Broadway Federal would experience a 3%
increase in NPV in a rising rate environment and a 5% decrease in NPV in a
declining rate environment.
In evaluating Broadway Federal's exposure to interest rate risk, certain
shortcomings inherent in the NPV method of analysis presented in the foregoing
table must be considered. These include the factors mentioned in the discussion
under "-Interest Rate Sensitivity" above, and the fact that market interest
rates are unlikely to adjust simultaneously.
Critical Accounting Policies. The discussion and analysis of the financial
condition and results of operations of the Company are based upon the
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets and liabilities at the
date of our financial statements. Actual results may differ from these estimates
under different assumptions or conditions.
Accounting for the allowance for loan losses involves significant judgments
and assumptions by management that have a material impact on the carrying value
of loans receivable. Management considers this accounting policy to be a
critical accounting policy. The judgments and assumptions used by management are
based on historical experience and other factors, which are believed reasonable
under the circumstances as described in Item 1. "Description of Business -
Lending Activities-Allowance for Loan Losses".
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, 2002 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, 2002. The expected maturity date values
for loans receivable, mortgage-backed securities, and investment securities were
calculated by adjusting the instrument's contractual maturity dates for
expectations of prepayments, as set forth in the notes. Similarly, expected
maturity date values for interest-bearing core deposits were calculated based
upon estimates of the period over which the deposits would be outstanding as set
forth in the notes to the table. With respect to the Company's adjustable rate
instruments, expected maturity date values were measured by adjusting the
instrument's contractual maturity date for expectations of prepayments, as set
forth in the notes. From a risk management perspective, however, the Company
believes that repricing dates, as opposed to expected maturity dates, may be
more relevant in analyzing the value of such instruments.
22
Expected Maturity Date
Fiscal Year Ended December 31, 2002
-----------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total Fair Value
--------- -------- --------- -------- -------- ----------- ---------- ----------
(Dollars in thousands)
Interest Earnings Assets:
Loans receivable (1)(2)(3)
Fixed $ 5,572 $ 3,524 $ 2,381 $ 1,393 $ 976 $ 1,632 $ 15,478 $ 16,651
Average interest rate 8.08% 8.12% 8.06% 7.77% 7.66% 7.24% 7.94%
Adjustable $ 94,334 $23,859 $10,966 $ 627 $ 628 $ 212 $130,626 $132,343
Average interest rate 6.76% 6.99% 7.00% 6.73% 6.73% 6.01% 6.82%
Investment securities (4) $ 8,030 - - - - - $ 8,030 $ 8,088
Average interest rate 3.07% - - - - - 3.07%
Mortgage backed securities (5)(6)
Fixed $ 4,559 $ 2,430 $ 1,319 $ 737 $ 416 $ 487 $ 9,948 $ 10,382
Average interest rate 6.28% 6.31% 6.34% 6.36% 6.37% 6.40% 6.31%
Adjustable $ 11,651 $ 6,561 $ 4,003 $ 3,141 $ 3,142 - $ 28,498 $ 28,632
Average interest rate 4.10% 4.09% 4.10% 4.12% 4.12% - 4.10%
Interest bearing deposits $ 1,500 - - - - - $ 1,500 $ 1,500
Average interest rate 1.13% - - - - - 1.13%
Total interest earning assets $125,646 $36,374 $18,669 $ 5,898 $ 5,162 $ 2,331 $194,080 $197,596
Interest Bearing Liabilities
Savings account deposits
NOW accounts (7) $ 2,131 $ 1,768 $ 1,468 $ 1,218 $ 5,948 - $ 12,533 $ 12,533
Average interest rate 0.34% 0.34% 0.34% 0.34% 0.34% - 0.34%
Passbook accounts (8) $ 5,011 $ 4,159 $ 3,452 $ 2,865 $ 2,378 $11,613 $ 29,478 $ 29,478
Average interest rate 0.78% 0.78% 0.78% 0.78% 0.78% 0.78% 0.78%
Certificate accounts (9) $ 64,601 $13,075 $ 8,012 $ 2,994 $ 2,997 $ 2,907 $ 94,586 $ 96,268
Average interest rate 2.51% 3.67% 4.88% 4.85% 4.85% 5.34% 3.10%
Money Market funds (10) $ 2,877 $ 1,927 $ 3,936 - - - $ 8,740 $ 8,740
Average interest rate 1.38% 1.38% 1.38% - - - 1.38%
Non-interest bearing checking $ 3,760 $ 2,445 $ 1,590 $ 1,034 $ 672 $ 1,310 $ 10,811 $ 10,811
Average interest rate
Federal Home Loan Bank Advances:
Fixed rate borrowing $ 8,247 $ 8,190 $ 6,181 $ 4,629 $ 1,477 - $ 28,724 $ 28,986
Average interest rate 2.58% 2.58% 2.73% 2.87% 2.87% - 2.67%
Other interest bearing liabilities - - - $ 558 - - $ 558 $ 555
Average interest rate - - - 2.00% - - 2.00%
Total interest bearing liabilities $ 86,627 $31,564 $24,639 $13,298 $13,472 $15,830 $185,430 $187,371
23
-------
(1) Does not include undisbursed loan proceeds, net deferred loan fees or the
allowance for loan losses.
(2) For fixed rate single-family residential loans assumes annual amortization
and balloon maturities as appropriate. Assumes a prepayment rate of 10.8%
to 29% for the fixed and balloon mortgage loans. For adjustable rate
single-family loans, the expected maturity is the repayment of principal or
repricing, whichever occurs first. Assumes a prepayment rate of 21.90%. For
fixed rate non-single family residential loans, assumes annual amortization
and a prepayment rate of 6% to 17%. For adjustable rate non-single family
residential loans, the expected maturity is the repayment of principal or
repricing, whichever occurs first. Assumes a prepayment rate of 6%.
(3) Approximately forty-eight percent (48%) of the Company's adjustable rate
loans change with COFI or the 12 MTA. The vast majority of these loans
reprice on an average of six months or less. The remaining adjustable rate
loans primarily change with a current market index such as the Treasury
Index. All loans are subject to various market-based annual and lifetime
rate caps and floors.
(4) Investment securities of the Company are comprised of a mutual fund
invested in ARM loans primarily indexed to the one year Treasury bill and
as such have an anticipated maturity of one year or less, a certificate of
deposit, and Federal Agency debentures.
(5) For mortgage-backed securities with single-family residential loan
collateral, assumes annual amortization and balloon maturities as
appropriate. Assumes prepayment rates of 12.9% to 25.3% for fixed rate
securities.
(6) The Company's adjustable rate mortgage-backed securities reprice on an
annual basis based upon changes in the Treasury. Various annual and
lifetime market-based caps and floors exist. Assumes a prepayment rate of
21.90%.
(7) For NOW accounts, assumes a 17% decay rate for five years, with the
remaining balance maturing at the end of five years.
(8) For regular passbook savings accounts, assumes a 17% decay rate for seven
years, with the remaining balance maturing at the end of seven years.
(9) Certificate accounts, assumes stated maturities.
(10) Money Market fund accounts, assumes a 33% decay rate, with the remaining
balances maturing in the third year.
24
Average Balance Sheet. The following table sets forth certain information
relating to the Company's average balance sheets for the years ended December
31, 2002 and 2001. The yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods shown except where noted otherwise. Average balances are derived from
average month-end balances. Management does not believe that the use of average
monthly balances instead of average daily balances has caused any material
differences in the information presented. The yields and costs include fees that
are considered adjustments to yields.
For the Year Ended December 31,
-------------------------------------------------------------------
2002 2001
--------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- --------- ---------- ------- -------- -------------
(Dollars in thousands)
Assets
Interest-earning assets:
Interest-earning deposits $ 2,674 $ 30 1.13% $ 1,658 $ 21 1.27%
Federal Funds sold and other short-term
investments 13,663 393 2.88% 11,650 594 5.10%
Investment securities 1,703 68 3.99% 2,038 90 4.42%
Loans receivable(1)(2) 139,349 10,784 7.74% 133,743 11,452 8.56%
Mortgage-backed securities 20,765 1,109 5.34% 11,894 744 6.26%
FHLB stock 1,455 85 5.84% 1,363 97 7.12%
--------- ------- -------- --------
Total interest-earning assets 179,609 $12,469 6.94% 162,346 $ 12,998 8.01%
-------- --------
Non-interest-earning assets 8,180 14,162
-------- --------
Total assets $187,789 $176,508
======== ========
Liabilities and Retained Earnings
Interest-bearing liabilities:
Money market deposits $ 8,030 $ 119 1.48% $ 5,567 $ 106 1.91%
Passbook deposits 28,665 232 0.81% 27,835 289 1.04%
NOW and other demand deposits 24,070 43 0.18% 20,216 78 0.38%
Certificate accounts 93,223 3,358 3.60% 91,797 5,200 5.67%
-------- ------- -------- -------- -----
Total deposits 153,988 3,752 2.42% 145,415 5,673 3.90%
FHLB advances 15,088 817 5.41% 8,788 580 6.60%
-------- ------- -------- --------
Total interest-bearing liabilities 169,076 4,659 2.70% 154,203 6,253 4.06%
-------- ------- -------- --------
Non-interest-bearing liabilities 3,259 7,994
Retained earnings 15,454 14,311
-------- --------
Total liabilities and retained earnings $187,789 $176,508
======== ========
Net interest rate spread (3) $ 7,900 4.24% $ 6,745 3.95%
======= ========
Effective net interest rate spread(4) 4.40% 4.15%
Ratio of interest-earning assets
to interest-bearing liabilities 106.23% 105.28%
Return on average assets 0.77% 0.39%
Return on average equity 9.32% 4.79%
Average equity to average assets ratio 8.23% 8.11%
-----------
(1) Amount is net of deferred loan fees, loan discounts, loans in process and
loan loss allowances, and includes loans held for sale.
(2) Amount excludes non-performing loans.
(3) Interest rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing
liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
25
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.
