UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark one)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2012
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-27464
BROADWAY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 95-4547287 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
4800 Wilshire Boulevard, Los Angeles, California | 90010 | |
(Address of principal executive offices) | (Zip Code) |
(323) 634-1700
(Registrants Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered | |
Common Stock, par value $0.01 per share (including attached preferred stock purchase rights) |
The NASDAQ Stock Market, LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrants most recently completed second fiscal quarter: $1,991,000
Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date: As of March 11, 2013, 1,917,422 shares of the Registrants common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants definitive proxy statement for the 2013 annual meeting of shareholders are incorporated by reference in Part III, Items 10 through 14 of this report.
PART I | ||||||||
Item 1. | Business | 1 | ||||||
Item 2. | Properties | 27 | ||||||
Item 3. | Legal Proceedings | 27 | ||||||
Item 4. | Mine Safety Disclosure | 27 | ||||||
PART II | ||||||||
Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 28 | ||||||
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 30 | ||||||
Item 8. | Financial Statements and Supplementary Data | 41 | ||||||
Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 41 | ||||||
Item 9A. | Controls and Procedures | 41 | ||||||
Item 9B. | Other Information | 42 | ||||||
PART III | ||||||||
Item 10. | Directors, Executive Officers and Corporate Governance | 43 | ||||||
Item 11. | Executive Compensation | 43 | ||||||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 43 | ||||||
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 43 | ||||||
Item 14. | Principal Accountant Fees and Services | 43 | ||||||
PART IV | ||||||||
Item 15. | Exhibits and Financial Statement Schedules | 43 | ||||||
Signatures | 46 |
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Forward-Looking Statements
Certain statements herein, including without limitation, certain matters discussed under Managements Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of this Form 10-K, 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 our 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 or implied by such statements. 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-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law.
The following factors, among others, could cause future results to differ materially from historical results or from those anticipated by forward-looking statements included in this Form 10-K: (1) the level of demand for mortgage loans, which is affected by such external factors as general economic conditions, market interest rate levels, tax laws, and the demographics of our lending markets; (2) the direction and magnitude of changes in interest rates and the relationship between market interest rates and the yield on our interest-earning assets and the cost of our interest-bearing liabilities; (3) the rate and amount of loan losses incurred and projected to be incurred by us, increases in the amounts of our nonperforming assets, the level of our loss reserves and managements judgments regarding the collectability of loans; (4) changes in the regulation of lending and deposit operations or other regulatory actions, whether industry wide or focused on our operations, including increases in capital requirements or directives to increase loan loss allowances or make other changes in our business operations; (5) actions undertaken by both current and potential new competitors; (6) the possibility of continuing adverse trends in property values or economic trends in the residential and commercial real estate markets in which we compete; (7) the effect of changes in economic conditions; (8) the effect of geopolitical uncertainties; (9) continuing difficulties in successfully completing our pending recapitalization which is described in this report or an inability to obtain and retain sufficient operating cash at our holding company level; and (10) other risks and uncertainties detailed in this Form 10-K, including those described in Part II, Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations.
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ITEM 1. | BUSINESS |
General
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 Banks conversion from a federally chartered mutual savings association to a federally chartered stock savings bank. In connection with the conversion, the Banks 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 is currently regulated by the Board of Governors of the Federal Reserve System (FRB). The Bank is currently regulated by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC). The Banks deposits are insured up to applicable limits by the FDIC. The Bank is also a member of the Federal Home Loan Bank (FHLB) of San Francisco. See Regulation for further descriptions of the regulatory system to which the Company and the Bank are subject.
Business Overview; Recent Developments
Since 2008, we have experienced elevated levels of loan delinquencies and non-performing assets which have resulted in operating losses. Due to these factors and an assessment of our business and assets in the course of a regulatory examination of the Bank in March 2010, the Company and the Bank were designated as being in troubled condition. The Company and the Bank agreed to the issuance of cease and desist orders to them in September 2010, which we refer to collectively as the C&Ds. The C&Ds mandated improvements in enumerated aspects of our business operations and place limitations on us, including prohibition of the payment of dividends by the Bank or the Company, or the incurrence of any new debt or payment on existing debt by the Company, in each case without prior regulatory approval. These and related matters, including our results of operations, loan delinquencies and nonperforming assets, are discussed below in this Item 1, under the caption Regulation Cease and Desist Orders and in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The Company is pursuing a comprehensive recapitalization plan to improve the Companys capital structure. The principal elements of the recapitalization plan include agreements with the holders of the outstanding series of the Companys preferred stock to exchange their respective holdings into the Companys common stock or equivalents on negotiated terms, agreements with our senior lender to exchange a portion of its debt for common stock or equivalents and modify the terms of the remaining loan, and the concurrent sale by the Company of approximately $4 million of additional common stock in private placement transactions. Based on agreements reached with certain of the holders of our preferred stock and discussions with potential common stock investors to date, we anticipate that these transactions would, if completed, result in the issuance of approximately 17.8 million new shares of the Companys common stock, which would constitute approximately 90% of the pro forma outstanding shares of the Companys common stock. The number of shares of common stock that would be required to be issued pursuant to the negotiated terms of the recapitalization plan exceeds the Companys currently authorized and unissued shares of common stock. We plan to seek shareholder approval to increase our authorized number of shares of common stock and such other shareholder approvals as may be required to complete the recapitalization. Our recapitalization plan is discussed in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Capital Resources.
The Company is in default on a bank loan in the principal amount of $5.0 million and has other payment obligations, including interest payments on $6.0 million of Floating Rate Junior Subordinated Debentures (which are suspended while the Companys senior debt is in default) and operating expenses that it is not currently able to pay. The Company has initiated discussion with the OCC regarding the possibility of a limited dividend by the Bank to the Company and is continuing to explore other potential means of obtaining cash for the payment of its separate company obligations while it pursues completion of its recapitalization plans. The directors and officers of the Bank purchased $200 thousand of the Companys common stock during the second half of 2012.
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These conditions and the Companys operating losses raise substantial doubt about the Companys ability to continue as a going concern. These and related matters, including the potential effects on the Companys financial statements and other financial information included in this report, all of which have been prepared on the basis that the Company will continue as a going concern, are discussed in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations and in Note 2 of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
We are headquartered in Los Angeles, California and our principal business is the operation of our wholly-owned subsidiary, Broadway Federal. Broadway Federals principal business consists of attracting retail deposits from the general public in the areas surrounding our branch offices and investing those deposits, together with funds generated from operations and borrowings, primarily in multi-family mortgage loans, commercial real estate loans and one-to-four family mortgage loans. In addition, we invest in securities issued by the federal government and federal agencies, residential mortgage-backed securities and other investments.
Our revenues are derived primarily from interest income on loans and investments. Our principal costs are interest expenses we incur on deposits and borrowings, together with general and administrative expenses. Our earnings are significantly affected by general economic and competitive conditions, particularly changes in market interest rates and U.S. Treasury yield curves, government policies and actions of regulatory authorities.
Lending Activities
General
Our loan portfolio is comprised primarily of mortgage loans which are secured by multi-family properties, commercial real estate, including churches, and one to four-family properties. The remainder of the loan portfolio consists of commercial business loans, construction loans and consumer and other loans. At December 31, 2012, our net loan portfolio totaled $251.7 million, or 67% of total assets.
We emphasize the origination of adjustable-rate mortgage loans (ARMs) and hybrid ARM loans (ARM loans having an initial fixed rate period) primarily for retention in our portfolio. We retain these loans in order to maintain a substantial percentage of our loans that have more frequent repricing, thereby reducing our exposure to interest rate risk. At December 31, 2012, approximately 99% of our mortgage loans had adjustable rates.
The types of loans that we originate are subject to federal laws and regulations. The interest rates that we charge 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.
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The following table sets forth the composition of our loans held for investment by type, dollar amount and percentage of the total loan portfolio at the dates indicated.
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2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||||
Amount | Percent of total |
Amount | Percent of total |
Amount | Percent of total |
Amount | Percent of total |
Amount | Percent of total |
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(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
One-to-four units |
$ | 57,733 | 21.94 | % | $ | 76,682 | 22.57 | % | $ | 82,764 | 20.56 | % | $ | 90,747 | 20.03 | % | $ | 68,478 | 20.25 | % | ||||||||||||||||||||
Five or more units |
83,350 | 31.68 | % | 108,161 | 31.83 | % | 128,534 | 31.92 | % | 146,291 | 32.28 | % | 87,679 | 25.93 | % | |||||||||||||||||||||||||
Commercial real estate |
41,124 | 15.63 | % | 54,259 | 15.97 | % | 72,770 | 18.08 | % | 82,276 | 18.16 | % | 66,861 | 19.77 | % | |||||||||||||||||||||||||
Church |
76,254 | 28.98 | % | 89,099 | 26.22 | % | 97,634 | 24.25 | % | 101,007 | 22.29 | % | 84,041 | 24.85 | % | |||||||||||||||||||||||||
Construction |
735 | 0.28 | % | 3,790 | 1.11 | % | 5,421 | 1.35 | % | 5,547 | 1.22 | % | 5,505 | 1.63 | % | |||||||||||||||||||||||||
Commercial |
3,826 | 1.45 | % | 6,896 | 2.03 | % | 12,178 | 3.02 | % | 23,166 | 5.11 | % | 22,357 | 6.61 | % | |||||||||||||||||||||||||
Consumer |
104 | 0.04 | % | 929 | 0.27 | % | 3,288 | 0.82 | % | 4,110 | 0.91 | % | 3,246 | 0.96 | % | |||||||||||||||||||||||||
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Gross loans |
263,126 | 100.00 | % | 339,816 | 100.00 | % | 402,589 | 100.00 | % | 453,144 | 100.00 | % | 338,167 | 100.00 | % | |||||||||||||||||||||||||
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Plus: Premiums on loans purchased |
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Less: |
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Loans in process |
74 | 202 | 371 | 822 | 1,499 | |||||||||||||||||||||||||||||||||||
Deferred loan fees (costs), net |
(557 | ) | (473 | ) | (889 | ) | (817 | ) | (213 | ) | ||||||||||||||||||||||||||||||
Unamortized discounts |
17 | 18 | 33 | 39 | 51 | |||||||||||||||||||||||||||||||||||
Allowance for loan losses |
11,869 | 17,299 | 20,458 | 20,460 | 3,559 | |||||||||||||||||||||||||||||||||||
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Total loans held for investment |
$ | 251,723 | $ | 322,770 | $ | 382,616 | $ | 432,640 | $ | 333,273 | ||||||||||||||||||||||||||||||
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Multi-Family and Commercial Real Estate Lending
Our primary lending emphasis has been on the origination of multi-family and commercial real estate loans. These loans are secured primarily by apartment buildings or by properties used for business purposes, such as small office buildings, health care facilities and retail facilities located in our primary market area.
Our multi-family loans amounted to $83.4 million and $108.2 million at December 31, 2012 and 2011, respectively. Multi-family loans represented 32% of our gross loan portfolio at December 31, 2012 and December 31, 2011. All of the multi-family residential mortgage loans outstanding at December 31, 2012 were ARMs. The vast majority of our multi-family loans amortize over 30 years. As of December 31, 2012, our single largest multi-family credit had an outstanding balance of $3.2 million, was current and was secured by a 38-unit apartment complex in Montebello, California. At December 31, 2012, the average balance of a loan in our multi-family portfolio was approximately $376 thousand.
Our commercial real estate loans amounted to $41.1 million and $54.3 million at December 31, 2012 and 2011, respectively. Commercial real estate loans represented 16% of our gross loan portfolio at December 31, 2012 and December 31, 2011. All except one commercial real estate loan outstanding at December 31, 2012 were ARMs. Most commercial real estate loans are originated with principal repayments on a 30 year amortization schedule but are due in 15 years. As of December 31, 2012, our single largest commercial real estate credit had an outstanding principal balance of $2.7 million, was current and was secured by a commercial building located in Los Angeles, California. At December 31, 2012, the average balance of a loan in our commercial real estate portfolio was approximately $603 thousand.
3
The interest rates on multi-family and commercial ARM loans are based on a variety of indices, including the 6-Month London InterBank Offered Rate Index (6-Month LIBOR), the 1-Year Constant Maturity Treasury Index (1-Yr CMT), the 12-Month Treasury Average Index (12-MTA), the 11th District Cost of Funds Index (COFI), and the Wall Street Journal Prime Rate (Prime Rate). We currently offer loans with interest rates that adjust monthly, semi-annually, and annually. Borrowers are required to make monthly payments under the terms of such loans.
Loans secured by multi-family and commercial real properties are granted based on the income producing potential of the property and the financial strength of the borrower. 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 required principal and interest payments, or debt service), and the ratio of the loan amount to the lower of the selling price or the appraised value of the collateral.
We seek to mitigate the risks associated with multi-family and commercial real estate loans described below by applying appropriate underwriting requirements, which include limitations on loan-to-value ratios and debt service coverage ratios. Under our underwriting policies, loan-to-value ratios on our multi-family and commercial real estate loans usually do not exceed 75% of the lower of the selling price or the appraised value of the underlying property. We also generally require minimum debt service coverage ratios of 115% for multi-family loans and 125% for commercial real estate loans. Properties securing multi-family and commercial real estate loans are appraised by management-approved independent appraisers. Title insurance is required on all loans.