Year ended December 31, 2002 Year ended December 31, 2001
Compared to year ended Compared to year ended
December 31, 2001 December 31, 2000
----------------------------- -------------------------------
Increase (Decrease) in Net Increase (Decrease) in Net
Interest Income Interest Income
----------------------------- -------------------------------
Due to Due to Due to Due to
Volume Rate Total Volume Rate Total
-------- -------- --------- -------- -------- -------
(In thousands)
Interest-earning assets:
Interest-earning deposits $ 12 $ (3) $ 9 $ 25 $ (14) $ 11
Federal funds sold and other 90 (291) (201) 548 2 550
short term investments (14) (8) (22) (414) (139) (553)
Investment securities, net 520 (1,188) (668) 545 156 701
Loans receivable, net 488 (123) 365 1 (7) (6)
Mortgage backed securities, net 7 (19) (12) 6 4 10
FHLB stock ------- -------- --------- -------- -------- -------
Total interest-earning assets 1,103 (1,632) (529) 711 2 713
------- -------- --------- -------- -------- -------
Interest-bearing liabilities: 40 (27) 13 26 (42) (16)
Money market deposits 9 (66) (57) (4) (63) (67)
Passbook deposits 12 (47) (35) 12 (27) (15)
NOW and other demand deposits 82 (1,924) (1,842) 386 422 808
Certificate accounts 357 (120) 237 (315) 86 (229)
FHLB advances ------- -------- --------- -------- -------- -------
Total interest-bearing
liabilities 500 (2,184) (1,684) 105 376 481
------- -------- --------- -------- -------- -------
Change in net interest income $ 603 $ 552 $ 1,155 $ 606 $(374) $ 232
======= ======== ========= ======== ========= =======
26
Comparison of Operating Results for the Years Ended December 31, 2002 and
December 31, 2001
General. The Company recorded net earnings of $1,441,000 or $0.77 per
diluted common share, for the year ended December 31, 2002, compared to net
earnings of $685,000 or $0.37 per diluted common share, for the year ended
December 31, 2001. The growth in net earnings was largely attributable to an
increase in net interest income after provision for loan losses ("net interest
margin"), which increased by $1.4 million during the year.
Interest Income. Interest income decreased by $529,000 or 4.1% in 2002
compared to 2001. The decrease was primarily attributable to a 107 basis point
decrease in the yield on interest earning assets offset by the effect of a $17.3
million increase in average interest-earning assets in 2002 compared to 2001.
The Bank was able to increase its loan portfolio through loan originations and
purchases. The loan portfolio increased to $143.9 million at December 31, 2002
from $141.3 million at December 31, 2001.
The yield on average interest-earning assets was 6.94% in 2002 compared to
8.01% in 2001, a decrease of 107 basis points. The investment portfolio yield
declined to 3.99% in 2002 from 4.42% in 2001, a 43 basis point decrease. The
loan portfolio yield also declined to 7.74% in 2002 from 8.56% in 2001, an 82
basis point decrease.
Interest Expense. Interest expense decreased by $1.7 million or 26.9% in
2002 compared to 2001. The decrease was primarily attributable to a 136 basis
point decrease in the cost of interest-bearing liabilities to 2.70% in 2002 from
4.06% in 2001, offset by the effect of a $14.9 million increase in average
interest-bearing liabilities to $169.1 million in 2002 from $154.2 million in
2001. Deposits grew to $156.1 million at December 31, 2002 from $151.2 million
at December 31, 2001, and the weighted average cost of deposits decreased to
2.42% in 2002 from 3.90% in 2001. Of the deposit growth, $7.6 million occurred
in core deposit accounts, consisting of NOW and demand deposits, money market
deposits and passbook deposits. Core deposits grew to $61.6 million at December
31, 2002 from $53.9 million at December 31, 2001. The average cost of core
deposits decreased to 0.67% in 2002 from 0.88% in 2001 and the cost of
certificate accounts, also decreased, to 3.60% in 2002 from 5.67% in 2001.
The weighted average cost of FHLB advances was 5.41% in 2002 compared to
6.60% in 2001. The higher cost of borrowings in 2001 was substantially related
to fixed-rate borrowings maturing in 2002 and 2003 with interest rates ranging
from 6.64% to 6.77%. During December 2002, FHLB advances of $4.5 million due in
September 2003 were refinanced with new borrowings with maturities ranging from
one to three years, and with an average interest rate of 2.17%. The Bank paid
$185,000 in prepayment fees, which has been included in interest expense in the
accompanying Statement of Operations and Comprehensive Earnings.
Net Interest Income After Provision for (Recovery of) Loan Losses. Net
interest income after provision for (recovery of) loan losses increased by $1.4
million or 21.9% in 2002 compared to 2001. The net interest rate spread
increased to 4.24% from 3.95%. The effective net interest rate spread increased
to 4.40% from 4.15%. The provision for loan losses decreased $292,000 based on
management's estimate of the level of valuation allowance needed to cover the
inherent risk in the portfolio.
The allowance for loan losses as a percentage of total loans was 0.98% at
December 31, 2002 compared to 1.10% at December 31, 2001. The Bank's ratio of
non-performing assets, consisting of non accrual loans and real estate acquired
through foreclosure, to total assets improved to 0.07% at December 31, 2002,
from 0.26% at December 31, 2001. At December 31, 2002 and 2001, the Bank had no
foreclosed real estate assets.
Non-Interest Income. Non-interest income increased by $64,000 or 6.8% in
2002 compared to 2001 primarily from the increase in service charges amounting
to $61,000.
Non-Interest Expense. Non-interest expense increased $384,000 or 6.0% in
2002 compared to 2001. The increase was primarily attributable to an increase in
compensation and benefits relating to higher performance bonuses and to higher
salaries.
27
Comparison of Financial Condition at December 31, 2002 and December 31, 2001
Assets. Total assets at the end of 2002 were $204.9 million compared to
$178.9 million at the end of 2001, a $26.0 million increase. Assets increased
largely due to the increase in the mortgage-backed securities portfolios of
$24.6 million.
Mortgage-backed securities available for sale increased $27.7 million in
2002 reflecting purchases, net of repayments. Mortgage-backed securities
classified as held to maturity decreased $3.1 million because of repayments.
During the third and fourth quarter of 2002, the Bank implemented a revenue
enhancement strategy consisting of investing in Agency mortgage-backed
securities funded by liquidation of lower-yielding short-term investments, and
by FHLB advances. The mortgage-backed securities consist of 30 year amortizing
loans, structured with a fixed interest rate for a period of five or seven
years, after which time the securities convert to a one-year or six-month
standard adjustable rate mortgage. Such loans are referred to as hybrid ARMs.
Loans receivable, including loans held for sale, increased $2.6 million in
2002 resulting from loan originations of $30.8 million, offset by loan payoffs,
and principal repayments of $28.8 million. In 2001 loans receivable increased
$14.7 million, substantially due to loan purchases of $8.2 million and a lower
level of loan payoffs. At December 31, 2002 and 2001 89.7% and 89.5%,
respectively, of loans receivable were adjustable rate mortgages. At those same
dates 65.4% and 62.4%, respectively, were multifamily loans, and 20.6% and
23.4%, respectively, were single-family loans.
Investment securities available for sale is comprised of mutual fund
investments in adjustable rate mortgage funds. These mutual funds generally
provide a higher short-term yield than Federal funds sold or other overnight
investments, and due to the short duration of the underlying assets, the funds
are relatively stable in terms of changes in market value. At December 31, 2002
and 2001 the yield on these investments was 2.55% and 4.55%, respectively.
Liabilities. Total liabilities at the end of 2002 were $188.0 million
compared to $164.3 million at the end of 2001, a $23.7 million increase. The
increase was primarily attributable to a $17.7 million increase in FHLB
borrowings.
During the third and fourth quarter of 2002, the Bank borrowed $20 million
in 54-month amortizing advances to fund the purchase of Agency hybrid ARMs as
part of the Bank's revenue enhancement strategy. At December 31, 2002 and 2001,
FHLB advances were 14.0% and 6.1%, respectively, of total assets, and the
weighted average cost of advances at those dates was 2.67% and 4.93%,
respectively.
Deposits increased by $5.0 million in 2002. During the first half of 2002,
the Bank focused on increasing the percentage of core deposits to total
deposits. At the end of 2002, core deposits represented 39.4% of total deposits
compared to 35.7% at the end of 2001. The Bank also focused on extending its
certificate of deposit maturities in the current low interest rate environment,
and was able to increase the weighted average certificate of deposit maturity to
18 months at year-end 2002 from 11 months at year-end 2001. At December 31, 2002
and 2001, the weighted average cost of deposits was 2.42% and 3.90%,
respectively, a 148 basis point decrease.
Liquidity and Capital Resources. Sources of liquidity and capital for the
Company on a stand-alone basis include distributions from the Bank and
borrowings under a $5 million line of credit with First Federal Bank of
California. Additionally, in December 2002, the Company issued 100,000 shares of
non-cumulative, non-voting Series B Preferred Stock to Fannie Mae for gross
proceeds of $1.0 million. 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 mortgage-backed securities, proceeds from the
sale of investment and mortgage-backed securities, 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.
In July 2001, the Office of Thrift Supervision removed the regulation that
required a savings institution to maintain an average daily balance of liquid
assets of at least 4% of its liquidity base, and retained a provision requiring
28
a savings institution to maintain sufficient liquidity to ensure its safe and
sound operation. The determination of what constitutes safe and sound operation
was left to the discretion of management. The Bank's goal is to maintain cash
and liquid investments at a modest level, particularly in light of the available
borrowing capacity from the FHLB and other sources. At December 31, 2002 cash
and cash equivalents, short-term investments and excess borrowing capacity from
the FHLB was 24.8% of the liquidity base (defined as deposits plus borrowings
less share loans).
The Bank has other sources of liquidity in the event that a need for
additional funds arises, including brokered deposits, and the Company's $5
million line of credit with First Federal Bank of California, which can be
pushed down to the Bank.
At December 31, 2002, the Bank had outstanding commitments to originate
loans of approximately $2.2 million. The Bank anticipates that it will have
sufficient funds available to meet its future loan origination commitments.
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
increased costs 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 Note 2 of the Notes to the Consolidated Financial
Statements.
Item 7. Financial Statements of Broadway Financial Corporation
See Index to the Consolidated Financial Statements of Broadway Financial
Corporation beginning on Page 38.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
PART III
Item 9. Directors and Executive Officers of the Registrant
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
2003 Annual Meeting of Shareholders (the "Company's 2003 Proxy Statement").
Item 10. Executive Compensation
The information required by this Item is incorporated herein by reference
to the Company's 2003 Proxy Statement, under the caption "Executive Compensation
Benefits and Related Matters".
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this Item, other than the following table, is
incorporated herein by reference to the Company's 2003 Proxy Statement, under
the caption "Voting Securities and Principal Holders Thereof".
29
Equity Compensation Plan Information
Number of Securities
to be Issued Upon Weighted Average Number of Securities
Exercise of Exercise Price of Remaining Available for
Outstanding Options, Outstanding Options, Future Issuance Under
Plan Category Warrants and Rights Warrants and Rights Equity Compensation Plans
Recognition and Retention Plan 759 $ 5.50 7,773
Performance Equity Plan 18,840 $ 6.51 8,738
Employee Stock Ownership Plan 73,247 $ 5.00 31,265
Long Term Incentive Plan 277,914 $ 6.14 72,086
Stock Option Plan for
Outside Directors 35,592 $ 5.31 20,255
----------------------- ------------------------ ----------------------------
Total 406,352 $ 5.89 140,117
======================= ======================== ============================
Item 12. Certain Relationships and Related Transactions
None.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number
2.1 Plan of Conversion, including Certificate of Incorporation and Bylaws
of the Registrant and Federal Stock Charter and Bylaws of Broadway
Federal (Exhibit 2.1 to Amendment No. 2 to Registration Statement on
Form S-1, No. 33-96814, filed by Registrant on November 13, 1995)
3.1 Form of Certificate of Incorporation of Registrant (contained in
Exhibit 2.1) 3.2 Form of Bylaws of Registrant (contained in Exhibit
2.1) 4.1 Form of Common Stock Certificate (Exhibit 4.1 to Registration
Statement on Form S-1, No. 33-96814,filed by the Registrant on
September 12, 1995)
4.2 Form of Series A Preferred Stock Certificate (Exhibit 4.2 to Amendment
No. 1 to Registration Statement on Form S-1, No. 33-96814, filed by
the Registrant on November 6, 1995)
4.3 Form of Certificate of Designation for the Series A Preferred Stock
(contained in Exhibit 2.1)
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 Broadway Financial Corporation,
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 dated August 1, 1997, (Exhibit 10.4 to Form 10-KSB
filed by the Registrant for the fiscal year ended December 31, 1997.
10.5 Broadway Financial Corporation Performance Equity Program for Officers
and Directors, dated August 1, 1997, filed as Exhibit 10.5 to Form
10-KSB filed by the Registrant for the fiscal year ended December 31,
1997.
10.6 Broadway Financial Corporation Stock Option Plan for Outside Directors
(filed by the Registrant as part of Form S-8, No. 333-17331, on
December 5, 1996)
10.7 Broadway Financial Corporation Long Term Incentive Plan (filed by
Registrant as part of Form S-8, No. 333-17331, on December 5, 1996)
30
21.1 Subsidiaries of Broadway Financial Corporation (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
99.1 CEO and CFO Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
------------
* Exhibits followed by a parenthetical reference are incorporated by
reference herein from the document described therein.
31
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors
Broadway Financial Corporation:
We consent to the incorporation by reference in the registration statements (No.
333-17331 and No. 333-102138) on Form S-8 of Broadway Financial Corporation of
our report dated February 6, 2003, with respect to the consolidated balance
sheets of Broadway Financial corporation as of December 31, 2002 and 2001, and
the related consolidated statements of operations and comprehensive earnings,
changes in stockholders' equity and cash flows for the years then ended, which
report appears in the December 31, 2002 annual report on Form 10-KSB of Broadway
Financial Corporation.
/s/ KPMG LLP
Los Angeles, California
March 31, 2003
32
Exhibit 99.1
SECTION 906 CERTIFICATION
The following statement is provided by the undersigned to accompany the
foregoing Report on Form 10-KSB pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be
deemed filed pursuant to any provision of the Exchange Act of 1934 or any other
securities law.
Each of the undersigned certifies that the foregoing Report on Form 10-KSB fully
complies with the requirements of Section 13(a) of the Securities Exchange Act
of 1934 (15 U.S.C. Section 78) and that the information contained in the Form
10-KSB fairly presents, in all material respects, the financial condition and
results of operations of Broadway Financial Corporation as of and for the year
ended December 31, 2002.
Date: March 31 2003 By: /s/ Paul C. Hudson
Paul C. Hudson
President and Chief Executive Officer
Broadway Financial Corporation
Date: March 31 2003 By: /s/ Alvin D. Kang
Alvin D. Kang
Chief Financial Officer
33
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on November 6, 2002 announcing
a two-for-one stock split in the form of a stock dividend of one share
for each outstanding share, and its intention to increase the
quarterly cash dividend.
The Company filed a report on Form 8-K on November 8, 2002 clarifying
its previous announcement regarding the cash dividend.
Item 14. Controls and Procedures
As of December 31, 2002, an evaluation was performed under the supervision
of the Company's Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO") of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's CEO
and CFO concluded that the Company's disclosure controls and procedures were
effective as of December 31, 2002. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to December 31, 2002.
34
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 31, 2003
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 31, 2003
Paul C. Hudson
ief Executive Officer, President
and Director
(Principal Executive Officer)
/s/ Alvin D. Kang Date: March 31, 2003
Alvin D. Kang
Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ Elbert T. Hudson Date: March 31, 2003
Elbert T. Hudson
Chairman of the Board
/s/ Kellogg Chan Date: March 31, 2003
Kellogg Chan
Director
/s/ Rosa M. Hill Date: March 31, 2003
Rosa M. Hill
Director
/s/ Albert Odell Maddox Date: March 31, 2003
Albert Odell Maddox
Director
/s/ Larkin Teasley Date: March 31, 2003
Larkin Teasley
Director
/s/ Daniel A. Medina Date: March 31, 2003
Daniel A. Medina
Director
/s/ Virgil P. Roberts Date: March 31, 2003
Virgil P. Roberts
Director
/s/ Robert C. Davidson, Jr. Date: March 31, 2003
Robert C. Davidson
Director
35
SECTION 302 CERTIFICATION
I, Paul C. Hudson, certify that:
1. I have reviewed this annual report on Form 10-KSB of Broadway Financial
Corporation.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as designed in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Paul C. Hudson
Signature
Paul C. Hudson
Chief Executive Officer
Broadway Financial Corporation
36
SECTION 302 CERTIFICATION
I, Alvin D. Kang, certify that:
1. I have reviewed this annual report on Form 10-KSB of Broadway Financial
Corporation.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as designed in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Alvin D. Kang
Signature
Alvin D. Kang
Chief Financial Officer
Broadway Financial Corporation
37
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements
Years ended December 31, 2002 and 2001
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations and Comprehensive 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
38
Independent Auditors' Report
The Board of Directors and Stockholders
Broadway Financial Corporation:
We have audited the accompanying consolidated balance sheets of Broadway
Financial Corporation and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations and comprehensive 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Broadway Financial
Corporation and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Los Angeles, California
February 6, 2003
F-1
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, December 31,
2002 2001
------------ ------------
Assets
Cash $ 3,859,000 $ 2,639,000
Federal funds sold 1,500,000 2,600,000
Interest bearing deposits 1,028,000 5,028,000
Investment securities held to maturity (fair value of
$2,046,000 at December 31, 2002) 2,000,000 -
Investment securities available for sale, at fair value 5,007,000 4,504,000
Mortgage-backed securities held to maturity (fair value of $11,317,000
at December 31, 2002 and $14,231,000 at December 31, 2001) 10,843,000 3,931,000
Mortgage-backed securities available for sale 27,697,000 -
Loans receivable, net 140,085,000 3,937,000
Loans receivable held for sale, at lower of cost or fair value 3,770,000 7,362,000
Accrued interest receivable 995,000 943,000
Investments in capital stock of Federal Home Loan Bank, at cost 1,561,000 1,399,000
Office properties and equipment, net 5,811,000 6,001,000
Other assets 750,000 557,000
------------ ------------
Total assets $204,906,000 $178,901,000
============ ============
Liabilities and stockholders' equity
Deposits $156,148,000 $151,156,000
Advances from Federal Home Loan Bank 28,724,000 11,000,000
Advance payments by borrowers for taxes and insurance 311,000 224,000
Deferred income taxes 931,000 556,000
Other liabilities 1,871,000 1,337,000
------------ -----------
187,985,000 164,273,000
Total liabilities
Stockholders' Equity:
Preferred non-convertible, non-cumulative, and non-voting stock, $.01par value,
authorized 1,000,000 shares; issued and outstanding 55,199 shares of
Series A and 100,000 shares of Series B at December 31, 2002 and 55,199
shares of Series A at December 31, 2001 2,000 1,000
Common stock, $.01 par value, authorized 3,000,000 shares; issued and
outstanding 1,815,294 shares at December 31, 2002 and 1,809,476
shares at December 31, 2001 10,000 10,000
Additional paid-in capital 10,512,000 9,481,000
Accumulated other comprehensive gain, net of taxes 57,000 2,000
Retained earnings-substantially restricted 7,005,000 5,804,000
Treasury stock-at cost, 53,648 shares at December 31, 2002
and 51,197 shares at December 31, 2001 (520,000) (469,000)
Unearned Employee Stock Ownership Plan shares (145,000) (201,000)
------------ -----------
Total stockholders' equity 16,921,000 14,628,000
------------ -----------
Total liabilities and stockholders' equity $204,906,000 $178,901,000
============ ============
See accompanying notes to consolidated financial statements.
F-2
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Earnings
Year Ended December 31,
2002 2001
------------ -------------
Interest on loans receivable $10,784,000 $11,452,000
Interest on investment securities held to maturity 68,000 110,000
Interest on investment securities available for sale 247,000 136,000
Interest on mortgage-backed securities 1,109,000 744,000
Other interest income 261,000 556,000
------------ -------------
Total interest income 12,469,000 12,998,000
------------ -------------
Interest on deposits 3,752,000 5,673,000
Interest on borrowings 817,000 580,000
------------ -------------
Total interest expense 4,569,000 6,253,000
------------ -------------
Net interest income before provision for loan losses 7,900,000 6,745,000
Provision for (recovery of) loan losses (142,000) 150,000
------------ -------------
Net interest income after provision for (recovery of) loan losses 8,042,000 6,595,000
Non-interest income:
Service charges 858,000 797,000
Gain on loans receivable held for sale 2,000 5,000
Gain on securities available for sale 90,000 1,000
Other 49,000 132,000
------------ -------------
Total non-interest income 999,000 935,000
------------ -------------
Non-interest expense:
Compensation and benefits 3,669,000 3,261,000
Occupancy expense, net 1,291,000 1,167,000
Advertising and promotional expense 123,000 163,000
Professional services 455,000 402,000
Contracted security services 163,000 164,000
Telephone and postage 118,000 216,000
Stationary, printing and supplies 115,000 109,000
Other 819,000 887,000
------------ -------------
Total non-interest expense 6,753,000 6,369,000
------------ --------------
Earnings before income taxes 2,288,000 1,161,000
Income taxes 847,000 476,000
------------ -------------
Net earnings 1,441,000 685,000
------------ -------------
Other comprehensive income, net of tax:
Unrealized gain on securities available for sale 94,000 4,000
Income tax expense (39,000) (2,000)
------------ ------------
Other comprehensive income, net of tax 55,000 2,000
------------ ------------
Comprehensive earnings $ 1,496,000 $ 687,000
============ ============
Net earnings $ 1,441,000 $ 685,000
Dividends paid on preferred stock (40,000) (28,000)
------------ -----------
Earnings available to common shareholders $ 1,401,000 $ 657,000
============ ===========
Earnings per share-basic $ 0.79 $ 0.37
============ ===========
Earnings per share-diluted $ 0.77 $ 0.37
============ ===========
See accompanying notes to consolidated financial statements.