Multi-family and commercial real estate 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. Because payments on loans secured by multi-family and commercial real properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or general economy, such as we are experiencing with the current economic downturn. Continued adverse economic conditions in our primary lending market area could result in reduced cash flows on multi-family and commercial real estate loans, vacancies and reduced rental rates on such properties. We seek to reduce these risks by originating such loans on a selective basis and generally restrict such loans to our general market area. In 2008, we ceased out-of-state lending for all types of lending. As of December 31, 2012, we had no large out-of-state loans.
Originating loans secured by church properties is a market niche in which we have been active since our inception. We believe that the importance of church organizations in the social and economic structure of the communities we serve makes church lending an important aspect of our community orientation. We further believe 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 commercial properties. Nonetheless, adverse economic conditions can result in risks to loan repayment that are similar to those encountered in other types of commercial 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. Because of these factors, we do not believe the current real estate market and economic environment support pursuing the origination of additional church loans. Additionally, the cease and desist order issued to Broadway Federal by the OTS, described below under the caption Regulation, restricts us from originating church loans. As a result, we have suspended the origination of church loans. At December 31, 2012, the average balance of a loan in our church loan portfolio was approximately $627 thousand. Our church loans totaled $76.3 million and $89.1 million at December 31, 2012 and 2011, respectively.
The underwriting standards for loans secured by church properties are different than for other commercial real estate properties in that the ratios used in evaluating the loans are based upon the level and history of church member contributions as a repayment source rather than income generated by rents or leases.
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One-to-Four Family Mortgage Lending
While we are primarily a multi-family and commercial real estate lender, we also originate ARMs and fixed rate loans secured by one-to-four family (single-family) residences, with maturities of up to 30 years. Substantially all of our single-family loans are secured by properties located in Southern California, with most being in our primary market areas of Mid-City and South Los Angeles. Loan originations are generally obtained from our loan representatives or third party brokers, existing or past customers, and referrals from members of churches or other organizations in the local communities where we operate. Single-family loans totaled $57.7 million and $76.7 million at December 31, 2012 and 2011, respectively. Single-family loans represented 22% of our gross loan portfolio at December 31, 2012, compared to 23% at December 31, 2011. Of the single-family residential mortgage loans outstanding at December 31, 2012, 2% were fixed rate loans and 98% were ARMs.
The interest rates for our single-family ARMs are indexed to COFI, 6-Month LIBOR, 12-MTA and 1-Yr. CMT. We currently offer loans with interest rates that adjust monthly, semi-annually, and annually. Borrowers are required to make monthly payments under the terms of such loans.
We qualify our ARM borrowers based upon the fully indexed interest rate (LIBOR 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 we determine to adjust for market and other competitive factors. The ARMs that we offer have a lifetime adjustment limit that is set at the time the loan is approved. In addition, because of interest rate caps and floors, market rates may exceed or go below the respective maximum or minimum rates payable on our ARMs.
Our policy is to originate one-to-four family residential mortgage loans in amounts of up to 90% of the lower of the appraised value or the selling price of the property securing the loan. Any loan in excess of 80% of the appraised value or selling price of the property securing the loan generally requires private mortgage insurance or the Bank charges a higher interest rate to cover the additional risk associated with making a loan with a loan to value ratio higher than 80%. Under certain circumstances, we may originate loans of up to 97% of the selling price if private mortgage insurance is obtained. We may originate loans based on other parameters for loans that are originated for committed sales to other investors. Properties securing a single-family loan are appraised by an approved independent appraiser and title insurance is required on all such loans.
Mortgage loans that we originate generally include due-on-sale clauses, which provide us with the contractual right to declare the loan immediately due and payable in the event the borrower transfers ownership of the property.
Commercial Lending
We originate and purchase non-real estate commercial loans that are secured by business assets, the franchise value of the business, if applicable, and individual assets such as deposit accounts, securities and automobiles. Most of these loans are originated with maturities of up to 5 years. Commercial loans amounted to $3.8 million and $6.9 million at December 31, 2012 and 2011, respectively. At December 31, 2012, commercial loans represented 1% of our gross loan portfolio, compared to 2% at December 31, 2011. Of the commercial loans outstanding at December 31, 2012, 3% were fixed rate loans and 97% were variable rate loans. As of December 31, 2012, our single largest commercial credit had a total outstanding principal balance of $1.7 million and is the only remaining loan to a sports franchise. The loan was modified and converted into a term loan in October 2011. The borrower has been performing in accordance with the modified terms.
In 2007, management and the Board of Directors decided to terminate the Banks prior strategy of lending to sports franchises and reduced its participation in nationally syndicated corporate loan facilities in order to focus on financing opportunities within our market area.
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Construction Lending
Construction loans totaled $735 thousand and represented less than 1% of our gross loan portfolio at December 31, 2012, compared to $3.8 million, or 1% of our gross loan portfolio at December 31, 2011. We provide loans for construction of single-family, multi-family and commercial real estate projects and for land development. We generally make construction and land loans at variable interest rates based upon the Prime Rate. Generally, we require a loan-to-value ratio not exceeding 75% to 80% on a purchase and a loan-to-cost ratio of 80% to 90% on a refinance of construction loans.
Construction loans involve risks that are different from those for completed project lending because we advance loan funds based upon the security and estimated value at completion of the project under construction. If the borrower defaults on the loan, we may have to advance additional funds to finance the projects completion before the project can be sold. Moreover, construction projects are affected by uncertainties inherent in estimating construction costs, potential delays in construction schedules, market demand and the accuracy of estimates of the value of the completed project considered in the loan approval process. In addition, construction projects can be risky as they transition to completion and lease-up. Tenants who may have been interested in leasing a unit or apartment may not be able to afford the space when the building is completed, or may fail to lease the space for other reasons such as more attractive terms offered by competing lessors, making it difficult for the building to generate enough cash flow for the owner to obtain permanent financing. Many construction project owners are faced with these risks given the current economic downturn. Consequently, we are not originating construction loans at this time.
Consumer Lending
Consumer loans totaled $104 thousand and $929 thousand at December 31, 2012 and 2011, respectively, representing less than 1% of our gross loan portfolio. In 2011, our consumer loans primarily consisted of loans secured by savings accounts which were 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 deposit account, depending on the type of account, and with maturity dates based on the earlier of one year from origination or the maturity date of the deposit account. We currently are not originating loans secured by savings accounts.
Loan Originations, Purchases and Sales
Loan originations are derived from our loan personnel, local mortgage brokers, advertising and referrals from customers. For all loans that we originate, 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 us. The Board annually reviews our appraisal policy. Management reviews annually the qualifications and performance of independent appraisers that we use.
It is our 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, we may require private mortgage insurance and the borrower is required to make payments to a mortgage impound account from which we make disbursements to pay private mortgage insurance premiums, property taxes and hazard and flood insurance as required.
Our Board of Directors has authorized the following loan approval limits: if the total of the borrowers existing loans and the loan under consideration is $500,000 or less, the new loan may be approved by the Chief Executive Officer or the Chief Credit Officer; if the total of the borrowers existing loans and the loan under consideration is from $500,001 to $1,750,000, the new loan must be approved by three Loan Committee members, one of whom must be a Board appointed non-management Director; and if the total of existing loans and the loan under consideration is more than $1.75 million, the new loan must be approved by four Loan Committee members, two of whom must be Board appointed non-management Directors or by the Executive Committee of the Board of Directors. In addition, it is our practice that all loans approved only by management be reported to the Loan Committee by the following month, and be ratified by the Board of Directors.
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From time to time, we purchase loans originated by other institutions based upon our investment needs and market opportunities. The determination to purchase specific loans or pools of loans is subject to our underwriting policies, which consider, among other factors, the financial condition of the borrower, the location of the underlying collateral property and the appraised value of the collateral property. We did not purchase any loans during the years ended December 31, 2012 and 2011.
We originate and purchase loans for investment and for sale. Loan sales are made from the loans held for sale portfolio and from loans originated during the period that are designated as held for sale. It is our current practice to sell most single-family conforming fixed rate mortgage loans that we originate, retaining a limited amount in our portfolio. Conforming loans are loans that qualify in terms of maximum loan size and other criteria for purchase by FNMA and FHLMC. We also may sell commercial real estate and multi-family ARMs that we originate based upon our investment and liquidity needs and market opportunities. At December 31, 2012, we had 48 loans totaling $19.1 million held for sale. The servicing rights associated with sold loans are recorded as assets based upon their fair values. At December 31, 2012 and 2011, we had $141 thousand and $362 thousand, respectively, in mortgage servicing rights.
We receive monthly loan servicing fees on loans sold and serviced for others, primarily insured financial institutions. Generally, we collect these fees by retaining a portion of the loan collections in an amount equal to an agreed percentage of the monthly loan installments, 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, 2012 and 2011, we were servicing $14.7 million and $36.5 million, respectively, of loans for others. The servicing rights associated with sold loans are recorded as assets based upon their fair values. At December 31, 2012 and 2011, we had $141 thousand and $362 thousand, respectively, in mortgage servicing rights.
The following table sets forth loan originations, purchases, sales and principal repayments for the periods indicated, including loans held for sale.
2012 | 2011 | 2010 | ||||||||||
(In thousands) | ||||||||||||
Gross loans: |
||||||||||||
Beginning balance |
$ | 353,473 | $ | 433,281 | $ | 475,078 | ||||||
Loans originated: |
||||||||||||
One-to-four units |
3,084 | 619 | 2,369 | |||||||||
Five or more units |
17,092 | 2,986 | 10,683 | |||||||||
Commercial real estate |
180 | 364 | 1,056 | |||||||||
Church |
| | 395 | |||||||||
Construction |
| | | |||||||||
Commercial |
169 | 1,148 | 2,817 | |||||||||
Consumer |
2 | | 133 | |||||||||
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Total loans originated |
20,527 | 5,117 | 17,453 | |||||||||
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Less: |
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Principal repayments |
71,041 | 44,236 | 37,463 | |||||||||
Sales of loans |
2,901 | 12,231 | 11,410 | |||||||||
Loan charge-offs |
7,412 | 17,643 | 5,372 | |||||||||
Transfer of loans held for investment to real estate owned |
10,151 | 10,815 | 5,005 | |||||||||
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Ending balance (1) |
$ | 282,495 | $ | 353,473 | $ | 433,281 | ||||||
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(1) | Includes loans held-for-sale totaling $19.4 million, $13.7 million and $30.7 million at December 31, 2012, 2011 and 2010, respectively, exclusive of a $318 thousand, $674 thousand and $1.3 million valuation allowance at December 31, 2012, 2011 and 2010, respectively. |
7
Loan Maturity and Repricing
The following table sets forth the contractual maturities of the loans in our loans held for investment at December 31, 2012 and does not reflect the effect of prepayments or scheduled principal amortization.
One-to- four Units |
Five or more units |
Commercial real estate |
Church | Construction | Commercial | Consumer | Gross loans receivable |
|||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Amounts Due: |
||||||||||||||||||||||||||||||||
One year or less |
$ | 21 | $ | | $ | 167 | $ | 3,661 | $ | 273 | $ | 1,544 | $ | 22 | $ | 5,688 | ||||||||||||||||
After one year: |
||||||||||||||||||||||||||||||||
One year to five years |
765 | 16 | 2,585 | 140 | 462 | 118 | 13 | 4,099 | ||||||||||||||||||||||||
After five years |
56,947 | 83,334 | 38,372 | 72,453 | | 2,164 | 69 | 253,339 | ||||||||||||||||||||||||
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Total due after one year |
57,712 | 83,350 | 40,957 | 72,593 | 462 | 2,282 | 82 | 257,438 | ||||||||||||||||||||||||
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Total |
$ | 57,733 | $ | 83,350 | $ | 41,124 | $ | 76,254 | $ | 735 | $ | 3,826 | $ | 104 | $ | 263,126 | ||||||||||||||||
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The following table sets forth the dollar amount of gross loans receivable, excluding loans held for sale, at December 31, 2012 which are contractually due after December 31, 2013, and whether such loans have fixed interest rates or adjustable interest rates.
Adjustable | Fixed | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
One-to-four units |
$ | 56,397 | $ | 1,315 | $ | 57,712 | ||||||
Five or more units |
83,350 | | 83,350 | |||||||||
Commercial real estate |
40,618 | 339 | 40,957 | |||||||||
Church |
72,593 | | 72,593 | |||||||||
Construction |
462 | | 462 | |||||||||
Commercial |
2,282 | | 2,282 | |||||||||
Consumer |
13 | 69 | 82 | |||||||||
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Total |
$ | 255,715 | $ | 1,723 | $ | 257,438 | ||||||
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% of total |
99.33 | % | 0.67 | % | 100.00 | % | ||||||
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Asset Quality
General
The underlying credit quality of our loan portfolio is dependent primarily on each borrowers ability to continue to make required loan payments and, in the event a borrower is unable to continue to do so, the value of the collateral securing the loan, if any. A borrowers ability to pay typically is dependent, in the case of one to four-family mortgage loans and consumer loans, primarily on employment and other sources of income, and in the case of multi-family and commercial real estate loans, on the cash flow generated by the property, which in turn is impacted by general economic conditions. Other factors, such as unanticipated expenditures or changes in the financial markets, may also impact a borrowers ability to make loan payments. Collateral values, particularly real estate values, are also impacted by a variety of factors, including general economic conditions, demographics, property maintenance and collection or foreclosure delays.
Although we believe our underwriting and loan review procedures are appropriate for the various kinds of loans we originate or purchase, our results of operations and financial condition have been adversely affected by the deterioration in the quality of our loan portfolio. Therefore, one of our most important operating objectives is to improve asset quality. Management is using a number of strategies to achieve this goal, including maintaining sound credit standards in loan originations, regular, recurring monitoring of the loan portfolio, including through independent third party loan reviews, and employing active collection and workout processes for delinquent or problem loans.
8
Delinquencies
We perform a monthly review of all delinquent loans and loan delinquency reports are made monthly to the Internal Asset Review Committee of the Board of Directors. When a borrower fails to make a required payment on a loan, we take a number of steps to induce the borrower to cure the delinquency and restore the loan to current status. The procedures we follow with respect to delinquencies vary depending on the type of loan, the type of property securing the loan, and the period of delinquency. In the case of residential mortgage loans, we generally send the borrower a written notice of non-payment promptly after the loan becomes past due. In the event payment is not received promptly thereafter, additional letters are sent and telephone calls are made. If the loan is still not brought current and it becomes necessary for us to take legal action, we generally commence foreclosure proceedings on all real property securing the loan. In the case of commercial real estate loans, we generally contact the borrower by telephone and send a written notice of non-payment upon expiration of the applicable grace period. Decisions as to when to commence foreclosure actions for commercial real estate loans are made on a case-by-case basis. We may consider loan workout arrangements with these types of borrowers in certain circumstances.
The following table sets forth our loan delinquencies by type and amount at the dates indicated.
December 31, 2012 | December 31, 2011 | December 31, 2010 | ||||||||||||||||||||||||||||||||||||||||||||||
60-89 Days | Non-accrual loans and loans delinquent 90 days or more |
60-89 Days | Non-accrual loans and loans delinquent 90 days or more |
60-89 Days | Non-accrual loans and loans delinquent 90 days or more |
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Number of loans |
Principal balance of loans |
Number of loans |
Principal balance of loans |
Number of loans |
Principal balance of loans |
Number of loans |
Principal balance of loans |
Number of loans |
Principal balance of loans |
Number of loans |
Principal balance of loans |
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(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
One-to-four units |
5 | $ | 871 | 28 | $ | 8,145 | 5 | $ | 2,464 | 18 | $ | 7,974 | 3 | $ | 71 | 15 | $ | 6,227 | ||||||||||||||||||||||||||||||
Five or more units |
1 | 554 | 10 | 4,268 | 1 | 63 | 10 | 5,946 | 4 | 1,068 | 4 | 2,250 | ||||||||||||||||||||||||||||||||||||
Commercial real estate |
| | 11 | 7,090 | 1 | 525 | 14 | 5,787 | 1 | 1,287 | 14 | 10,321 | ||||||||||||||||||||||||||||||||||||
Church |
| | 29 | 17,245 | 3 | 1,440 | 33 | 24,669 | 7 | 5,230 | 23 | 18,281 | ||||||||||||||||||||||||||||||||||||
Construction |
| | 1 | 273 | 1 | 264 | 1 | 302 | | | 1 | 320 | ||||||||||||||||||||||||||||||||||||
Commercial |
| | | | | | | | | | 2 | 3,768 | ||||||||||||||||||||||||||||||||||||
Consumer |
| | 1 | 69 | | | 1 | 70 | | | 2 | 2,265 | ||||||||||||||||||||||||||||||||||||
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Total |
6 | $ | 1,425 | 80 | $ | 37,090 | 11 | $ | 4,756 | 77 | $ | 44,748 | 15 | $ | 7,656 | 61 | $ | 43,432 | ||||||||||||||||||||||||||||||
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Delinquent loans to total gross loans, including loans held for sale |
0.50 | % | 13.13 | % | 1.35 | % | 12.66 | % | 1.77 | % | 10.02 | % |
Non-Performing Assets
Non-performing assets (NPAs) include non-accrual loans and real estate owned through foreclosure or deed in lieu of foreclosure (REO). NPAs at December 31, 2012 decreased to $45.3 million, or 12.11% of total assets, from $51.4 million, or 12.43% of total assets, at December 31, 2011. The decrease in non-performing assets was primarily due to a decrease in non-accrual loans which was partially offset by an increase in REO. Non-accrual loans decreased $7.6 million to $37.1 million at December 31, 2012, from $44.7 million at December 31, 2011. These loans consist of delinquent loans that are 90 days or more past due and troubled debt restructurings (TDRs) that do not qualify for
9
accrual status. While non-accrual loans decreased as compared to the prior year, they continue to remain at historically elevated levels as a result of the prolonged levels of high unemployment in our market area, as well as the decline in the housing market in 2008 through 2011. The decrease in non-accrual loans was primarily a result of homes sold by borrowers through negotiated short sales, loan charge-offs, loan sales, and loans foreclosed on by the Bank.
The following table provides information regarding our non-performing assets at the dates indicated.
December 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Non-accrual loans: |
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One-to-four units |
$ | 8,145 | $ | 7,974 | $ | 6,227 | $ | 4,756 | $ | | ||||||||||
Five or more units |
4,268 | 5,946 | 2,250 | 1,644 | 200 | |||||||||||||||
Commercial real estate |
7,090 | 5,787 | 10,321 | 6,061 | 541 | |||||||||||||||
Church |
17,245 | 24,669 | 18,281 | 12,942 | 2,578 | |||||||||||||||
Construction |
273 | 302 | 320 | | | |||||||||||||||
Commercial |
| | 3,768 | 7,269 | 110 | |||||||||||||||
Consumer |
69 | 70 | 2,265 | 2,249 | 34 | |||||||||||||||
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Total non-accrual loans |
37,090 | 44,748 | 43,432 | 34,921 | 3,463 | |||||||||||||||
Loans delinquent 90 days or more and still accruing |
| | | | | |||||||||||||||
Real estate owned acquired through foreclosure |
8,163 | 6,699 | 3,036 | 2,072 | | |||||||||||||||
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Total non-performing assets |
$ | 45,253 | $ | 51,447 | $ | 46,468 | $ | 36,993 | $ | 3,463 | ||||||||||
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Non-accrual loans as a percentage of gross loans, including loans held for sale |
13.13 | % | 12.66 | % | 10.02 | % | 7.35 | % | 0.95 | % | ||||||||||
Non-performing assets as a percentage of total assets |
12.11 | % | 12.43 | % | 9.60 | % | 7.10 | % | 0.85 | % |
No accruing loans were contractually past due by 90 days or more at December 31, 2012 or 2011. We had no commitments to lend additional funds to borrowers whose loans were on non-accrual status at December 31, 2012.
We discontinue accruing interest on loans when the loans become 90 days delinquent as to their payment due date (missed three payments), unless the timing of collections are reasonably estimable and collection is probable. In addition, we reverse all previously accrued and uncollected interest through a charge to interest income. While loans are in non-accrual status, interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
We may agree to modify the contractual terms of a borrowers loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring. Loans modified in a troubled debt restructuring are placed on non-accrual status until we determine that future collection of principal and interest is reasonably assured, which requires that the borrower demonstrate performance according to the restructured terms, generally for a period of at least six months. Loans modified in a troubled debt restructuring which are included in non-accrual loans totaled $19.3 million at December 31, 2012 and $19.4 million at December 31, 2011. Excluded from non-accrual loans are restructured loans that were not delinquent at the time of modification or loans that have complied with the terms of their restructured agreement for six months or such longer period as management deems appropriate for particular loans, and have therefore been returned to accruing status. Restructured accruing loans totaled $18.0 million at December 31, 2012 and $17.7 million at December 31, 2011.
During 2012, gross interest income that would have been recorded on non-accrual loans had they performed in accordance with their original terms, totaled $2.9 million. Actual interest recognized on non-accrual loans and included in net earnings for the year 2012 was $1.0 million.
We update our estimates of collateral value for non-performing loans which are 90 days or more delinquent every nine months. We also update the collateral values for certain other loans when the Internal Asset Review Committee believes repayment of such loans may be dependent on the value of the underlying collateral. For one-to-four family
10
mortgage loans, updated estimates of collateral value are obtained through appraisals and automated valuation models. For multi-family and commercial real estate properties, we estimate collateral value through appraisals or internal cash flow analyses when current financial information is available, coupled with, in most cases, an inspection of the property. When the collateral value is less than the recorded investment in the loan, the deficiency is classified as a loss and charged off. See Allowance for Loan Losses for full discussion of the allowance for loan losses.
REO is real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at the lower of cost or fair value less estimated selling costs. Any excess of carrying value over fair value at the time of acquisition is charged to the allowance for loan losses at the time of foreclosure. Thereafter, we charge non-interest expense for the property maintenance and protection expenses incurred as a result of owning the property, as well as for any decreases in the properties estimate fair value after foreclosure. These provisions for decreases in property values are maintained in a separate allowance for losses for REO. At December 31, 2012, we had $8.2 million in REO, which consisted of eight commercial real estate properties and five church buildings. We had $6.7 million in REO at December 31, 2011.
Classification of Assets
Federal regulations and our internal policies require that we utilize an asset classification system as a means of monitoring and reporting problem and potential problem assets. We have incorporated asset classifications as a part of our credit monitoring system and thus classify potential problem assets as Special Mention, and problem assets as Substandard, Doubtful or Loss assets. An asset is considered Special Mention if the loan is current but there are some potential weaknesses that require managements close attention. 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 us to sufficient risk to warrant classification in one of the aforementioned categories, but that are considered to possess some weaknesses, are designated Special Mention.
Our Internal Asset Review Department reviews and classifies our assets and independently reports the results of its reviews to the Internal Asset Review Committee of our Board of Directors monthly. The following table provides information regarding our criticized and classified assets at the dates indicated.
December 31, 2012 | December 31, 2011 | |||||||||||||||
Number of loans |
Principal balance of loans |
Number of loans |
Principal balance of loans |
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(Dollars in thousands) | ||||||||||||||||
Special Mention |
45 | $ | 31,769 | 59 | $ | 38,776 | ||||||||||
Substandard |
123 | 62,087 | 115 | 76,241 | ||||||||||||
Doubtful |
1 | 57 | 11 | 1,692 | ||||||||||||
Loss |
| | | | ||||||||||||
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Total |
169 | $ | 93,913 | 185 | $ | 116,709 | ||||||||||
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Allowance for Loan Losses
In originating loans, we recognize that losses will be experienced on loans and that the risk of loss may vary as a result of many factors, including the type of loan being made, the creditworthiness of the borrower, general economic conditions and, in the case of a secured loan, the quality of the collateral for the loan. We are required to maintain an adequate allowance for loan losses in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Our allowance for loan losses represents our managements best estimate of the probable incurred credit losses in our loan portfolio as of the date of the consolidated financial statements. It is intended to cover specifically identifiable
11
loan losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable. There can be no assurance, however, that actual losses incurred will not exceed the amount of managements estimates.
Our Internal Asset Review Department issues reports to the Board of Directors and continually reviews loan quality. This analysis includes a detailed review of the classification and categorization of problem loans, potential problem loans and loans to be charged off, an assessment of the overall quality and collectability of the portfolio, and concentration of credit risk. Management then evaluates the allowance, determines its appropriate level and the need for additional provisions, and presents its analysis to the Board of Directors which ultimately reviews and approves managements recommendation.
The allowance for loan losses is increased by provisions for loan losses which are charged to earnings. The allowance for loan losses is decreased by the amount of charge-offs, net of recoveries. Provisions are recorded to adjust the allowance for loan losses to the level deemed appropriate by management. The Bank utilizes an allowance methodology that considers a number of quantitative and qualitative factors, including the amount of non-performing loans, our loss experience, conditions in the real estate and housing markets, current economic conditions, particularly increasing levels of unemployment, and changes in the size of the loan portfolio.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans for which the terms have been modified, and for which the borrower is experiencing financial difficulties are considered troubled debt restructurings (TDR) and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan-by-loan basis. If a loan is impaired, a portion of the allowance is allocated to the loan so that the loan is reported, net, at the present value of estimated future cash flows using the loans existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loans effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral less estimated selling costs. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for allowance for loan losses. At December 31, 2012, impaired loans totaled $44.4 million and had an aggregate specific allowance allocation of $2.7 million.
The general component of the allowance for loan losses covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. Each month, we prepare an analysis which categorizes the entire loan portfolio by certain risk characteristics such as loan type (one-to-four family, multi-family, commercial real estate, construction, commercial and industrial and consumer) and loan classification (pass, special mention, substandard and doubtful). We assign estimated loss factors to the loan classification categories on the basis of our assessment of the potential risk inherent in each loan type. These factors are periodically reviewed for appropriateness giving consideration to our historical loss experience, levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.
12
In addition to loss experience and environmental factors, we use qualitative analyses to determine the adequacy of our allowance for loan losses. This analysis includes ratio analysis to evaluate the overall measurement of the allowance for loan losses and comparison of peer group reserve percentages. The qualitative review is used to reassess the overall determination of the allowance for loan losses and to ensure that directional changes in the allowance for loan losses and the provision for loan losses are supported by relevant internal and external data.