F-3
Broadway Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Accumulated Retained
Additional Other
Preferred Common Paid-in Comprehensive (Substantially
Stock Stock Capital Income Restricted)
--------- -------- ------------ ------------- --------------
Balance, at December 31, 2000 $ 1,000 $ 10,000 $ 9,460,000 $ - $ 5,322,000
Net earnings for the year
ended December 31, 2001 - - - - 685,000
Unrealized gain on securities
available for sale, net of tax - - - 2,000 -
Treasury stock used for vested
stock awards - - 15,000 - -
Cash dividends paid of $0.10 per
share common stock - - - - (175,000)
Cash dividends paid pf $0.50 per
share preferred stock - - - - (28,000)
Allocation of Employee Stock
Ownership Shares - - 6,000 - -
---------- -------- ------------ ------------- --------------
Balance at December 31, 2001 1,000 10,000 9,481,000 2,000 5,804,000
Net earnings for the year ended
December 31, 2002 - - - - 1,441,000
Unrealized gain on securities
available for sale, net of tax - - - - 55,000
Treasury stock used for vested
stock awards - - - (3,000) -
Treasury stock acquired - - - - -
Issuance of Series B Preferred Stock 1,000 - 999,000 - -
Cash dividends paid of $0.10 per
share common stock - - - - (200,000)
Cash dividends paid of $0.50 per
share preferred stock - - - - (40,000)
---------- -------- ------------ ------------- --------------
Allocation of Employee Stock
Ownership Shares - - 35,000 - -
---------- -------- ------------ ------------- --------------
Balance, at December 31, 2002 $ 2,000 $ 10,000 $10,512,000 $ 57,000 $ 7,005,000
========== ======== ============ ============= ==============
See accompanying notes to consolidated financial statements.
F-4
Earnings Unearned Total
Treasury ESOP Stockholders'
Stock Shares Equity
---------- ---------- --------------
Balance, at December 31, 2000 $(554,000) $(262,000) $ 13,977,000
Net earnings for the year
ended December 31, 2001 - - 685,000
Unrealized gain on securities
avaialble for sale,net of tax - - 2,000
Treasury stock used for vested
stock awards 85,000 - 100,000
Cash dividends paid of $0.10 per
share of common stock - - (175,000)
Cash dividends paid of $0.50 per
share of preferred stock - - (28,000)
Allocation of Employer Stock
Ownership Shares 61,000 67,000
---------- ---------- --------------
Balance at December 31, 2001 (469,000) (201,000) 14,628,000
Net earnings for the year
ended December 31, 2002 - - 1,441,000
Unrealized gain on securities
available for sale, net of tax - - 55,000
Treasury stock used for vested 32,000 - 29,000
stock awards
Treasury stock acquired (83,000) - (83,000)
Issuance of Series B Preferred Stoc - - 1,000,000
Cash dividends paid of $0.10 per
share of common stock - - (200,000)
Cash dividends paid of $0.50 per
share of preferred stock - - (40,000)
--------- ---------- -------------
Allocation of Employee Stock
Ownership Shares - 56,000 91,000
--------- ---------- -------------
Balance, at December 31, 2002 $(520,000) $(145,000) $ 16,921,000
========== ========== =============
F-4a
Broadway Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
------------------------------------
2002 2001
--------------- ----------------
Cash flows from operating activities:
Net earnings $ 1,441,000 $ 685,000
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation 392,000 341,000
Amortization of premium and discounts on loans purchased (145,000) 6,000
Amortization of net deferred loan origination fees (251,000) (81,000)
Amortization of discounts and premiums on investment securities
and mortgage- backed securities 182,000 (178,000)
Amortization of deferred compensation 91,000 90,000
Gain on sale of securities available for sale (90,000) (1,000)
Gain on sale of loans receivable held for sale (2,000) (5,000)
(Gain) loss on disposal of fixed assets 57,000 (18,000)
Gain on sale of real estate acquired through foreclosure (2,000) -
Provision (recovery of) for loan losses (142,000) 150,000
Loans originated for sale (1,079,000) (777,000)
Proceeds from sale of loans receivable held for sale 732,000 604,000
Purchases of loans \ 820,000 (8,001,000)
Changes in operating assets and liabilities:
Accrued interest receivable (52,000) 128,000
Other assets (193,000) 214,000
Accrual for branch closure - 55,000
Deferred income taxes 331,000 154,000
Other liabilities 536,000 (422,000)
Other - 121,000
--------------- ----------------
Total adjustments (455,000) (7,620,000)
--------------- ----------------
Net cash provided by (used in) operating activities 986,000 (6,935,000)
--------------- ----------------
Cash flows from investing activities:
Loans originated, net of refinances (29,766,000) (25,925,000)
Principal repayment on loans 28,810,000 19,605,000
Purchases of interest-bearing deposits - (6,028,000)
Purchases of investment securities held-to-maturity (2,000,000) -
Purchases of investment securities available for sale (42,502,000) (4,600,000)
Purchases of mortgage-backed securities held to maturity (2,093,000) (6,317,000)
Purchases of mortgage-backed securities available for sale (44,963,000) -
Proceeds from maturities of interest bearing deposits 4,000,000 1,000,000
Proceeds from maturities of investment securities held to maturity - 10,623,000
Proceeds from maturities of mortgage-backed securities held to maturity 5,013,000 3,312,000
Proceeds from sale of securities available for sale 42,012,000 -
Proceeds from sale of mortgage-backed securities available for sale 17,424,000 -
Purchase of Federal Home Loan stock (162,000) (83,000)
Proceeds from sale of fixed assets 6,000 222,000
Proceeds from sale of real estate acquired through foreclosure 109,000 -
Capital expenditures for office properties and equipment (266,000) (291,000)
--------------- ----------------
Net cash used in investing activities $ (24,378,000) $ (8,482,000)
--------------- ----------------
See accompanying notes to consolidated financial statements.
F-5
Broadway Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended December 31,
2002 2001
-------------- --------------
Cash flows from financing activities:
Net increase in deposits $ 4,992,000 $ 9,562,000
Increase in advances from the Federal Home Loan Bank 17,724,000 1,000,000
Preferred stock issued 1,000,000 -
Dividends paid (240,000) (203,000)
Purchases Treasury stock (83,000) -
Stock optoins exericsed 32,000 -
Increase in advances by borrowers for taxes and insurance 87,000 30,000
-------------- --------------
Net cash provided by financing activities 23,512,000 10,389,000
-------------- --------------
Net increase (decrease) in cash and cash equivalents 120,000 (5,028,000)
Cash and cash equivalents at beginning of period 5,239,000 10,267,000
-------------- --------------
Cash and cash equivalents at end of year $ 5,359,000 $ 5,239,000
============== ==============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 4,720,000 $ 6,253,000
============== =============
Cash paid for income taxes $ 413,000 $ 696,000
============== ==============
Supplemental disclosure of non-cash investing and financing activities
Transfers of loans to real estate acquired through foreclosure $ 107,000 $ -
============== ==============
See accompanying notes to consolidated financial statements
F-6
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
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. ("the Bank"). The Bank'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, 2002, the Bank operated four
retail-banking offices in Southern California. The Bank 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 the Bank's significant accounting policies.
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, the Bank and BankSmart, Inc. (a dormant
company). 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 2002
presentation.
These consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, to disclose contingent assets and liabilities at the date of the
financial statements, and to report the amounts of revenues and expenses during
the reporting periods. The most significant estimate for the Company relates to
the allowance for loan losses. Actual results could differ from those estimates.
Securities Available For Sale
Investment and mortgage-backed securities not classified as either trading
or held to maturity are considered to be available for sale. Gains and losses
realized on the sale of these securities are based on the specific
identification method. Unrealized gains and losses from available-for-sale
securities are excluded from earnings and reported (net of tax) in accumulated
other comprehensive income until realized. Other than temporary declines in fair
value are recognized as a reduction to current earnings.
Securities Held to Maturity
Investment securities and mortgage-backed securities held-to-maturity 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.
Premiums and discounts on investment securities and mortgage-backed
securities are amortized utilizing the interest method over the contractual
terms of the assets.
F-7
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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 probable and estimable losses on loans receivable.
The allowance is reviewed and adjusted based upon a number of quantitative and
qualitative factors, including current economic trends, risks and uncertainties,
industry experience, historical loss experience, the borrowers' ability to repay
and repayment performance, probability of foreclosure, estimated collateral
values, asset classifications, the Bank's underwriting practices and
management's assessment of credit risk inherent in the portfolio. Loans, 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 the Bank's allowance for loan losses.
Such agencies may require the Bank to make additional provisions for estimated
loan losses based upon their judgments 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 the Bank will be unable to collect all amounts due
(i.e., both principal and interest) according to the contractual terms of the
loan agreement. Impaired loans exclude large groups of smaller balance
homogenous loans that are collectively evaluated for impairment. For the Bank,
loans collectively reviewed for impairment include all loans with principal
balances of less than $250,000. 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, the Bank 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 impaired,
and previously accrued but uncollected interest income is reversed. Interest
income on impaired loans is recognized on a cash basis.
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 the 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 Receivable Held for Sale
Loans receivable 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 Bank
identifies those loans that, 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
F-8
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 for similar loans.
Loan Sales and Servicing
The Bank from time to time sells mortgage loans and loan participations
from originations or portfolios identified as held for sale. Cash proceeds from
loan sales are equal to the principal amount of loans or participations with
yields to the investor based upon current market rates. 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 Operations and
Comprehensive Earnings. The Bank 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 Bank purchases or participates in loans originated by other
institutions. The determination to purchase loans is based upon the Bank's
investment needs and market opportunities. Subject to regulatory restrictions
applicable to savings institutions, the Bank'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 Bank's underwriting policies, which require
consideration of the financial condition of the borrower and the appraised value
of the property, among other factors. Premiums or discounts incurred upon the
purchase of loans are recognized in 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 initially 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 40 years
Furniture, fixtures and equipment 3 to 10 years
Leasehold improvements Shorter of the estimated useful
lives of the assets, or the terms
of the respective leases, not to
exceed 15 years.
F-9
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 using 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.
Preferred Stock
The Series A and Series B preferred stock are non-convertible,
non-cumulative, non-redeemable and non-voting perpetual preferred stock, with a
par value of $0.01 per share and a liquidation preference of $10.00 per share.
Both the Series A and Series B Preferred Stock have non-cumulative annual
dividend rates of 5% of the liquidation preference.
Cash and Cash Equivalents
For purposes of presentation in the Consolidated Statements of Cash Flows,
cash and cash equivalents include cash on hand, cash due from banks, and federal
funds sold. Generally, federal funds are sold for one-day periods.
Earnings Per Share
Basic earnings per share is determined by dividing net income available to
common stockholders by the average number of shares of common stock outstanding,
and diluted earnings per share is determined by dividing net income available to
common stockholders by the average number of shares of common stock outstanding
adjusted for the dilutive effect of common stock equivalents.
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 the Bank's loan portfolio.
The Bank has established a system for monitoring the level of credit risk in its
loan portfolio.
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 the Bank'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.
The Bank's lending activities are concentrated in Southern California. The
Bank currently focuses on the origination of multi-family residential mortgage
loans and, to a lesser extent, single family residential mortgage loans and
loans to community churches. The Bank generally requires collateral to support
borrower commitments on loans receivable. The collateral may take several forms.
Generally, for the Bank's mortgage loans, the collateral will be the underlying
mortgaged property.
Market risk is the risk of loss from adverse changes in market prices and
rates. The Bank's market risk arises primarily from interest rate risk inherent
in the Bank's lending, investing and deposit taking and borrowing activities. To
that end, management actively monitors and manages its interest rate risk
exposure. The Company does not currently engage in trading activities. The
F-10
Company 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 Bank's loans reprice based on the Eleventh
District Cost of Funds Index ("COFI") the 12-month moving average of the one
year Treasury Index ("12 MTA") and the one-year Treasury Index ("Treasury
Index"). The repricing of loans based on the COFI and 12 MTA indexes means the
interest rate on those loans receivable tend to lag market interest rates. The
Treasury Index is considered a current market rate index. At December 31, 2002,
$50.8 million of multi-family residential mortgage loans were based on the
Treasury Index. The Company closely monitors the pricing sensitivity of its
financial instruments.
Stock Option Plan
In January 1997 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based compensation awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the provisions of APB No. 25,
"Accounting for Stock Issued to Employees" and provide pro forma net income and
pro forma earnings per share disclosures for employee stock options and grants
made in 1995 and future years as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB No. 25 and to provide the pro forma disclosure provisions of
SFAS No. 123.
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 Black-Scholes option valuation model does not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
The fair value of options granted by the Company in 2002 was estimated at
the date of grant using a Black-Scholes option valuation model with the
following assumptions:
Risk free interest rate 3.92%
Expected volatility 29.74%
Expected dividend yield 3.00%
Expected option life 10 years
Approximate fair value of options granted $1.94
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 2001 and 2000 would have been as follows:
2002 2001
------------- -------------
Net income
As reported $ 1,441,000 $ 685,000
Pro forma $ 1,351,000 $ 653,000
Basic net income per share
As reported $ 0.79 $ 0.37
Pro forma $ 0.76 $ 0.36
Diluted net income per share
As reported $ 0.77 $ 0.37
Pro forma $ 0.74 $ 0.35
F-11
Employee Stock Ownership Plan
Accounting principles generally accepted in the United States of America
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 (an internally leveraged ESOP) is reflected
as a reduction to equity and the related interest income and expense is not
recorded. The Company records fluctuations in compensation expense as a result
of changes in the fair value of the Company's common stock; however, any such
compensation expense fluctuations results in an offsetting adjustment to paid-in
capital.
Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements
No. 4, 44, and 64, Amendment of SFAS Statement No. 13, and Technical
Corrections" ("SFAS 145"), which updates, clarifies and simplifies existing
accounting pronouncements. SFAS 145 rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt." SFAS 145 amends SFAS No. 13, "Accounting
for Leases," to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The provisions of SFAS 145 related to SFAS No. 4 and SFAS No. 13
are effective for fiscal years beginning and transactions occurring after May
15, 2002, respectively. Management anticipates that SFAS 145 will not have a
material effect on the Company's consolidated financial statement.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), which requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS 146 replaces Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
provisions of SFAS 146 are to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. Management anticipates that SFAS
146 will not have a material effect on the Company's consolidated financial
statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9" ("SFAS 147"), which addresses the financial accounting and
reporting for the acquisition of all or part of a financial institution, except
for a transaction between two or more mutual enterprises. SFAS 147 removes
acquisitions of financial institutions, other than transactions between two or
more mutual enterprises, from the scope of Statement of Financial Accounting
Standards No. 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions," ("SFAS 72"), and Financial Accounting Standards Board
Interpretation No. 9, "Applying APB Opinions No. 16 and 17 When a Savings and
Loan Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method," and requires that those transactions be
accounted for in accordance with Statement of Financial Accounting Standards No.
141, "Business Combinations," and SFAS 142. Thus, the requirement in SFAS 72 to
recognize, and subsequently amortize, any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets acquired as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of SFAS 147.
SFAS 147 also provides guidance on the accounting for the impairment or
disposal of acquired long-term customer-relationship intangible assets of
financial institutions such as depositor- and borrower-relationship intangible
assets and credit cardholder intangible assets. Those intangible assets are
subject to the same undiscounted cash flow recoverability test and impairment
loss recognition and measurement provisions that SFAS 144 requires for other
long-lived assets that are held and used. The provisions of SFAS 147 are
effective on October 1, 2002. Management anticipates that SFAS 147 will not have
a material effect on the Company's consolidated financial statements.
F-12
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation--Transition and Disclosure", which amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), which provides
alternative methods of transition for enterprises that elect to change to the
SFAS 123 fair value method of accounting for stock-based employee compensation.
SFAS 148 will permit two additional transition methods for entities that adopt
the preferable SFAS 123 fair value method of accounting for stock-based employee
compensation. Both of those methods avoid the ramp-up effect arising from
prospective application of the fair value method under the existing transition
provisions of SFAS 123. In addition, under the provisions of SFAS 148, the
original Statement 123 prospective method of transition for changes to the fair
value method will no longer be permitted in fiscal periods beginning after
December 15, 2003.
SFAS 148 will also amend the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The provisions of SFAS 148 are effective for
fiscal years ended after December 15, 2002. The disclosures to be provided in
annual financial statements will be required for fiscal years ended after
December 15, 2002, and the disclosures to be provided in interim financial
reports will be required for interim periods begun after December 15, 2002, with
earlier application encouraged. Management anticipates the adoption of SFAS 148
will not have a material effect on the Company's consolidated financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57, and 107 and a rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is require to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002. The disclosure requirements are effective for financial statements of
interim and annual periods ending after December 15, 2002. Management
anticipates that the application of this Interpretation is not expected to have
a material effect on the Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable entities created after January 31,
2003, and to variable interests in variable interest entities obtained after
January 31, 2003. For public enterprises, with a variable interest in a variable
interest entity created before February 1, 2003, the Interpretation applies no
later than the beginning of the first interim or annual reporting period
beginning after June 15, 2003. The Interpretation required certain disclosures
in financial statements issued after January 31, 2003, if it is reasonably
possible that public enterprises will consolidate or disclose information about
variable interest entities when the Interpretation becomes effective. Management
anticipates the application of this Interpretation is not expected to have a
material effect on the Company's consolidated financial statements.
F-13
3. Investment Securities
The following table provides a summary of investment securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
----------- ----------- ---------- -----------
December 31, 2002:
Held to maturity:
Federal Agency Debentures $2,000,000 $ 46,000 - $2,046,000
----------- ---------- ---------- -----------
$2,000,000 $ 46,000 - $2,046,000
=========== ========== ========== ===========
Available for sale:
Mutual Funds $5,002,000 $ 5,000 - $5,007,000
---------- ---------- ---------- -----------
$5,002,000 $ 5,000 - $5,007,000
=========== ========== ========== ===========
December 31, 2001:
Available for sale:
Mutual Funds $4,500,000 $ 4,000 - $4,504,000
---------- ---------- ---------- -----------
$4,500,000 $ 4,000 - $4,504,000
=========== ========== ========== ===========
The remaining contractual maturities for investment securities at December
31, 2002 are as follows:
Amortized
Cost Fair Value
------------ -----------
Due in one year or less $5,002,000 $5,007,000
Due after one year through five years - -
Due after five years through ten years 2,000,000 2,046,000
------------ -----------
Total $7,002,000 $7,053,000
============ ===========
At December 31, 2002 and 2001, the Company had accrued interest receivable
on investment securities of $51,000 and $14,000, respectively.
F-14
4. Mortgage-backed Securities
The following table provides a summary of agency mortgage-backed securities
held-to-maturity:
December 31, 2002:
Gross Gross
Amortized Unrealized Unrealized
Agency Cost Gain Loss Fair Value
------------ ------------ ----------- --------- ------------
FNMA $ 8,590,000 $ 369,000 $ - $ 8,959,000
GNMA 2,111,000 100,000 - 2,211,000
FHLMC 142,000 5,000 - 147,000
------------ ----------- --------- ------------
$10,843,000 $ 474,000 $ - $11,317,000
============ =========== ========= ============
December 31, 2001:
Gross Gross
Amortized Unrealized Unrealized
Agency Cost Gain Loss Fair Value
------------ ------------ ----------- --------- ------------
FNMA $ 10,212,000 $ 243,000 $ - $10,455,000
GNMA 3,351,000 42,000 - 3,393,000
FHLMC 368,000 15,000 - 383,000
------------ ----------- --------- ------------
$ 13,931,000 $ 300,000 $ - $14,231,000
============ =========== ========= ============
The remaining contractual maturities for investment securities at December
31, 2002 are as follows:
Amortized
Cost Fair Value
------------ -------------
Due within one year $ - $ -
Due one year through five years - -
Due after five years 10,843,000 11,317,000
------------ -------------
Total $10,843,000 $ 11,317,000
============ =============
The following table provides a summary of mortgage-backed securities
available for sale with a comparison of carrying and fair value:
December 31, 2002
Gross Gross
Amortized Unrealized Unrealized
Agency Cost Gain Loss Fair Value
------------ ------------ ----------- --------- ------------
FHLMC $ 20,269,000 $ 68,000 $ - $20,337,000
FNMA 7,334,000 26,000 - 7,360,000
------------ ----------- --------- ------------
$ 27,603,000 $ 94,000 $ - $27,697,000
============ =========== ========= ============
F-15
The remaining contractual matruities for mortgage-backed securities
available for sale at December 31, 2002 are as follows:
Amortized
Cost Fair Value
------------ -------------
Due within one year $ - $ -
Due one year through five years - -
Due after five years 27,603,000 27,697,000
------------ -------------
Total $27,603,000 $ 27,697,000
============ =============
At December 31, 2002 and 2001, the Company had accrued interest receivable
on mortgage-backed securities of $219,000 and $132,000, respectively. During the
year ended December 31, 2002, the Company sold $16.8 million in mortgage-backed
securities available for sale and realized gains of $70,000, which have been
included in gain on securities available for sale interest income in the
accompanying Statement of Operations and Comprehensive Earnings.