During 2012, we refined our historical loss rate calculation with the use of a migration to loss analysis, and re-assessed the application of the qualitative factors noted above for purposes of allocating the allowance for loan losses by loan category. As a result of our updated loss analyses, we modified certain general reserve rate percentages at December 31, 2012 to reflect our current estimates of the amount of probable incurred losses in our loan portfolio in determining our general valuation allowances. Based on our evaluation of the housing and real estate markets and overall economy, including the unemployment rate, the levels and composition of our loan delinquencies and non-performing loans, our loss history and the size and composition of our loan portfolio, we determined that an allowance for loan losses of $11.9 million, or 4.51% of loans held for investment was appropriate at December 31, 2012, compared to $17.3 million, or 5.09% of loans held for investment at December 31, 2011. The provision for loan losses related to loans held for investment totaled $1.2 million for the year ended December 31, 2012.
In addition to the requirements of GAAP related to loss contingencies, a federally chartered savings associations determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OCC. The OCC, in conjunction with the other federal banking agencies, provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate valuation allowances and guidance for banking agency examiners to use in determining the adequacy of valuation allowances. It is required that all institutions have effective systems and controls to identify, monitor and address asset quality problems, analyze all significant factors that affect the collectability of the portfolio in a reasonable manner and establish acceptable allowance evaluation processes that meet the objectives of the federal regulatory agencies. While we believe that the allowance for loan losses has been established and maintained at adequate levels, future adjustments may be necessary if economic or other conditions differ materially from the conditions on which we based our estimates at December 31, 2012. In addition, there can be no assurance that the OCC or other regulators, as a result of reviewing our loan portfolio and/or allowance, will not require us to materially increase our allowance for loan losses, thereby affecting our financial condition and earnings.
The following table sets forth our allocation of the allowance for loan losses to the various categories of loans held for investment and the percentage of loans in each category to total loans at the dates indicated.
December 31, | ||||||||||||||||||||||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||||
Amount | Percent of loans in each category to total loans |
Amount | Percent of loans in each category to total loans |
Amount | Percent of loans in each category to total loans |
Amount | Percent of loans in each category to total loans |
Amount | Percent of loans in each category to total loans |
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(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
One-to-four units |
$ | 2,060 | 21.94 | % | $ | 4,855 | 22.57 | % | $ | 4,579 | 20.56 | % | $ | 4,292 | 20.03 | % | $ | 239 | 20.25 | % | ||||||||||||||||||||
Five or more units |
2,122 | 31.68 | % | 2,972 | 31.83 | % | 2,469 | 31.92 | % | 1,650 | 32.28 | % | 688 | 25.93 | % | |||||||||||||||||||||||||
Commercial real estate |
2,685 | 15.63 | % | 3,108 | 15.97 | % | 3,493 | 18.08 | % | 1,877 | 18.16 | % | 745 | 19.77 | % | |||||||||||||||||||||||||
Church |
4,818 | 28.98 | % | 5,742 | 26.22 | % | 6,909 | 24.25 | % | 9,257 | 22.29 | % | 809 | 24.85 | % | |||||||||||||||||||||||||
Construction |
8 | 0.28 | % | 249 | 1.11 | % | 74 | 1.35 | % | 87 | 1.22 | % | 58 | 1.63 | % | |||||||||||||||||||||||||
Commercial |
98 | 1.45 | % | 247 | 2.03 | % | 1,300 | 3.02 | % | 2,018 | 5.11 | % | 621 | 6.61 | % | |||||||||||||||||||||||||
Consumer |
78 | 0.04 | % | 126 | 0.27 | % | 1,634 | 0.82 | % | 1,279 | 0.91 | % | 265 | 0.96 | % | |||||||||||||||||||||||||
Unallocated |
| | | | | | | | 134 | | ||||||||||||||||||||||||||||||
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Total allowance for loan losses |
$ | 11,869 | 100.00 | % | $ | 17,299 | 100.00 | % | $ | 20,458 | 100.00 | % | $ | 20,460 | 100.00 | % | $ | 3,559 | 100.00 | % | ||||||||||||||||||||
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13
The lower levels of allowance in 2012 and 2011 compared to 2010 and 2009 reflect a decrease in the size of our loan portfolio, an increase in the number of non-performing loans that were charged-off and reported at the fair value of the collateral less estimated selling costs and to a lesser extent, a slight improvement in the credit quality of our loan portfolio. Additionally, the Bank recorded charge-offs of $3.4 million in 2012 on a group of single family classified loans that were reclassified to loans held for sale as of December 31, 2012. This group of single family loans was sold for $7.9 million in a bulk sale completed in February 2013.
The following table sets forth the activity in our allowance for loan losses related to our loans held for investment for the years indicated.
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Allowance balance at beginning of year |
$ | 17,299 | $ | 20,458 | $ | 20,460 | $ | 3,559 | $ | 2,051 | ||||||||||
Charge-offs: |
||||||||||||||||||||
One-to-four units |
(5,138 | ) | (896 | ) | (1,999 | ) | (1,631 | ) | | |||||||||||
Five or more units |
(104 | ) | (438 | ) | (21 | ) | (200 | ) | | |||||||||||
Commercial real estate |
(544 | ) | (4,544 | ) | (210 | ) | | | ||||||||||||
Church |
(1,354 | ) | (3,787 | ) | | (667 | ) | | ||||||||||||
Commercial |
| (3,916 | ) | (1,738 | ) | (156 | ) | | ||||||||||||
Consumer |
| (1,843 | ) | (504 | ) | (74 | ) | (3 | ) | |||||||||||
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Total charge-offs |
(7,140 | ) | (15,424 | ) | (4,472 | ) | (2,728 | ) | (3 | ) | ||||||||||
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Recoveries: |
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One-to-four units |
25 | | | | | |||||||||||||||
Five or more units |
1 | 2 | | | 139 | |||||||||||||||
Commercial real estate |
60 | 15 | | | | |||||||||||||||
Church |
15 | 4 | | | | |||||||||||||||
Commercial |
412 | 67 | | | | |||||||||||||||
Consumer |
7 | 24 | 5 | | | |||||||||||||||
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Total recoveries |
520 | 112 | 5 | | 139 | |||||||||||||||
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Provision charged to earnings |
1,190 | 12,153 | 4,465 | 19,629 | 1,372 | |||||||||||||||
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Allowance balance at end of year |
$ | 11,869 | $ | 17,299 | $ | 20,458 | $ | 20,460 | $ | 3,559 | ||||||||||
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Net charge-offs (recoveries) to average loans, excluding loans held for sale |
2.04 | % | 3.85 | % | 0.97 | % | 0.64 | % | (0.04 | %) | ||||||||||
Allowance for loan losses as a percentage of gross loans, excluding loans held for sale |
4.51 | % | 5.09 | % | 5.08 | % | 4.52 | % | 1.06 | % | ||||||||||
Allowance for loan losses as a percentage of total non-accrual loans, excluding loans held for sale |
44.09 | % | 44.20 | % | 54.53 | % | 66.20 | % | 157.62 | % | ||||||||||
Allowance for loan losses as a percentage of total non-performing assets |
26.23 | % | 33.62 | % | 44.03 | % | 55.31 | % | 102.77 | % |
Investment Activities
The main objectives of our investment strategy are to provide a source of liquidity for deposit outflows, repayment of borrowings and loan fundings, and to generate a favorable return on investments without incurring undue interest rate or credit risk. Subject to various restrictions, our 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, corporate bonds and marketable equity securities. Mortgage-backed securities consist principally of FNMA, FHLMC and GNMA securities backed by 30-year amortizing hybrid ARM loans, structured with fixed interest rates for periods of three to seven years, after which time the loans convert to one-year or six-month adjustable rate mortgage loans. At December 31, 2012, our securities portfolio consisted of residential mortgage-backed securities and totaled $13.4 million, or 4% of total assets.
14
We classify investments as held-to-maturity or available-for-sale at the date of purchase based on our assessment of our internal liquidity requirements. Securities in the held-to-maturity category consist of securities purchased for long-term investment in order to enhance our ongoing stream of net interest income. Securities deemed held-to-maturity are classified as such because we have both the intent and ability to hold these securities to maturity. Securities purchased to meet investment-related objectives such as liquidity management or interest rate risk and which may be sold as necessary to implement management strategies, are designated as available-for-sale at the time of purchase. Held-to-maturity securities are reported at cost, adjusted for amortization of premium and accretion of discount. Available-for-sale securities are reported at fair value. We currently have no securities classified as trading securities. On December 30, 2011, all of the held-to-maturity securities, which had a total carrying amount of $10.5 million, were transferred to the available-for-sale portfolio at fair value of $11.0 million.
During 2012, we sold $1.0 million of U.S federal agency bonds and recognized a gain of $50 thousand. There were no sales of securities during 2011.
The following table sets forth information regarding the carrying amount and fair values of our securities at the dates indicated.
December 31, | ||||||||||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||||||||
Carrying amount |
Fair value |
Carrying amount |
Fair value |
Carrying amount |
Fair value |
|||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Available-for-sale: |
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Residential mortgage-backed securities |
$ | 13,378 | $ | 13,378 | $ | 17,910 | $ | 17,910 | $ | 10,524 | $ | 10,524 | ||||||||||||
U.S. Government and federal agency |
| | 1,069 | 1,069 | | | ||||||||||||||||||
Held-to-maturity: |
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Residential mortgage-backed securities |
| | | | 11,737 | 12,162 | ||||||||||||||||||
U.S. Government and federal agency |
| | | | 1,000 | 1,099 | ||||||||||||||||||
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Total |
$ | 13,378 | $ | 13,378 | $ | 18,979 | $ | 18,979 | $ | 23,261 | $ | 23,785 | ||||||||||||
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The table below sets forth certain information regarding the carrying amount, weighted average yields and contractual maturities of our securities as of December 31, 2012. The table reflects stated final maturities and does not reflect scheduled principal payments or expected payoffs.
At December 31, 2012 | ||||||||||||||||||||||||||||||||||||||||
One Year or less | More than one year to five years |
More than five years to ten years |
More than ten years |
Total | ||||||||||||||||||||||||||||||||||||
Carrying amount |
Weighted average yield |
Carrying amount |
Weighted average yield |
Carrying amount |
Weighted average yield |
Carrying amount |
Weighted average yield |
Carrying amount |
Weighted average yield |
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(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
Available-for-sale: |
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Residential mortgage-backed securities |
$ | | | % | $ | | | % | $ | 2,430 | 4.10 | % | $ | 10,948 | 2.97 | % | $ | 13,378 | 3.17 | % | ||||||||||||||||||||
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Total |
$ | | | % | $ | | | % | $ | 2,430 | 4.10 | % | $ | 10,948 | 2.97 | % | $ | 13,378 | 3.17 | % | ||||||||||||||||||||
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At December 31, 2012, the mortgage- backed securities in our portfolio have an estimated remaining life of 4.7 years.
15
Sources of Funds
General
Deposits are our primary source of funds for supporting our lending and other investment activities and general business purposes. In addition to deposits, we obtain funds from the amortization and prepayment of loans and residential mortgage-backed securities, sales of loans and residential mortgage-backed securities, advances from the FHLB, and cash flows generated by operations.
Deposits
We offer a variety of deposit accounts with a range of interest rates and terms. Our 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 maturities of term certificates generally range from one month to five years. We accept deposits from customers within our market area based primarily on posted rates but from time to time negotiate the rate on these instruments commensurate with the size of the deposit. We rely primarily on customer service and long-standing relationships with customers to attract and retain deposits. We seek to maintain and increase our retail core deposit relationships, consisting of customers with passbook accounts, checking accounts, non-interest bearing demand accounts and money market accounts, which we believe 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, the availability of other investment alternatives, and general economic conditions significantly affect our ability to attract and retain deposits.
We also open deposit accounts for customers in the United States through the Internet and deposit listing services, such as QwickRate. Internet and QwickRate deposits totaled $14.5 million and $68.9 million, respectively, at December 31, 2012 compared to $41.7 million and $52.0 million, respectively, at December 31, 2011. During 2011 and prior, we generated term certificates through the use of brokers and internet-based network deposits. We also participated in a deposit program called Certificate of Deposit Account Registry Service (CDARS), which is a deposit placement service that allows us to place our customers funds in FDIC-insured certificates of deposit at other banks and, at the same time, receive an equal sum of funds from the customers of other banks in the CDARS Network. The Bank no longer accepts CDARS deposits. At December 31, 2012, we had approximately $2.9 million in brokered deposits, of which $100 thousand were obtained through CDARS. This compared to $9.2 million in brokered deposits at December 31, 2011, of which $384 thousand were obtained through CDARS.
According to the C&D Orders received by the Company in September of 2010, we can no longer accept brokered deposits. Under applicable regulations, the term brokered deposits includes both deposits acquired through third party brokers and deposits that an institution solicits by offering rates of interest that are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions in the institutions normal market area.
The following table sets forth the maturity periods of our certificates of deposit in amounts of $100 thousand or more at December 31, 2012.