5. Loans Receivable, Net and Loans Receivable Held for Sale
The following is a summary of loans receivable, net:
December 31,
---------------------------
2002 2001
------------ -------------
Held for investment:
Real estate:
Residential:
One to four units $ 29,506,000 $ 33,478,000
Five or more units 92,586,000 82,652,000
Construction 1,726,000 -
------------ -------------
Total residential 123,818,000 116,130,000
------------ -------------
Non-residential 16,924,000 18,383,000
------------ -------------
Total real estate 140,742,000 134,513,000
Loans secured by deposit accounts 350,000 897,000
Other 1,593,000 1,206,000
------------ -------------
Total gross loans receivable 142,685,000 136,616,000
------------ -------------
Plus:
Premium on loans purchased 1,000 4,000
Less:
Loans in process 568,000 16,000
Allowance for loan losses 1,429,000 1,571,000
Deferred loan fees, net 431,000 683,000
Unamortized discounts 173,000 413,000
------------ -------------
Loans receivable, net $140,085,000 $133,937,000
============ =============
Loans receivable held for sale:
Residential:
One to four units $ 586,000 $ 237,000
Five or more units 3,184,000 7,125,000
------------ -------------
Loans receivable held for sale $ 3,770,000 $ 7,362,000
============ =============
Weighted average interest rate 6.84% 7.67%
============ =============
F-16
Activity in the allowance for loan losses is summarized as follows:
Year Ended December 31,
---------------------------
2002 2001
------------ -------------
Balance at beginning of year $ 1,571,000 $ 1,421,000
Provision for (recovery of) loan losses (142,000) 150,000
Charge-offs - -
------------ -------------
Balance at end of year $ 1,429,000 $ 1,571,000
============ =============
At December 31, 2002 and 2001, the Bank had accrued interest receivable on
loans of $701,000 and $797,000, respectively.
The Bank serviced loans for others totaling $11.1 million and $12.7 million
at December 31, 2002 and 2001, respectively.
At December 31, 2002 and 2001, the Bank had loans to directors amounting to
$658,000 and $667,000, respectively. In the opinion of management, the terms of
these loans are based upon the normal market for such loans. At December 31,
2002 these loans were performing in accordance with their terms.
The following is a summary of the Bank's non-accrual loans by loan type at
December 31, 2002 and 2001:
December 31,
----------------------
2002 2001
--------- ---------
Residential real estate $ 96,000 $257,000
Other 39,000 211,000
--------- ---------
Total non-accrual loans $135,000 $468,000
========= =========
The Bank had no restructured loans or accruing loans that are contractually
past due 90 days or more at December 31, 2002 and 2001.
The gross amount of interest income that would have been recorded during
the years ended December 31, 2002 and 2001, if non-accrual loans had been
current in accordance with their original terms, was $13,000 and $58,000,
respectively. For the years ended December 31, 2002 and 2001, $13,000 and
$57,000, respectively, was actually received on non-accrual loans and is
included in interest income on loans in the accompanying Consolidated Statements
of Operations and Comprehensive Earnings. The Bank had no commitments to lend
additional funds to borrowers whose loans are on non-accrual at December 31,
2002 and 2001.
At December 31, 2002 and 2001, the total recorded investment in impaired
loans was approximately $39,000 and $211,000, respectively. There were related
impairment allowances of $16,000 and $211,000 at December 31, 2002 and 2001,
respectively. Provisions for losses and any related recoveries related to
impaired loans are added to the allowance for loan losses. During the years
ended December 31, 2002 and 2001, the Bank's average investment in impaired
loans was $147,000 and $303,000, respectively, and interest income recorded on
impaired loans during these periods totaled $5,000 and $36,000 respectively,
none of which was recorded utilizing the accrual basis method of accounting. At
December 31, 2002 and 2001, all impaired loans were unsecured fully reserved
lines of credit.
Substantially all of the Bank's real estate loans are secured by properties
located in Southern California. At each of December 31, 2002 and 2001,
approximately 86%, of the loan portfolio consisted of loans secured by
residential real estate. In addition, approximately 11% and 13% of the loan
portfolio at December 31, 2002 and 2001, respectively, was secured by
F-17
non-residential real estate. Loans secured by church real estate represented 52%
and 59% of non-residential real estate loans at December 31, 2002 and 2001,
respectively.
6. Investment in Capital Stock of the FHLB
As a member of the Federal Home Loan Bank (FHLB) System, the Bank is
required to own capital stock in the FHLB, which is carried at cost, in an
amount at least equal to the greatest 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. The Bank was in
compliance with this requirement with an investment in FHLB stock at December
31, 2002 and 2001, of $1.6 million and $1.4 million, respectively.
7. Office Properties and Equipment, net
Office properties and equipment consist of the following:
December 31,
------------------------------------
2002 2001
---------------- ----------------
Land $ 1,723,000 $ 1,723,000
Office buildings and improvements 4,047,000 3,984,000
Furniture, fixtures and equipment 1,598,000 1,726,000
---------------- ----------------
7,368,000 7,433,000
Less accumulated depreciation (1,557,000) (1,432,000)
---------------- ----------------
Office properties and equipment, net $ 5,811,000 $ 6,001,000
================ ================
During the years ended December 31, 2002 and 2001, depreciation expense
totaled $392,000 and $341,000, respectively.
8. Deposits
A summary of deposits by type of account and interest rate at the dates
indicated is as follows:
December 31,
----------------------------------------------
2002 2001
------------------------ --------------------
Rate* Amount Rate* Amount
-------- ------------- ----- ------------
Balance by account type:
NOW account and other demand deposits 0.34% $ 12,533,000 0.34% $ 12,055,000
Non-interest bearing demand deposits - 10,811,000 - 7,510,000
Money market deposits 1.36% 8,740,000 1.89% 8,906,000
Passbook 0.79% 29,478,000 1.03% 25,471,000
Certificates of deposit 3.11% 94,586,000 4.44% 97,214,000
------------- ------------
$156,148,000 $151,156,000
============= ============
------------
* Weighted average interest rate.
The aggregate amount of time deposits equal to or exceeding $100,000 totaled
$42.6 million and $35.3 million at December 31, 2002 and 2001, respectively.
During the years ended December 31, 2002 and 2001, the weighted average
interest rate on total deposits was 2.42% and 3.90%, respectively.
F-18
Maturities of certificates of deposit at December 31, 2002, are summarized
as follows:
Maturity Amount
2003 $ 64,662,000
2004 13,090,000
2005 8,020,000
2006 3,694,000
Thereafter 5,120,000
-------------
$ 94,586,000
=============
Interest expense by type of deposit account is summarized in the following
table for the periods indicated:
Year ended December 31,
--------------------------
2002 2001
----------- -----------
Money market deposits $ 119,000 $ 106,000
Passbook deposits 232,000 289,000
NOW and other demand deposits 43,000 78,000
Certificates of deposit 3,358,000 5,200,000
----------- ----------
$3,752,000 $5,673,000
=========== ==========
9. Advances from the Federal Home Loan Bank and Other Borrowings
At December 31, 2002 and 2001, FHLB advances amounted to $28.7 million and
$11.0 million, respectively. The outstanding borrowings at December 31, 2002 and
2001 had weighted average interest rates of 2.67% and 4.93%, respectively.
Pursuant to collateral agreements with the FHLB, advances are secured by loans
totaling $69.6 million and $20.9 million, and mortgage-backed securities of $6.3
million and $3.2 million at December 31, 2002 and 2001, respectively. The
available unused borrowing capacity with the FHLB approximated $30.7 million and
$18.1 million as of December 31, 2002 and 2001, respectively.
The maturities of FHLB advances at December 31, 2002 were as follows:
Year Ending
December 31,
------------
2003 $ 4,000,000
2004 4,000,000
2005 1,500,000
2007 19,224,000
------------
$ 28,724,000
============
On January 17, 2003, the Company entered into an unsecured $5.0 million
revolving line of credit agreement with First Federal Bank of California.
Interest is at the prime rate if the loan proceeds are used for CRA lending, and
at prime plus one percent if the loan proceeds are used for any other purpose.
The line of credit is renewable annually, and may be converted to a four-year
term loan at the same rate of interest.
F-19
10. Income Taxes
The following is a summary of the provision for income tax expense:
2002 2001
---------- ----------
Current taxes:
Federal income $ 505,000 $ 217,000
State franchise 11,000 105,000
---------- ----------
516,000 322,000
---------- ----------
Deferred taxes:
Federal income 243,000 144,000
State franchise 88,000 10,000
---------- ----------
331,000 154,000
---------- ----------
$ 847,000 $ 476,000
========== ==========
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:
2002 2001
----------- ----------
Computed "expected" federal taxes $ 778,000 $ 395,000
Increases to taxes resulting from:
California franchise tax,
net of federal income tax 65,000 76,000
Other 4,000 5,000
------------ ----------
$ 847,000 $ 476,000
============ ==========
In prior years, the Bank 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, the Bank could deduct from taxable income an allowance for bad
debts based upon the experience method. Under provisions of the Small Provision
Job Protection Act of 1996, the Bank lost the use of the method of calculating a
bad debt deduction based on a percentage of taxable income. However, the Bank
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, 2002 is substantially restricted for tax
purposes and includes $3,013,000 in all periods, for which no provision for
federal income tax has been made. If in the future, this tax bad debt reserve is
used for any purpose other than to absorb bad debt losses, federal income taxes
may be imposed at the then applicable rates.
F-20
The tax effects of temporary and permanent differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 2002 and 2001, are presented below:
2002 2001
------------ -----------
Deferred tax assets:
Allowance for loan losses $ 565,000 $ 623,000
Accrued liabilities 48,000 166,000
Lower of cost or market adjustment 22,000 60,000
State income taxes 31,000 27,000
Other 5,000 44,000
------------ ------------
Net deferred tax assets 671,000 920,000
Deferred tax liabilities:
Basis difference on fixed assets (399,000) (438,000)
Deferred loan fees (599,000) (515,000)
FHLB stock dividend (537,000) (504,000)
Other (67,000) (19,000)
------------ ------------
Total gross deferred tax liabilities (1,602,000) $(1,476,000)
------------ ------------
Net deferred tax liability $ (931,000) $ (556,000)
============ ============
Deferred tax assets are initially recognized for differences between the
financial statement carrying amount and the tax bases of assets and liabilities
which will result in future deductible amounts and operating loss and tax credit
carryforwards. A valuation allowance is then established to reduce that deferred
tax asset to the level at which it is "more likely than not" that the tax
benefits will be realized. Realization of tax benefits of deductible temporary
differences and operating loss or credit carryforwards depends on having
sufficient taxable income of an appropriate character within the carryback and
carryforward periods. Sources of taxable income that may allow for the
realization of tax 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 the Company's gross deferred tax assets,
management believes that it is more likely than not that the Company will
realize the tax benefit related to these assets.