December 31, 2012 | ||||||||
Amount | Weighted average rate | |||||||
(Dollars in thousands) | ||||||||
Certificates maturing: |
||||||||
Less than three months |
$ | 14,102 | 1.65 | % | ||||
Three to six months |
21,222 | 1.14 | % | |||||
Six to twelve months |
28,369 | 1.14 | % | |||||
Over twelve months |
57,614 | 1.73 | % | |||||
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Total |
$ | 121,207 | 1.48 | % | ||||
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16
The following table sets forth the distribution of our average deposits for the years indicated and the weighted average interest rates during the year for each category of deposits presented.
For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||||||||||||||||||||
Average balance |
Percent of total |
Weighted average rate |
Average balance |
Percent of total |
Weighted average rate |
Average balance |
Percent of total |
Weighted average rate |
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(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Money market deposits |
$ | 18,980 | 6.90 | % | 0.43 | % | $ | 24,063 | 7.52 | % | 0.41 | % | $ | 27,701 | 7.16 | % | 0.66 | % | ||||||||||||||||||
Passbook deposits |
36,530 | 13.28 | % | 0.32 | % | 38,177 | 11.93 | % | 0.34 | % | 37,574 | 9.71 | % | 0.43 | % | |||||||||||||||||||||
NOW and other demand deposits |
37,814 | 13.74 | % | 0.07 | % | 42,210 | 13.19 | % | 0.09 | % | 47,077 | 12.16 | % | 0.22 | % | |||||||||||||||||||||
Certificates of deposit |
181,849 | 66.08 | % | 1.66 | % | 215,611 | 67.36 | % | 1.96 | % | 274,641 | 70.97 | % | 1.99 | % | |||||||||||||||||||||
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Total |
$ | 275,173 | 100.00 | % | 1.18 | % | $ | 320,061 | 100.00 | % | 1.40 | % | $ | 386,993 | 100.00 | % | 1.53 | % | ||||||||||||||||||
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Borrowings
We utilize short-term and long-term advances from the FHLB of San Francisco as an alternative to retail deposits as a funding source for asset growth. FHLB advances are generally secured 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 fluctuates from time to time in accordance with the policies of the FHLB. At December 31, 2012, we had $79.5 million in FHLB advances and had the ability to borrow up to an additional $8.8 million based on available and pledged collateral.
The following table sets forth information concerning our FHLB advances at or for the periods indicated.
At or For the Year Ended | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
(Dollars in thousands) | ||||||||||||
FHLB Advances: |
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Average balance outstanding during the year |
$ | 82,694 | $ | 86,967 | $ | 87,897 | ||||||
Maximum amount outstanding at any month-end during the year |
$ | 83,000 | $ | 87,000 | $ | 88,000 | ||||||
Balance outstanding at end of year |
$ | 79,500 | $ | 83,000 | $ | 87,000 | ||||||
Weighted average interest rate during the year |
2.95 | % | 3.10 | % | 3.33 | % | ||||||
Weighted average interest rate at end of year |
2.67 | % | 3.09 | % | 3.24 | % |
On March 17, 2004, the Company issued $6.0 million of Floating Rate Junior Subordinated Debentures in a private placement. The debentures mature in 10 years and interest is payable quarterly at a rate per annum equal to the 3-month LIBOR plus 2.54%. The interest rate is determined as of each March 17, June 17, September 17, and December 17, and was 2.85% at December 31, 2012. In September 2010, the Company stopped paying interest on the debentures. As disclosed below in Regulation Cease and Desist Orders and in Note 2 Going Concern, Regulatory Matters and Managements Plans for Recapitalization of the Company of the Notes to Consolidated Financial Statements, the Company is not permitted to make payments on any debts without prior notice to and receipt of written notice of non-objection from the OCC. In addition, under the terms of the subordinated debentures, the Company is not allowed to make payments on the subordinated debentures if the Company is in default on any of its senior indebtedness, which term includes the senior line of credit described below.
On February 28, 2010, the Company borrowed an aggregate of $5.0 million under its $5.0 million line of credit with another financial institution, and invested all of the proceeds in the equity capital of the Bank. The interest rate on the line of credit adjusts annually, subject to a minimum of 6.00% and increases by an additional 5% in the event of default. Borrowings under this line of credit are secured by all of the Companys assets. The full amount of this borrowing became due and payable on July 31, 2010. This senior line of credit has not been repaid and the Company
17
is in default under the line of credit agreement. Under the terms of the cease and desist order issued to us and the Bank by the OTS, we are not permitted to make any payments on this senior line of credit, or to obtain dividends from the Bank for that purpose or any other purpose without the prior approval of the OCC. See Item 7 Managements Discussion and Analysis Liquidity in Part II of this Report for further information.
Market Area and Competition
Broadway Federal is a community-oriented savings institution offering a variety of financial services to meet the needs of the communities it serves. Our retail banking network includes full service banking offices, automated teller machines and internet banking capabilities. We have two banking offices in Los Angeles and one banking office located in the nearby City of Inglewood.
The Los Angeles metropolitan area is a highly competitive market in which we face substantial competition in making loans and in attracting deposits. Although our offices are primarily located in low and moderate income minority areas that have historically been under-served by other financial institutions, we are facing increasing competition for deposits and residential mortgage lending in our immediate market areas, including direct competition from mortgage banking companies, commercial banks and savings and loan associations. Most of these financial institutions are significantly larger than we are and have greater financial resources, and many have a regional, statewide or national presence.
Personnel
At December 31, 2012, we had 73 employees, which consisted of 67 full-time and 6 part-time employees. We believe that we have good relations with our employees and none are represented by a collective bargaining group.
Regulation
General
Broadway Federal is regulated by the OCC, as its primary federal regulator, and by the FDIC, as its deposit insurer. We, as a savings and loan holding company, are regulated, examined and supervised by the FRB. The Bank is subject to regulation and examination by the OCC with respect to most of its business activities, including, among other things, capital standards, general investment authority, deposit taking and borrowing authority, mergers and other business combination transactions, establishment of branch offices, and permitted subsidiary investments and activities. The OCC has primary enforcement responsibility over federally chartered savings associations and has substantial discretion to impose enforcement action on an institution that fails to comply with applicable regulatory requirements, including with respect to its capital requirements. In addition, the FDIC has the authority to recommend to the OCC that enforcement action be taken with respect to a particular federally chartered savings association and, if action is not taken by the OCC, the FDIC has authority to take such action under certain circumstances.
Broadway Federal is a member of the FHLB System. The Bank is subject to the regulations of the FRB concerning reserves required to be maintained against deposits, transactions with affiliates, Truth in Lending and other consumer protection requirements and certain other matters. The Company is also required to file certain reports with and otherwise comply with the rules and regulations of the Securities and Exchange Commission (SEC) under the federal securities laws.
Changes in the applicable laws or regulations of the OCC, the FDIC, the FRB or other regulatory authorities could have a material adverse impact on the Bank and the Company, their operations, and the value of the Companys debt and equity securities.
The following paragraphs summarize certain of the laws and regulations that apply to us and to the Bank. These descriptions of statutes and regulations and their possible effects do not purport to be complete descriptions of all of the provisions of those statutes and regulations and their possible effects on us, nor do they purport to identify every statute and regulation that may apply to us.
18
Cease and Desist Orders
In March 2010, based on information obtained during a regulatory examination of the Bank, the Company and the Bank were determined to be in troubled condition and agreed to the issuance of cease and desist orders to them by the OTS effective September 9, 2010. We refer to these orders collectively as the C&Ds. The C&Ds, which are now administered by the OCC with respect to the Bank and the FRB with respect to the Company, impose limitations on the Company and the Bank, including the following, among others:
| The Bank may not increase its total assets during any quarter in excess of an amount equal to the net interest credited on deposit liabilities during the prior quarter without the prior written notice to and receipt of notice of non-objection from the OCC. |
| Neither the Company nor the Bank may declare or pay any dividends or make any other capital distributions without the prior written approval of the OCC. |
| Neither the Company nor the Bank may make any changes in its directors or senior executive officers without prior notice to and receipt of notice of non-objection from the OCC. |
| The Company and the Bank are subject to limitations on severance and indemnification payments and on entering into or amending employment agreements and compensation arrangements, and on the payment of bonuses to Bank directors and officers. |
| The Company may not incur, issue, renew, repurchase, make payments on or increase any debt or redeem any capital stock without prior notice to and receipt of written notice of non-objection from the FRB. |
| The Bank is not permitted to increase the amount of its brokered deposits beyond the amount of interest credited without prior notice to and receipt of notice of non-objection from the OCC. |
The C&Ds also required that we develop and implement plans for improvement of various aspects of our business, including a plan for the Company to raise capital sufficient to enable the Bank to maintain a Tier 1 (Core) Capital ratio of at least 8.00% and a Total Risk-Based Capital ratio of at least 12% and plans for the Bank detailing how it would maintain such capital ratios, and how the Bank would address required corrective actions identified by the regulators in the course of their examination of the Bank, reduce the levels of its classified assets and improve the Banks liquidity and liquidity planning. The Bank was also required by the C&Ds to obtain an independent third party review of its loan portfolio and of its allowance for loan losses to assess whether the Banks allowance for loan losses methodology is consistent with regulatory requirements and guidance, and to reduce the Banks concentration of church loans.
Consistent with the C&D, we have taken actions to address the concerns expressed by the OTS, including the following:
| Increased the Banks liquid assets to $77.7 million at December 31, 2012, from $50.6 million at December 31, 2011, $32.5 million at December 31, 2010 and $22.4 million at December 31, 2009; |
| Substantially reduced the Banks brokered deposits to $2.9 million at year-end 2012, from $9.2 million at year-end 2011, $18.2 million at year end 2010 and $101.0 million at year-end 2009; |
| Substantially revised the Banks loan underwriting and internal asset review procedures and other aspects of the Banks business, as well as the Companys management of its business and the oversight of the Companys business by the Board; |
| Developed and are pursuing a capital plan for increasing our common equity base, as described under Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Capital Resources. |
Recent Regulatory Reform Legislation
In July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which is intended to address perceived weaknesses in the U.S. financial regulatory system and prevent future economic and financial crises.
19
As a result of the Dodd-Frank Act, on July 21, 2011, the OTS, our previous primary federal regulator, was merged into the OCC, which has taken over the regulation of all federal savings associations. The FRB acquired the OTS authority over all savings and loan holding companies.
The Dodd-Frank Act requires the federal banking agencies to establish consolidated risk-based and leverage capital requirements for insured depository institutions, depository institution holding companies and certain non-bank financial companies. These requirements must be no less than those to which insured depository institutions are currently subject to. As a result, by July 2015, we will become subject to consolidated capital requirements which we have not been subject to previously.
The Dodd-Frank Act also includes a provision that will change the assessment base for federal deposit insurance from the amount of insured deposits to the amount of consolidated assets less tangible capital, make permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance until December 31, 2012 for non-interest bearing demand transaction accounts at all insured depository institutions.
The Dodd-Frank Act also provides for the creation of the Bureau of Consumer Financial Protection (CFPB). The CFPB will have the authority to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit unfair, deceptive or abusive acts and practices.
The Dodd-Frank Act also includes other provisions, subject to further rulemaking by the federal bank regulatory agencies, that may affect our future operations. We will not be able to determine the impact of these provisions until final rules are promulgated to implement these provisions and other regulatory guidance is provided interpreting these provisions.
Capital Requirements
The OCC capital regulations require federally chartered savings associations to meet three minimum capital ratios: (1) tangible capital must equal at least 1.5% of total adjusted assets; (2) core capital must generally equal at least 4.0% of total adjusted assets (this ratio is referred to as the leverage ratio); and (3) risk-based capital must equal at least 8.0% of total risk-based assets. In assessing an institutions capital adequacy, the OCC takes into consideration not only these numeric factors but also qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions to the extent it considers necessary.
The core capital requirement generally requires a savings institution to maintain a ratio of core capital to adjusted total assets of not less than 4% (3% for certain highly evaluated institutions not experiencing or anticipating significant growth). 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 institutions core capital is, in general, calculated in accordance GAAP, with certain exceptions. Intangible assets must be deducted from core capital, with certain exceptions and limitations for 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 assets. In addition, the asset base for computing a savings institutions capital requirement includes off-balance sheet items, including assets sold with recourse. Generally, the OCC 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, subject to limitations, and, subject to certain limitations, loan and lease general valuation allowances. At December 31, 2012 and 2011, the general valuation allowance included in our supplementary capital was $3.2 million and $3.9 million, respectively. A savings institutions supplementary capital may be used to satisfy the risk-based capital requirement only to the extent of that institutions core capital.