At December 31, 2002, the Company had a net current tax receivable of
$198,000. At December 31, 2001, the Company had a net current tax receivable of
$296,000.
11. Employee Benefit Plans
Stock Incentive Plans
Broadway Federal 401(k) Plan
The Bank established a 401(k) Plan in which employees could elect to enroll
each January 1 or July 1 of every year provided that they were at least 21 years
of age and had been employed for at least six months prior to the semiannual
enrollment date. During January 2003, the Bank amended the Plan to eliminate the
six-month employment requirement. 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 2002 and 2001, the Bank's contribution amounted to $42,000 and
$40,000, respectively.
F-21
Recognition and Retention Plan (RRP)
The Bank 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 the Company. Under the RRP, awards are granted in
the form of shares of common stock held by the RRP. These shares represent
deferred compensation and are accounted for as a reduction of stockholder's
equity. Shares allocated vest over a period of five years commencing one year
from the date of grant. Awards are automatically vested upon a change in control
of the Company or the Bank. In the event that, before reaching normal
retirement, a non-employee director terminates service with the Company or the
Bank, that person's non-vested awards are forfeited. Shares available and
unissued under the Plan totaled 7,773 at December 31, 2002. The expense related
to the RRP for the fiscal years ended December 31, 2002 and 2001 was immaterial.
Performance Equity Program (PEP)
The Bank 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 the Company's growth and
profitability in the future. Under the PEP, awards are granted in the form of
shares of common stock held by the PEP. These shares represent deferred
compensation and are accounted for as a reduction of stockholders' equity. In
the event that, before reaching normal retirement, an officer or employee
terminates service with the Company or the Bank, 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. Shares available and unissued under the Plan
totaled 8,738 at December 31, 2002. On July 25, 2002, the Company awarded 15,208
(adjusted for stock dividends PEP Base Grants to employees. The new grants were
awarded at a price of $6.68 (adjusted for stock split), representing the fair
market value of the Company's stock at the date of grant. The expense related to
the PEP for the fiscal years ended December 31, 2002 and 2001 was immaterial.
The table below reflects the RRP and PEP activity for the periods
indicated:
Stock Programs*
-------------------------------------------------------------
PEP RRP Total
------------------- ------------------ ------------------
Shares Price** Shares Price** Shares Price
-------- -------- ------- -------- -------- -------
Outstanding at January 1, 2002 8,392 $ 4.63 2,073 $ 5.50 10,465 $ 4.82
Granted 15,208 6.68 - - 15,208 6.68
Exercised (2,504) 5.09 (1,314) 5.50 (3,818) 5.23
Forfeited (2,256) 4.34 - 5.50 (2,256) 4.43
-------- ------- --------
Outstanding at December 31, 2002 18,840 $ 6.31 759 $ - 19,599 $ 6.28
======== ======== ======= ======== ======== =======
Outstanding at January 1, 2001 21,940 $ 5.03 10,524 $ 5.50 32,464 $ 5.19
Granted - - - - - -
Exercised (10,628) 5.36 (7,782) 5.50 (18,410) 5.41
Forfeited (2,920) 4.68 669 5.50 (3,589) 4.68
-------- ------- --------
Outstanding at December 31, 2001 8,392 $ 4.63 2,073 $ 5.50 10,465 $ 4.82
======== ======== ======= ======== ======== =======
------------
*Adjusted for stock split
** Weighted average price.
F-22
Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan (ESOP) for all employees
who attain a certain age and have completed one year of service during which
they served a minimum of 1,000 hours. The ESOP is internally leveraged, with a
$625,000 note from the Company. The ESOP purchased 134,974 shares (adjusted for
stock dividends) of the common stock of the Company issued in the conversion
from mutual to stock form of organization. The loan will be repaid principally
from the Bank's discretionary contributions to the ESOP, net of dividends paid,
over a period of ten years. At December 31, 2002 and 2001, the outstanding
balance of unallocated shares was $145,000 and $201,000, respectively, which is
shown as Unearned ESOP shares in the equity section of the consolidated 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 the Bank or the Company, will not receive any benefit if
such termination is prior to the participant's completion of three years of
credited service. Forfeitures will be reallocated among the remaining
participating employees in the same proportion as contributions. Participants
will become fully vested in the shares allocated to their accounts upon a change
in control of the Bank or the Company. Benefits are payable upon retirement,
death or disability of the participant. Since the quarterly contributions are
discretionary, the benefits payable under the ESOP cannot be estimated.
Compensation expense related to the allocation of shares at December 31, 2002
and 2001 was $91,000 and $66,000, respectively.
During the year ended December 31, 2002 and 2001, 12,176 and 13,052 shares,
respectively, were allocated, leaving an unallocated balance of 31,265 and
43,440 shares at December 31, 2002 and 2001, respectively (adjusted for stock
dividends). The fair value of unallocated ESOP shares totaled
$289,000 and $273,000 at December 31, 2002 and 2001, respectively.
Stock Option Plans
In 1996, the stockholders of the Company approved 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").
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 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 ten years from the date of grant. Such
options become vested and exercisable at the rate of twenty percent (20%)
annually commencing one year from the date of grant. Options available and
unissued under the Plan totaled 72,085 at December 31, 2002. On July 25, 2002,
November 15, 2000 and September 17, 1997, options to purchase 183,538, 48,006
and 78,892 shares, respectively, (adjusted for stock split) were granted. As of
December 31, 2002, 14,846 had been exercised.
The purpose of the Stock Option Plan is to promote the growth and
profitability of the Company and the Bank 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
F-23
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 ten years from the date of grant. Options available and unissued under
the Plan totaled 20,255 at December 31, 2002. On November 15, 2000 and September
17, 1997, options to purchase 7,000 and 32,290 shares, respectively, were
granted. As of December 31, 2002 no grants had been exercised.
The table below reflects activity in the stock option plans for the periods
indicated:
Stock Option Plan
----------------------------------------------------------------------------------
LTIP Stock Option Plan Total
------------------------ ----------------------- --------------------------
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- --------- ---------- ---------- ------------
Outstanding at January 1, 2002 117,693 $ 5.11 44,290 $ 5.32 161,983 $ 5.17
Granted 183,538 $ 6.68 - - 183,538 $ 6.68
Exercised (14,846) $ 5.46 (2,000) 4.80 (16,846) $ 5.30
Expired or canceled (8,472) $ 4.72 (6,698) $ 5.50 (15,170) $ 5.06
---------- --------- ----------
Outstanding at December 31, 2002 277,913 $ 6.14 35,592 $ 5.32 313,505 $ 6.05
========== ========== ========= ========== ========== ============
Outstanding at January 1, 2001 131,048 $ 5.07 44,290 $ 5.32 175,338 $ 5.13
Granted - $ - - - - $ -
Exercised - $ - - - - $ -
Expired or canceled (13,356) $ 4.72 - - (13,356) $ 4.72
---------- --------- ----------
Outstanding at December 31, 2001 117,693 $ 5.11 44,290 $ 5.32 161,983 $ 5.17
========== ========== ========= ========== ========== ============
The following table summarizes information about the stock options
outstanding at December 31, 2002 and 2001:
Options Outstanding Options Exercisable
---------------------------------------------- ---------------------------------------------
Weighted Weighted
Outstanding Average Weighted Outstanding Average Weighted
at Remaining Average at Remaining Average
Stock Option Plan Exercise December Contractual Exercise December 31, Contractual Exercise
Price 31, 2002 Life Price 2002 Life Price
------------------- --------- ----------- -------------- ----------- ------------ ------------- -----------
December 31, 2002:
LTIP $ 5.50 64,723 4.71 years $ 5.50 59,038 4.71 years $ 5.50
$ 4.34 29,652 7.88 years $ 4.34 11,859 7.88 years $ 4.34
$ 6.68 183,538 9.57 years $ 6.68 - $ 6.68
Stock Option Plan $ 5.50 29,792 4.71 years $ 5.50 27,526 4.71 years $ 5.50
$ 4.34 5,800 7.88 years $ 4.34 2,200 7.88 years $ 4.34
December 31, 2001:
LTIP $ 5.50 79,006 5.71 years $ 5.50 63,636 5.71 years $ 5.50
$ 4.34 38,688 8.88 years $ 4.34 8,182 8.88 years $ 4.34
Stock Option Plan $ 5.50 37,290 5.71 years $ 5.50 30,378 5.71 years $ 5.50
$ 4.34` 7,000 8.88 years $ 4.34 1,400 8.88 years $ 4.34
F-24
12. Commitments and Contingent Liabilities
Commitments
The Company, and the Bank, have operating leases on certain premises and
equipment on a long-term basis. Some of these leases require that the Company,
or the Bank, pay property taxes and insurance. Lease expense was approximately
$135,000 in 2002 and $117,000 in 2001. Annual minimum lease commitments
attributable to long-term leases at December 31, 2002 are as follows:
Premises Equipment Total
---------- ---------- ----------
Year ending December 31:
2003 $ 42,000 $ 111,000 $ 153,000
2004 42,000 111,000 153,000
2005 42,000 103,000 145,000
2006 42,000 100,000 142,000
2007 42,000 75,000 117,000
Thereafter through 2013 249,000 - 249,000
---------- --------- ----------
$ 459,000 $ 500,000 $ 959,000
========== ========= ==========
The Bank had commitments to originate loans of approximately $1.17 million
at December 31, 2002. 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. The Bank had no commitments to sell loans at
December 31, 2002.
Contingent Liabilities
In the ordinary course of business, the Company and the Bank 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 the Bank would not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
13. Regulatory Capital
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the capital regulations of the OTS promulgated thereunder
("Capital Regulations") established three capital requirements - a "leverage
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 the Bank. 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 the Bank's financial statements. At December 31,
2002 and 2001, the Bank 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. "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.
F-25
The tangible capital requirement adopted by the OTS Director requires a
savings institution to maintain "tangible capital" in an amount not less than
1.5% of adjusted total assets, which is the minimum amount required by FIRREA.
"Tangible capital" means core capital less any intangible assets (including
supervisory goodwill), plus purchased mortgage servicing rights, valued at the
lower of the maximum percentage established by the FDIC or the amount includable
in core capital as defined under the Capital Regulations.
The risk-based capital requirements provide, among other things that the
capital ratio applicable to an asset will be adjusted to reflect the degree of
defined credit risk associated with such asset. In addition, the asset base for
computing a savings institution's risk-based capital requirement includes
off-balance sheet items, including loans and other assets sold with
subordination or recourse. Generally, the Capital Regulations require savings
institutions to maintain "total capital" equal to 8% of risk weighted assets.