20
At December 31, 2012, Broadway Federal exceeded each of these minimum capital requirements as shown in the following table:
As of December 31, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Tangible Capital |
Tier 1 (Core) Capital |
Total Risk- Based Capital |
Tangible Capital |
Tier 1 (Core) Capital |
Total Risk- Based Capital |
|||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Equity capital-Broadway Federal (1) |
$ | 32,950 | $ | 32,950 | $ | 32,950 | $ | 30,997 | $ | 30,997 | $ | 30,997 | ||||||||||||
Additional supplementary capital: |
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General valuation allowance |
| | 3,247 | | | 3,921 | ||||||||||||||||||
Disallowed mortgage servicing rights assets |
(14 | ) | (14 | ) | (14 | ) | (36 | ) | (36 | ) | (36 | ) | ||||||||||||
Disallowed deferred tax assets |
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Regulatory capital balances |
32,936 | 32,936 | 36,183 | 30,961 | 30,961 | 34,882 | ||||||||||||||||||
Minimum requirement |
5,603 | 14,940 | 20,090 | 6,396 | 17,055 | 24,026 | ||||||||||||||||||
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Excess over minimum requirement |
$ | 27,333 | $ | 17,996 | $ | 16,093 | $ | 24,565 | $ | 13,906 | $ | 10,856 | ||||||||||||
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(1) | Excluding accumulated other comprehensive income, net of taxes. |
The current risk-based capital guidelines are based upon the 1988 capital accord of the Basel Committee on Banking Supervision, an international committee of central banks and bank supervisors and regulators. In December 2010, the Basel Committee published an agreement among its member country bank regulatory authorities to establish a new set of capital and other standards for major banking institutions, commonly referred to as Basel III. Under these standards, when fully phased in on January 1, 2019, banking institutions will be required to maintain a Common Equity Tier 1 capital ratio, a Tier 1 capital ratio, and a Total capital ratio. The Common Equity Tier 1 capital ratio and Tier 1 capital ratio requirements would be phased in incrementally between January 1, 2013 and January 1, 2015; the deductions from common equity made in calculating Common Equity Tier 1 capital ratio would be phased in incrementally over a four-year period commencing on January 1, 2014; and a capital conservation buffer requirement would be phased in incrementally between January 1, 2016 and January 1, 2019. Under proposed implementing regulations issued by the United States federal banking regulatory agencies in June 2012, which have not yet been finally adopted, the current United States bank capital standards would be revised to a requirement consisting of four fully phased-in minimum capital ratios: (1) a ratio of Common Equity Tier 1 capital to risk-weighted assets of 4.5%, (2) a Tier 1 capital to risk-weighted assets of 6.0%, (3) a Total capital to risk-weighted assets of 8% and (4) a leverage ratio of Tier 1 capital (with certain deductions) to average consolidated assets of 4%. For this purpose, Common equity Tier 1 capital will consist of common stock and related surplus. Total Tier 1 capital will include non-cumulative perpetual preferred stock. The rule proposal would also change the capital standards set forth in the capital category definitions used in the prompt corrective action regulations discussed below to refer to the new capital ratios and increasing the levels of capital required to be considered well capitalized under those regulations.
Prompt Corrective Action
Federal law provides a framework for the regulation of depository institutions and their affiliates, including parent holding companies, by their federal banking regulators. Among other things, it requires the relevant federal banking regulator to take prompt corrective action with respect to a depository institution if that institution does not meet certain capital adequacy standards, including requiring the prompt submission of an acceptable capital restoration plan. Generally, a capital restoration plan must be filed with the OCC within 45 days of the date an association receives notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized, and the plan must be guaranteed by any parent holding company. In addition, various mandatory supervisory actions become immediately applicable to the institution, including restrictions on growth of assets and other forms of expansion. Under the OCC regulations, generally, an institution is treated as well capitalized if its Total Risk-based capital ratio is 10% or greater, its Tier 1 Risk-based capital ratio is 6% or greater and its Leverage ratio is 5% or greater, and it is not subject to any order or directive by the OCC to meet a specific capital level.
21
The Bank was in compliance with all capital requirements in effect at December 31, 2012, and met the generally applicable capital ratio standards necessary to be considered well-capitalized under the prompt corrective action regulations adopted pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991. However, in March 2010, the Company and the Bank were determined to be in troubled condition by the OTS and they consented to the issuance to them of cease and desist orders by the OTS effective September 9, 2010, which orders remain in effect and are now administered by the OCC. The cease and desist orders require the Bank to achieve and maintain higher levels of regulatory capital than normally required. Under the applicable regulations, the Bank is therefore precluded from being considered to be more than adequately capitalized until such special capital requirements are terminated and the Company and the Bank are no longer considered to be in troubled condition.
The Bank met the minimum capital requirements under the cease and desist order at December 31, 2012. However, it did not meet the minimum capital requirements under the cease and desist order at December 31, 2011. Actual and normally required capital amounts and ratios at December 31, 2012 and December 31, 2011, together with the higher capital requirements that the Bank is required to meet under the cease and desist order applicable to it, are presented below.
Actual | Required for Capital Adequacy Purposes |
To Be Well Capitalized Under Prompt Corrective Action Regulations |
Capital Requirements under Cease and Desist Order |
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Amount | Ratio | Amount | Ratio | Amount | Ratios | Amount | Ratios | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
December 31, 2012: |
||||||||||||||||||||||||||||||||
Tangible Capital to adjusted total assets |
$ | 32,936 | 8.82 | % | $ | 5,603 | 1.50 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Tier 1(Core) Capital to adjusted total assets |
$ | 32,936 | 8.82 | % | $ | 14,940 | 4.00 | % | $ | 18,675 | 5.00 | % | $ | 29,881 | 8.00 | % | ||||||||||||||||
Tier 1(Core) Capital to risk weighted assets |
$ | 32,936 | 13.12 | % | N/A | N/A | $ | 15,067 | 6.00 | % | N/A | N/A | ||||||||||||||||||||
Total Capital to risk weighted assets |
$ | 36,183 | 14.41 | % | $ | 20,090 | 8.00 | % | $ | 25,112 | 10.00 | % | $ | 30,135 | 12.00 | % | ||||||||||||||||
December 31, 2011: |
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Tangible Capital to adjusted total assets |
$ | 30,961 | 7.27 | % | $ | 6,396 | 1.50 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Tier 1(Core) Capital to adjusted total assets |
$ | 30,961 | 7.27 | % | $ | 17,055 | 4.00 | % | $ | 21,319 | 5.00 | % | $ | 34,111 | 8.00 | % | ||||||||||||||||
Tier 1(Core) Capital to risk weighted assets |
$ | 30,961 | 10.31 | % | N/A | N/A | $ | 18,019 | 6.00 | % | N/A | N/A | ||||||||||||||||||||
Total Capital to risk weighted assets |
$ | 34,882 | 11.61 | % | $ | 24,026 | 8.00 | % | $ | 30,032 | 10.00 | % | 36,039 | 12.00 | % |
Deposit Insurance
The FDIC is an independent federal agency that insures deposits of federally insured banks and savings institutions, up to prescribed statutory limits for each depositor. Pursuant to the Dodd-Frank Act, the maximum deposit insurance amount has been permanently increased to $250,000 and the full amounts of all noninterest-bearing transaction accounts were insured through December 31, 2012.
The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to the FDICs Deposit Insurance Fund. The amount of the assessment paid by an institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors. The FDICs overall premium rate structure is subject to change from time to time to reflect its actual and anticipated loss experience. Since the beginning of the financial crisis in 2008, there have been higher levels of bank failures. These failures have dramatically increased the resolution costs of the FDIC and have substantially reduced the available amount of the DIF. On November 12, 2009, the FDIC adopted a requirement for institutions to prepay in 2009 their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012.
22
As required by the Dodd-Frank Act, the FDIC adopted a new Deposit Insurance Fund restoration plan which became effective on January 1, 2011. Among other things, the plan increased the minimum designated deposit insurance reserve ratio from 1.15% to 1.35% of insured deposits, which must be reached by September 30, 2020, and provides that in setting the assessments necessary to meet the new requirement, the FDIC is required to offset the effect of this provision on insured depository institutions with total consolidated assets of less than $10 billion, so that more of the cost of raising the reserve ratio will be borne by the institutions with more than $10 billion in assets.
On February 7, 2011, as mandated by the Dodd-Frank Act, the FDIC approved a final rule that redefines the deposit insurance premium assessment base to be an institutions average consolidated total assets minus average tangible equity and adopts a new assessment rate schedule, as well as alternative rate schedules that become effective when the reserve ratio reaches certain levels. The final rule also makes conforming changes to the unsecured debt and brokered deposit adjustments to assessment rates, eliminates the secured liability adjustment and creates a new assessment rate adjustment for unsecured debt held that is issued by another insured depository institution. The new rate schedule and other revisions to the assessment rules became effective for the quarter beginning April 1, 2011.
The FDIC may terminate a depository institutions deposit insurance upon a finding that the institutions financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the banks depositors.
All FDIC-insured institutions are also required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (FICO), an agency of the Federal government established to recapitalize the predecessor to the DIF. The FICO assessment rates are determined quarterly. Beginning April 1, 2011 the assessment rates are based on the level of risk-based assets. Prior to April 2011, the assessment rates were based on deposit levels. As of December 31, 2012, the assessment rate was 0.0064%. These assessments will continue until the FICO bonds mature in 2017.
Guidance on Commercial Real Estate Lending
In October 2009, the federal banking agencies adopted a policy statement supporting commercial real estate (CRE) loan workouts, which is referred to as the CRE Policy Statement. The CRE Policy Statement provides guidance for examiners, and for financial institutions that are working with CRE borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties. The CRE Policy Statement details risk-management practices for loan workouts that support prudent and pragmatic credit and business decision-making within the framework of financial accuracy, transparency, and timely loss recognition. The CRE Policy Statement states that financial institutions that implement prudent loan workout arrangements after performing comprehensive reviews of borrowers financial conditions will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse credit classifications. In addition, performing loans, including those renewed or restructured on reasonable modified terms, made to creditworthy borrowers, will not be subject to adverse classification solely because the value of the underlying collateral declined. The CRE Policy Statement reiterates existing guidance that examiners are expected to take a balanced approach in assessing institutions risk-management practices for loan workout activities.
Loans to One Borrower
Savings institutions generally are subject to the lending limits that are applicable to national banks. With certain limited exceptions, the maximum amount that a savings institution may lend to any borrower (including certain related persons or entities of such borrower) is an amount equal to 15% of the savings institutions unimpaired capital and unimpaired surplus, or $6.7 million for Broadway Federal at December 31, 2012, 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. We are in compliance with the limits that are applicable to loans to any one borrower. At December 31, 2012, our largest aggregate amount of loans to one borrower totaled $4.5 million. Both of the loans for the largest borrower were performing in accordance with their terms and the borrower had no affiliation with Broadway Federal.
23
Community Reinvestment Act
The Community Reinvestment Act (CRA) requires each savings institution, as well as other lenders, to identify the communities served by the institutions offices and to identify the types of credit the institution is prepared to extend within those communities. The CRA also requires the OCC 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 an application. Community groups have successfully protested applications on CRA grounds. In connection with the assessment of a savings institutions CRA performance, the OCC assigns ratings of outstanding, satisfactory, needs to improve or substantial noncompliance. The Bank was rated outstanding in its most recent CRA examination.
Qualified Thrift Lender Test
The Home Owners Loan Act (HOLA) requires savings institutions to meet a Qualified Thrift Lender (QTL) test. Under the QTL test, a savings association is required to maintain at least 65% of its portfolio assets (total assets less (1) specified liquid assets up to 20% of total assets, (2) intangibles, including goodwill, and (3) the value of property used to conduct business) in certain qualified thrift investments on a monthly basis during at least 9 out of every 12 months. 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 businesses, loans made through credit cards or credit card accounts and certain other permitted thrift investments. A savings institutions 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, 2012, the Bank was in compliance with the QTL test requirements.
The USA Patriot Act, Bank Secrecy Act (BSA), and Anti-Money Laundering (AML) Requirements
The USA PATRIOT Act was enacted after September 11, 2001 to provide the federal government with powers to prevent, detect, and prosecute terrorism and international money laundering, and has resulted in promulgation of several regulations that have a direct impact on savings associations. Financial institutions must have a number of programs in place to comply with this law, including: (i) a program to manage BSA/AML risk; (ii) a customer identification program designed to determine the true identity of customers, document and verify the information, and determine whether the customer appears on any federal government list of known or suspected terrorist or terrorist organizations; and (iii) a program for monitoring for the timely detection and reporting of suspicious activity and reportable transactions.
Privacy Protection
Broadway Federal is subject to OCC regulations implementing the privacy protection provisions of federal law. These regulations require Broadway Federal to disclose its privacy policy, including identifying with whom it shares nonpublic personal information, to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require Broadway Federal to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, to the extent its sharing of such information is not covered by an exception, Broadway Federal is required to provide its customers with the ability to opt-out of having Broadway Federal share their nonpublic personal information with unaffiliated third parties.
Broadway Federal is also subject to regulatory guidelines establishing standards for safeguarding customer information. The guidelines describe the agencies expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer.
24
Savings and Loan Holding Company Regulation
As a savings and loan holding company, we are subject to certain restrictions with respect to our activities and investments. Among other things, we are 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.
FRB and OCC approval must be obtained prior to any person acquiring control of the Company or Broadway Federal, respectively. 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 and may be presumed to exist at lower levels of ownership under certain circumstances.
Restrictions on Dividends and Other Capital Distributions
In general, the prompt corrective action regulations prohibit an OCC-regulated savings association 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, OCC regulations limit certain capital distributions by savings associations. Capital distributions are defined to include, among other things, dividends and payments for stock repurchases and payments of cash to stockholders in mergers.
Under the OCC capital distribution regulations, a savings association that is a subsidiary of a savings and loan holding company must notify the OCC at least 30 days prior to the declaration of any capital distribution by its savings association subsidiary. The 30-day period provides the OCC an opportunity to object to the proposed dividend if it believes that the dividend would not be advisable.
An application to the OCC 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 institutions year-to-date net income and its retained income for the preceding two years; (b) the institution is not entitled under OCC regulations to expedited treatment (which is generally available to institutions the OCC 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 institution by the OCC.