"Total capital" for these purposes consists of core capital and supplementary
capital. Supplementary capital includes among other things certain types of
preferred stock and subordinated debt and, subject to certain limitations,
general valuation allowances.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") contains "prompt corrective action" provisions pursuant to which
banks and savings institutions are to be classified into one of the five
categories based primarily upon capital adequacy. The OTS regulations
implementing the "prompt corrective action" provisions of FDICIA define the five
capital categories as follows: (i) an institution is "well capitalized" if it
has a total risk-based capital ratio of 10.00% or greater, has a Tier 1
risk-based capital ratio (Tier 1 capital to total risk-weighted assets) of 6.00%
or greater, has a core capital ratio of 5.00% or greater and is not subject to
any written capital order or directive to meet and maintain a specific capital
level or any capital measure; (ii) an institution is "adequately capitalized" if
it has a total risk-based capital ratio of 8.00% or greater, has a Tier 1
risk-based capital ratio of 4.00% or greater and has a core capital ratio of
4.00% or greater (3% 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, 2002 and 2001, the Bank's regulatory capital was in excess of the
amount necessary to be "well capitalized." Management believes there have been
no conditions or events since the last notification by the OTS that would change
the institution's category.
F-26
The table below presents the Bank's capital ratios as compared to the
requirements under FDICIA at December 31, 2002 and 2001:
Minimum For Capital Minimum Amount Required
Actual Adequacy Purposes to be Well Capitalized
----------------------- ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- --------- ----------- -------- ------------ --------
(Dollars in thousands)
December 31, 2002:
Leverage/Tangible Ratio $ 14,347 7.01% $ 8,185 4.0% $ 10,231 5.00%
Tier I Risk-based ratio $ 14,347 11.96% $ 4,799 4.0% $ 7,199 6.00%
Total Risk-based ratio $ 15,776 13.15% $ 9,599 8.0% $ 11,998 10.00%
December 31, 2001:
Leverage/Tangible Ratio $ 12,723 7.12% $ 7,145 4.0% $ 8,930 5.0%
Tier I Risk-based ratio $ 12,723 10.92% $ 4,659 4.0% $ 6,989 6.0%
Total Risk-based ratio $ 14,084 12.09% $ 9,318 8.0% $ 11,648 10.0%
The table below presents the Bank's capital ratios as compared to the
requirements under FIRREA at December 31, 2002 and 2001:
Tangible Capital Core Capital Risk-Based Capital
---------------------- ------------------------ --------------------------
Amount Ratio Amount Ratio Amount Ratio
--------- --------- ------------ -------- ------------ ----------
(Dollars in thousands)
December 31, 2002:
Actual $ 14,347 7.01% $ 14,347 7.01% $ 15,776 13.15%
Required 3,069 1.50% 8,185 4.00% 9,599 8.00%
--------- --------- ------------ -------- ------------ ----------
Excess $ 11,278 5.51% $ 6,162 3.01% $ 6,177 5.15%
========= ========= ============ ======== ============ ==========
December 31, 2001:
Actual $ 12,723 7.12% $ 12,723 7.12% $ 14,084 12.09%
Required 2,679 1.50% 7,145 4.00% 9,318 8.00%
--------- --------- ------------ -------- ------------ ----------
Excess $ 10,044 5.62% $ 5,578 3.12% $ 4,766 4.09%
========= ========= ============ ======== ============ ==========
14. Series B Preferred Stock
On December 30, 2002 the Company issued 100,000 shares of non-voting,
non-cumulative Series B Preferred Stock to Fannie Mae for gross proceeds of $1.0
million. The Company intends to use the proceeds from the sale of preferred
shares to invest in Broadway Federal, which will allow Broadway Federal to
engage in activities that will promote, among other things, the availability of
affordable housing in the Bank's market area.
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. All components of cash and cash equivalents and interest bearing
deposits are presumed to have approximately equal book and fair values because
the period over which such amounts are realized are relatively short. 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
F-27
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-28
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 2002 and 2001.
Carrying Value Fair Value
-------------- -------------
Assets:
Investment securities $ 7,007,000 $ 7,053,000
Mortgage-backed securities 38,540,000 39,014,000
Loans receivable 143,855,000 148,994,000
Federal Home Loan Bank stock 1,561,000 1,561,000
Liabilities:
Deposits 156,148,000 157,830,000
Federal Home Loan Bank advances 28,724,000 28,986,000
December 31, 2001
Assets:
Investment securities $ 4,504,000 $ 4,504,000
Mortgage-backed securities 13,931,000 14,231,000
Loans receivable 141,299,000 147,967,000
Federal Home Loan Bank stock 1,399,000 1,399,000
Liabilities:
Deposits 151,156,000 147,220,000
Federal Home Loan Bank advances 11,000,000 11,283,000
16. Earnings Per Share
For the years ended December 31, 2002 and 2001, basic earnings per share
are computed based on earnings available to common stockholders and the weighted
average number of shares for each respective year. Basic and diluted earnings
per share were the same for 2002 and 2001.
The Company's stock-based compensation awards were considered outstanding
as of the grant date for purposes of computing diluted EPS for the year ended
December 31, 2002 and 2001. 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.
F-29
The following table sets forth the computation of basic and diluted
earnings per share.
Year ended December 31,
--------------------------------------------------------------------------------
2002 2001
-------------------------------------- --------------------------------------
Per- Per-
Net earnings Avg. Shares share Net earnings Avg. Shares share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- ------------- ------ ------------ ------------- -------
Net earnings $1,441,000 $ 685,000
Less:
Preferred stock dividends (40,000) (28,000)
------------- ------------
Basic earnings per share 1,401,000 1,780,617 $0.79 $ 657,000 1,758,098 $0.37
Effect of dilutive
stock options - 39,734 - 5,738
------------- ------------- ------------ -------------
Diluted earnings per share $1,401,000 1,820,351 $0.77 $ 657,000 1,763,836 $0.37
============= ============= ====== ============ ============= =======
17. Unaudited Quarterly Financial Data
First Second Third Fourth
2002 Quarter Quarter Quarter Quarter Year
------------ ----------- ------------ ------------ -------------
Interest income $3,159,000 $3,095,000 $3,020,000 $3,195,000 $12,469,000
Interest expense 1,176,000 1,088,000 1,022,000 1,283,000 4,569,000
Net interest income 1,983,000 2,007,000 1,998,000 1,912,000 7,900,000
Provision for (recovery of)
loan losses - - - (142,000) (142,000)
Income before taxes 554,000 533,000 629,000 572,000 2,288,000
Net earnings 326,000 322,000 440,000 353,000 1,441,000
Basic earnings per share 0.18 0.35 0.25 0.19 0.79
Diluted earnings per share(1) 0.17 0.35 0.24 0.18 0.77
Market range:
High market price 6.40 8.00 8.35 10.16 10.16
Low market price 6.20 6.25 6.45 7.79 6.20
First Second Third Fourth
2001 Quarter Quarter Quarter Quarter Year
------------- ---------- ------------ ----------- ------------
Interest income $3,234,000 $3,305,000 $3,272,000 $3,187,000 $12,998,000
Interest expense 1,656,000 1,621,000 1,556,000 1,420,000 6,253,000
Net interest income 1,578,000 1,684,000 1,716,000 1,767,000 6,745,000
Provision for loan losses 30,000 45,000 30,000 45,000 150,000
Income before taxes 315,000 256,000 407,000 183,000 1,161,000
Net earnings 181,000 156,000 240,000 108,000 685,000
Basic earnings per share 0.10 0.08 0.13 0.05 0.37
Diluted earnings per share (1) 0.10 0.08 0.13 0.05 0.37
Market range:
High market price 4.72 5.75 6.55 6.30 6.55
Low market price 3.44 3.87 4.99 4.63 3.44
------------
(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.
F-30
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 the Bank and BankSmart, Inc. (a dormant
company). 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 the Bank has paid $500,000 in
dividends to the parent company.
Balance Sheets
December 31,
----------------------------
2002 2001
------------ ------------
Assets
Cash $ 2,113,000 $ 1,515,000
Investment in subsidiaries 14,504,000 12,733,000
Other assets 413,000 434,000
------------ ------------
$17,030,000 $14,682,000
============ ============
Liabilities and stockholders' equity
Other liabilities $ 109,000 $ 54,000
Stockholders' equity 16,921,000 14,628,000
------------ ------------
$17,030,000 $14,682,000
============ ============
Statements of Earnings
Year ended December 31,
--------------------------
2002 2001
------------ ----------
Interest income $ 12,000 $ 27,000
Other income 20,000 23,000
Other expense (255,000) (307,000)
------------ ----------
Earnings (loss) before income taxes (223,000) (257,000)
Income taxes (benefit) (92,000) (108,000)
------------ ----------
Earnings (loss) before equity in
undistributed earnings of subsidiaries (131,000) (149,000)
Equity in undistributed earnings
of subsidiaries 1,572,000 834,000
------------ ----------
Net earnings $1,441,000 $ 685,000
============ ==========
F-31
Statements of Cash Flows
Year ended December 31,
--------------------------
2002 2001
------------ -----------
Cash flows from operating activities
Net earnings $ 1,441,000 $ 685,000
Adjustments to reconcile net earnings to
cash provided by operating activities:
Equity in undistributed earnings of subsidiaries (1,572,000) (834,000)
Decrease in interest receivable - 21,000
Decrease in other assets 21,000 47,000
Increase (Decrease) in other liabilities 55,000 (23,000)
Other (56,000) 76,000
------------ -----------
Net cash used in operating activities (111,000) (28,000)
------------ -----------
Cash flows from investing activities
Proceeds from maturities of investment
securities held to maturity - 1,000,000
------------ -----------
Net cash used in investing activities - 1,000,000
------------ -----------
Cash flows from financing activities
Dividend received from subsidiary - 500,000
Stock reissued 32,000 85,000
Proceeds from issuance of Preferred Stock 1,000,000 -
Stock repurchased (83,000) -
Dividends paid (240,000) (203,000)
------------ -----------
Net cash used in financing activities 709,000 382,000
------------ -----------
Net increase in cash and cash equivalents 598,000 1,354,000
Cash and cash equivalents, beginning of year 1,515,000 161,000
------------ -----------
Cash and cash equivalents, end of year $ 2,113,000 $1,515,000
============ ===========
19. Subsequent Event
On January 31, 2003 the Company's Board of Directors adopted a Shareholder
Rights Plan (the "Rights Plan"). The Board's purpose in adopting the Rights Plan
is to protect shareholder value in the event of an unsolicited offer to acquire
the Company, particularly one that does not provide equitable treatment to all
shareholders. Adoption of the Rights Plan is intended to encourage a potential
acquirer of the Company to negotiate directly with the Board. In connection with
the adoption of the Rights Plan, the Board declared a dividend distribution of
one Right for each outstanding common share held by shareholders of record on
February 13, 2003.
F-32