As previously noted, the C&D issued by the OTS, which are now administered by the OCC with respect to the Bank and the FRB with respect to the Company, prohibits the Bank and Company from declaring or paying any dividends or making any other capital distributions without the prior written approval of the OCC and the FRB, respectively. The Banks ability to pay dividends to the Company is also subject to the restriction that 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 established in connection with the conversion of the Bank from the mutual to the stock form of organization.
See Item 5, Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities and Notes 2 and 16 of the Notes to Consolidated Financial Statements for a further description of dividend and other capital distribution limitations to which the Company and the Bank are subject.
Tax Matters
Federal Income Taxes
We report our 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 the Banks tax reserve for bad debts. The Bank 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.
25
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 for general corporations plus 2%.
26
ITEM 2. | PROPERTIES |
We conduct our business through three branch offices and a corporate office. Our loan service operation is also conducted from one of our branch offices. Our administrative and corporate operations are conducted from our corporate facility located at 4800 Wilshire Boulevard, Los Angeles, which we sold and concurrently leased in 2012. There are no mortgages, material liens or encumbrances against any of our owned properties. We believe that all of the properties are adequately covered by insurance, and that our facilities are adequate to meet our present needs.
Location |
Leased or Owned |
Original Date Leased or Acquired |
Date of Lease Expiration |
Net Book Value of Property or Leasehold Improvements at December 31, 2012 |
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(In thousands) | ||||||||||||||
Administrative/Loan Origination Center: |
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4800 Wilshire Blvd |
Leased | 2012 | | $ | | |||||||||
Los Angeles, CA |
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Branch Offices: |
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4835 West Venice Blvd. |
Building Owned | 1965 | 2013 | $ | 32 | |||||||||
Los Angeles, CA |
on Leased Land | |||||||||||||
170 N. Market Street |
Owned | 1996 | | $ | 627 | |||||||||
Inglewood, CA |
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(Branch Office/Loan Service Center) |
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4001 South Figueroa Street |
Owned | 1996 | | $ | 1,760 | |||||||||
Los Angeles, CA |
ITEM 3. | LEGAL PROCEEDINGS |
OTS Investigation
In 2010, the OTS notified us that it had initiated a formal investigation of the activities of a former loan officer of the Bank whose employment was terminated in March 2010. In connection with the investigation, the OTS issued subpoenas to the chief lending officer and chief executive officer requesting documents relating to our former loan officer and loans he originated while employed by the Bank. The subpoenas also contemplate taking oral testimony from the officers. While the OTS did not inform us of the scope of its investigation, we believe the investigation includes, but may not be limited to, inquiry into whether documentation submitted in connection with loan applications for loans originated by the loan officer contained inaccurate or deliberately falsified information and whether the loan officer received unauthorized direct or indirect benefits from payments made by the borrowers on such loans to loan brokers or other persons associated with the lending process. All of the loans originated by the former loan officer have been reviewed by us and by the independent loan review firm we engaged to perform a general review of our loan portfolio pursuant to the C&D issued to us by the OTS. We have taken the results of these loan reviews into account, along with all other relevant information known to us, in determining the amounts of our loan loss provisions and the level of our allowance for loan losses as of December 31, 2012.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not Applicable
27
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is traded on the Nasdaq Capital Market under the symbol BYFC. The table below shows the high and low sale prices for our common stock during the periods indicated.
2012 |
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||||
High |
$ | 1.73 | $ | 1.50 | $ | 3.20 | $ | 2.56 | ||||||||
Low |
$ | 1.24 | $ | 1.25 | $ | 0.91 | $ | 0.63 | ||||||||
2011 |
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||||
High |
$ | 2.80 | $ | 2.80 | $ | 2.23 | $ | 1.99 | ||||||||
Low |
$ | 2.01 | $ | 2.10 | $ | 1.20 | $ | 1.30 |
The closing sale price for our common stock on the Nasdaq Capital Market on March 11, 2013 was $0.85 per share. As of March 11, 2013, we had 371 shareholders of record and 1,917,422 shares of common stock outstanding.
As discussed below, we stopped paying dividends in May 2010 in order to retain capital for reinvestment in the Companys business. In general, we may pay dividends out of funds legally available for that purpose at such times as our Board of Directors determines that dividend payments are appropriate, after considering our net income, capital requirements, financial condition, alternate investment options, prevailing economic conditions, industry practices and other factors deemed to be relevant at the time. However, pursuant to the C&Ds issued to the Company and the Bank in September 2010, neither the Company nor the Bank may declare or pay dividends or make other capital distributions, which term includes repurchases of stock, without receipt of prior written notice of non-objection to such capital distribution from the FRB and OCC, respectively. In addition, we agreed in connection with our issuance of Series D and Series E Senior Preferred Stock to the U.S. Treasury that we would not pay cash dividends on our common stock at a quarterly rate greater than $0.05 per share, or redeem, purchase or acquire any of our common stock or other equity securities, without the prior approval of the U.S. Treasury while the Series D or Series E Senior Preferred Stock remain outstanding.
Our financial ability to pay permitted dividends is primarily dependent upon receipt of dividends from Broadway Federal. Broadway Federal is subject to certain requirements which may limit its ability to pay dividends or make other capital distributions. See Item 1 Business Regulation and Notes 2 and 16 of the Notes to Consolidated Financial Statements in Item 8 Financial Statements and Supplementary Data for an explanation of the impact of regulatory capital requirements on Broadway Federals ability to pay dividends.
28
Equity Compensation Plan Information
The following table provides information about the Companys common stock that may be issued under equity compensation plans as of December 31, 2012.
Plan category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) |
Weighted average exercise price of outstanding options, warrants and rights (b) |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
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Equity compensation plans approved by security holders: |
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1996 Long term incentive plan |
25,000 | $ | 11.39 | | ||||||||
Stock option plan for outside directors |
1,428 | $ | 10.49 | | ||||||||
2008 Long term incentive plan |
148,750 | $ | 5.32 | 202,968 | ||||||||
Equity compensation plans not approved by security holders: |
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None |
| | | |||||||||
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Total |
175,178 | $ | 6.23 | 202,968 | ||||||||
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29
ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and other factors that have affected our reported results of operations and financial condition or may affect our future results or financial condition. Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Overview
During 2011 and continuing through 2012, the U.S. economy has shown signs of a slow recovery from the recession which began in 2008. The national unemployment rate, while still at a high level, declined to 7.8% for December 2012, compared to 8.5% for December 2011. In Southern California where we operate, the unemployment rate remains higher at 9.8% for December 2012. In addition to the challenging economic environment, the regulation and oversight of our business changed significantly during 2011. As described in more detail in Item 1 Regulation, certain aspects of the Dodd-Frank Act have had and will continue to have an impact on us, including the combination on July 21, 2011 of our former primary banking regulator, the OTS, with the OCC, and transfer of the OTSs responsibilities as regulator of savings and loan holding companies to the FRB, the imposition of consolidated holding company capital requirements and changes to deposit insurance assessments.
Total assets decreased during 2012 primarily due to a decrease in our loan portfolio, as loan repayments, foreclosures and charge-offs exceeded loan originations during the year. The decrease in our loan portfolio, including loans held for sale, consisted of a $25.4 million decrease in our five or more units residential real estate loan portfolio, a $13.5 million decrease in our commercial real estate loan portfolio, a $14.1 million decrease in our church loan portfolio, a $11.0 million decrease in our one-to-four family residential real estate loan portfolio, a $3.1 million decrease in our construction loan portfolio, a $3.1 million decrease in our commercial loan portfolio, and a $825 thousand decrease in our consumer loan portfolio.
Total deposits decreased during 2012, as we continued to allow maturing certificates of deposit and brokered deposits, including deposits obtained through the CDARS reciprocal deposit referral system, to run off as total assets declined. Since the end of 2011, FHLB borrowings decreased by $3.5 million while subordinated debentures and other borrowings remained unchanged.
Our net earnings for the year ended December 31, 2012 were $588 thousand, compared to net loss of $14.3 million for the same period a year ago, representing an improvement of $14.8 million. The increase from a net loss to net earnings was primarily due to lower provisions for loan losses, a $2.5 million gain on the sale of our headquarters building, lower provisions for losses on REO and loans held for sale and lower income tax provision expense for the year 2012.
Going Concern and Regulatory Matters
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has a tax sharing liability to its consolidated subsidiary that exceeds its available cash, the Company is in default under the terms of a $5 million line of credit with another financial institution lender in which the stock of its subsidiary bank, Broadway Federal Bank (the Bank) is held as collateral for the line of credit and the Company and the Bank are both under formal regulatory agreements. Furthermore, the Company and the Bank are not in compliance with these agreements but management believes that the recapitalization plan that the Company is pursing will allow it to address many of the areas of non-compliance. Failure to comply with these agreements exposes the Company and the Bank to further regulatory sanctions. These matters raise substantial doubt about the ability of the Company to continue as a going concern. The ability of the Company to continue as a going concern is dependent on many factors, one of which is regulatory action, including acceptance of its capital plan. Managements plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Please also see Item 1, Business, Business Overview; Recent Developments.
30
Analysis of Net Interest Income
Net interest income is the difference between income on interest-earning assets and the expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. The yields set forth below include the effect of deferred loan fees, and discounts and premiums that are amortized or accreted to interest income or expense. We do not accrue interest on loans on non-accrual status; however, the balance of these loans is included in the total average balance, which has the effect of reducing average loan yields.
For the year ended December 31, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
(Dollars in Thousands) | Average Balance |
Interest | Average Yield/ Cost |
Average Balance |
Interest | Average Yield/ Cost |
||||||||||||||||||
Assets |
||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Interest-earning deposits |
$ | 6,559 | $ | 22 | 0.34 | % | $ | 6,271 | $ | 14 | 0.22 | % | ||||||||||||
Federal Funds sold and other short-term investments |
36,723 | 38 | 0.10 | % | 17,881 | 14 | 0.08 | % | ||||||||||||||||
Investment securities |
481 | 24 | 4.99 | % | 1,000 | 50 | 5.00 | % | ||||||||||||||||
Residential mortgage-backed securities |
14,946 | 467 | 3.12 | % | 19,388 | 650 | 3.35 | % | ||||||||||||||||
Loans receivable (1)(2) |
325,029 | 19,279 | 5.93 | % | 397,402 | 24,376 | 6.13 | % | ||||||||||||||||
FHLB stock |
3,939 | 61 | 1.55 | % | 4,089 | 11 | 0.27 | % | ||||||||||||||||
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Total interest-earning assets |
387,677 | $ | 19,891 | 5.13 | % | 446,031 | $ | 25,115 | 5.63 | % | ||||||||||||||
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Non-interest-earning assets |
6,738 | 6,629 | ||||||||||||||||||||||
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Total assets |
$ | 394,415 | $ | 452,660 | ||||||||||||||||||||
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Liabilities and Shareholders Equity |
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Interest-bearing liabilities: |
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Money market deposits |
$ | 18,980 | $ | 82 | 0.43 | % | $ | 24,063 | $ | 98 | 0.41 | % | ||||||||||||
Passbook deposits |
36,530 | 118 | 0.32 | % | 38,176 | 129 | 0.34 | % | ||||||||||||||||
NOW and other demand deposits |
37,814 | 27 | 0.07 | % | 42,210 | 40 | 0.09 | % | ||||||||||||||||
Certificate accounts |
181,849 | 3,019 | 1.66 | % | 215,611 | 4,226 | 1.96 | % | ||||||||||||||||
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Total deposits |
275,173 | 3,246 | 1.18 | % | 320,060 | 4,493 | 1.40 | % | ||||||||||||||||
FHLB advances |
82,694 | 2,437 | 2.95 | % | 86,967 | 2,699 | 3.10 | % | ||||||||||||||||
Junior subordinated debentures and other borrowings |
11,000 | 743 | 6.75 | % | 11,000 | 859 | 7.81 | % | ||||||||||||||||
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Total interest-bearing liabilities |
368,867 | $ | 6,426 | 1.74 | % | 418,027 | $ | 8,051 | 1.93 | % | ||||||||||||||
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Non-interest-bearing liabilities |
6,776 | 5,519 | ||||||||||||||||||||||
Shareholders Equity |
18,772 | 29,114 | ||||||||||||||||||||||
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Total liabilities and shareholders equity |
$ | 394,415 | $ | 452,660 | ||||||||||||||||||||
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Net interest rate spread (3) |
$ | 13,465 | 3.39 | % | $ | 17,064 | 3.70 | % | ||||||||||||||||
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Net interest rate margin (4) |
3.47 | % | 3.83 | % | ||||||||||||||||||||
Ratio of interest-earning assets to interest-bearing liabilities |
|
105.10 | % | 106.70 | % | |||||||||||||||||||
Return on average assets |
0.15 | % | (3.15 | %) | ||||||||||||||||||||
Return on average equity |
3.13 | % | (48.96 | %) | ||||||||||||||||||||
Average equity to average assets ratio |
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4.76 | % | 6.43 | % | |||||||||||||||||||
Dividend payout ratio (5) |
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(1) | Amount is net of deferred loan fees, loan discounts, and loans in process, and includes loans held for sale. |
(2) | Amount excludes interest on non-performing loans. |
(3) | Net 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 rate margin represents net interest income as a percentage of average interest-earning assets. |
(5) | Percentage is calculated based on dividends on common stocks divided by net earnings (loss) less dividends and accretion on preferred stocks. |
31
Changes in our net interest income are a function of changes in both rates and volumes of interest-earning assets and interest-bearing liabilities. The following table sets forth information regarding changes in our interest income and expense for the years 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, 2012 Compared to Year ended December 31, 2011 |
Year ended December 31, 2011 Compared to Year ended December 31, 2010 |
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Increase (Decrease) in Net Interest Income |
Increase (Decrease) in Net Interest Income |
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Due to Volume |
Due to Rate |
Total | Due to Volume |
Due to Rate |
Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
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Interest-earning deposits |
$ | 1 | $ | 7 | $ | 8 | $ | 5 | $ | (1 | ) | $ | 4 | |||||||||||
Federal funds sold and other short term investments |
18 | 6 | 24 | (3 | ) | (6 | ) | (9 | ) | |||||||||||||||
Investment securities, net |
(26 | ) | | (26 | ) | | | | ||||||||||||||||
Mortgage backed securities, net |
(141 | ) | (42 | ) | (183 | ) | (216 | ) | (48 | ) | (264 | ) | ||||||||||||
Loans receivable, net |
(4,147 | ) | (950 | ) | (5,097 | ) | (4,024 | ) | (647 | ) | (4,671 | ) | ||||||||||||
FHLB stock |
| 50 | 50 | (1 | ) | (7 | ) | (8 | ) | |||||||||||||||
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Total interest-earning assets |
(4,295 | ) | (929 | ) | (5,224 | ) | (4,239 | ) | (709 | ) | (4,948 | ) | ||||||||||||
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Interest-bearing liabilities: |
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Money market deposits |
(22 | ) | 6 | (16 | ) | (22 | ) | (62 | ) | (84 | ) | |||||||||||||
Passbook deposits |
(5 | ) | (6 | ) | (11 | ) | 3 | (37 | ) | (34 | ) | |||||||||||||
NOW and other demand deposits |
(4 | ) | (9 | ) | (13 | ) | (10 | ) | (54 | ) | (64 | ) | ||||||||||||
Certificate accounts |
(611 | ) | (596 | ) | (1,207 | ) | (1,158 | ) | (77 | ) | (1,235 | ) | ||||||||||||
FHLB advances |
(129 | ) | (133 | ) | (262 | ) | (31 | ) | (200 | ) | (231 | ) | ||||||||||||
Junior subordinated debentures |
| 12 | 12 | | (2 | ) | (2 | ) | ||||||||||||||||
Other borrowings |
| (128 | ) | (128 | ) | 54 | 374 | 428 | ||||||||||||||||
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Total interest-bearing liabilities |
(771 | ) | (854 | ) | (1,625 | ) | (1,164 | ) | (58 | ) | (1,222 | ) | ||||||||||||
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Change in net interest income |
$ | (3,524 | ) | $ | (75 | ) | $ | (3,599 | ) | $ | (3,075 | ) | $ | (651 | ) | $ | (3,726 | ) | ||||||
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Comparison of Operating Results for the Years Ended December 31, 2012 and 2011
General
Our most significant source of income is net interest income, which is the difference between our interest income and our interest expense. Generally, interest income is generated from our loans and investments (interest-earning assets) and interest expense is generated from deposits and borrowings (interest-bearing liabilities). Our results of operations are also affected by our provision for losses, non-interest income generated from service charges and fees on loan and deposit accounts, gain or loss on the sale of loans and securities, non-interest expenses and income taxes.
Net Earnings (Loss)
We recorded net earnings of $588 thousand, or ($0.38) loss per diluted common share, for the year ended December 31, 2012, compared to net loss of ($14.3) million, or ($8.81) per diluted common share, for the year ended December 31, 2011. The increase from a net loss to net earnings was primarily due to lower provisions for loan losses, a $2.5 million gain on the sale of our headquarters building, lower provisions for losses on REO and loans held for sale and lower income tax provision expense for the year 2012.
32
Net Interest Income
For the year ended December 31, 2012, net interest income before provision for loan losses totaled $13.5 million, down $3.6 million, or 21%, from $17.1 million of net interest income before provision for loan losses for the year ended December 31, 2011. The $3.6 million decrease in net interest income primarily resulted from a $58.4 million decrease in average interest-earning assets and a 36 basis point decrease in net interest margin.
Interest income decreased $5.2 million, or 21%, to $19.9 million for the year 2012 from $25.1 million for the year 2011. The decrease in interest income was primarily due to a $72.4 million decrease in the average balance of loans receivable from $397.4 million for the year 2011 to $325.0 million for the year 2012, which resulted in a $4.1 million reduction in interest income. Additionally, the average yield on loans decreased from 6.13% for the year 2011 to 5.93% for the year 2012, which resulted in a $950 thousand reduction in interest income. The decrease in the average yield on loans was primarily a result of continued high levels of non-performing loans, payoffs of loans with rates higher than the average yield on the loan portfolio, and lower rates on loan originations as a result of the low interest rate environment.
Interest expense decreased $1.6 million, or 20%, to $6.4 million for the year 2012 from $8.1 million for the year 2011. The decrease in interest expense was primarily attributable to a $44.9 million decrease in the average balance of deposits from $320.1 million for the year 2011 to $275.2 million for the year 2012, which resulted in a $642 thousand reduction in interest expense. Additionally, the average cost of deposits decreased from 1.40% for the year 2011 to 1.18% for the year 2012, which resulted in a $605 thousand reduction in interest expense. The decrease in the average cost of deposits reflects the impact of certificates of deposit at higher rates maturing and being replaced at lower interest rates. Also contributing to the decrease in interest expense during 2012 was lower average balance and average cost of FHLB advances. The average balance of FHLB advances decreased $4.3 million, from $87.0 million for the year 2011 to $82.7 million for the year 2012, which resulted in a $129 thousand decrease in interest expense. The average cost of FHLB advances decreased 15 bps, from 3.10% for the year 2011 to 2.95% for the year 2012, which resulted in a $133 thousand decrease in interest expense. The decrease in the average cost of FHLB advances was primarily due to the restructuring of $20.0 million of FHLB advances.
Provision for Loan Losses
We record a provision for loan losses as a charge to earnings when necessary in order to maintain the allowance for loan losses at a level sufficient, in managements judgment, to absorb losses inherent in the loan portfolio. At least quarterly, we conduct an assessment of the overall quality of the loan portfolio and general economic trends in the local market. The determination of the appropriate level for the allowance is based on that review, considering such factors as historical loss experience for each type of loan, the size and composition of our loan portfolio, the levels and composition of our loan delinquencies, non-performing loans and net loan charge-offs, the value of underlying collateral on problem loans, regulatory policies, general economic conditions, and other factors related to the collectability of loans in the portfolio.
For the year 2012, the provision for loan losses totaled $1.2 million, down $11.0 million, from a year ago. The decrease in the provision for loan losses for the year 2012 was primarily due to a $76.7 million decrease in our gross loan portfolio and an $8.3 million decrease in charge-offs.
At December 31, 2012 our allowance for loan losses was $11.9 million, or 4.51% of our loans receivable held for investment, compared to $17.3 million, or 5.09% of our gross loans, at year-end 2011. The decrease in the allowance for loan losses reflects the decrease in the size of our loan portfolio, the general stabilizing trend in overall asset quality we have experienced throughout 2012 as total delinquencies and charge-offs have continued a downward trend and the changes in the loss factors applied to the loan portfolio segments as a result of the application of a migration to loss analysis in determining our historical loss rates and the reassessment of qualitative risk factors for loans with no history of payment problems. Changes in the loss factors applied to the loan portfolio segments resulted in a $2.4 million decrease in the allowance for loan losses during 2012. Non-impaired loans decreased $64.7 million from $283.5 million at December 31, 2011 to $218.8 million at December 31, 2012, resulting in a decrease in the allowance for loan losses of $3.4 million during 2012.
33
The ratio of the allowance for loan losses to non-performing loans, excluding loans held for sale, increased to 44.09% at December 31, 2012, compared to 44.20% at year-end 2011. We update our estimates of collateral values on non-performing loans every nine months. If the estimated fair value of the loan collateral less estimated selling costs is less than the recorded investment in the loan, a charge-off of the difference is recorded to reduce the loan to its estimated fair value less estimated selling costs. Therefore certain losses inherent in our non-performing loans are being recognized through charge-off periodically. The impact of updating these estimates of collateral value and recognizing any required charge-offs is to increase charge-offs and reduce the allowance for loan losses required on these loans. As of December 31, 2012, 70% of our non-performing loans had already been written down to their estimated fair value less estimated selling costs. The remaining 30% of NPLs are reported at cost as the fair value of collateral less estimated selling costs exceeded the recorded investment in the loan.
Loan charge-offs during 2012 were $7.1 million, or 2.20% of average loans, compared to $15.4 million, or 3.88% of average loans, during 2011. Of the $7.1 million of charge-offs, $1.0 million were reserved for at year-end 2011. The remaining $6.1 million of charge-offs were reserved for during 2012 and were primarily related to loans that became impaired during 2012 and required write-downs based on recent valuations of the underlying collateral. Charge-offs in one-to-four family residential real estate loans totaled $5.1 million and represented 72% of charge-offs during 2012. Charge-offs in church loans totaled $1.4 million and represented 19% of charge-offs during 2012. Charge-offs in commercial real estate loans totaled $544 thousand and represented 8% of charge-offs during 2012. Charge-offs in five or more unit residential real estate loans totaled $104 thousand and represented 1% of charge-offs during 2012. Of the $5.1 million of charge-offs in one-to-four family residential real estate loans, $3.4 million was attributable to the fair value write down of 30 classified loans that were transferred to loans held for sale in 2012, and subsequently sold in February 2013.
Impaired loans at December 31, 2012 were $44.4 million, compared to $56.3 million at December 31, 2011. Specific reserves for impaired loans were $2.7 million, or 6.16% of the aggregate impaired loan amount at December 31, 2012, compared to $3.9 million, or 7.00%, at December 31, 2011. Excluding specific reserves for impaired loans, our coverage ratio (general allowance as a percentage of total non-impaired loans) was 4.18% at December 31, 2012, compared to 4.71% at December 31, 2011.
We performed an impairment analysis for all non-performing and restructured loans, and established specific reserves for impaired loans of $2.7 million at December 31, 2012. Of the $2.7 million specific reserves at December 31, 2012, $368 thousand was related to $1.2 million of loans that are non-performing. Additionally, we recorded $2.4 million of specific reserves for impairment related to $17.5 million of accruing loans that were modified in troubled debt restructurings. On $13.6 million of impaired loans, the fair value of collateral less estimated selling costs exceeded the recorded investment in the loan and did not require a specific reserve or charge-off. The remaining $12.1 million of impaired loans were written down to fair value after charge-offs of $10.0 million were recorded during 2012 and in prior periods.
Management believes that the allowance for loan losses is adequate to cover probable incurred losses in the loan portfolio as of December 31, 2012, but there can be no assurance that actual losses will not exceed the estimated amounts. In addition, the OCC and the FDIC periodically review the allowance for loan losses as an integral part of their examination process. These agencies may require an increase in the allowance for loan losses based on their judgments of the information available to them at the time of their examinations. The provisions for loan losses and corresponding allowance for loan losses in these financial statements contained in Part 1, Item 8 of this Form 10-K reflect judgments by the OCC made during its supervisory examination of our Bank completed in July 2012.
Non-Interest Income
Non-interest income for the year 2012 increased $2.4 million from $713 thousand in 2011 to $3.1 million in 2012. The increase primarily reflects a $2.5 million gain on the sale of our headquarters building and a $257 thousand increase in net gains on sales of REO. Partially offsetting these increases were lower service charges, lower loan servicing fee income and higher losses on sales of loans for the year 2012. Service charges decreased by $99 thousand in 2012 primarily due to the decrease in deposits. Loan servicing fees decreased in 2012 primarily due to $51 thousand lower servicing fee income and $137 thousand higher amortization expense on our mortgage servicing rights asset resulting from payoffs and payments on loans sold to or serviced for investors. During 2012, we sold certain delinquent and non-performing loans, primarily commercial real estate and church loans, totaling $2.9 million and recorded a loss of $253 thousand.
34
Non-Interest Expense
Non-interest expense for the year 2012 decreased $4.0 million from $18.0 million in 2011 to $14.0 million in 2012. A large portion of the decrease was from lower provisions for losses on REO and loans held for sale, which decreased a total of $3.1 million from $4.2 million in 2011 to $1.1 million in 2012. The provisions for losses decreased as recent valuations of the underlying collateral securing our non-performing loans held for sale and REO properties reflected steady values or a slower rate of depreciation than in 2011. Other significant decreases in non-interest expense include a $302 thousand decrease in compensation and benefits expense, a $270 thousand decrease in FDIC insurance premium expense resulting from lower deposits, a $157 thousand decrease in professional services expense and a $148 thousand decrease in occupancy expense.
Income Taxes
Income tax expense totaled $829 thousand for 2012 and $1.8 million for 2011. In 2012, the Company reported income tax expense equal to an effective tax rate of 58.50%, due to an increase in the valuation allowance related to the projected utilization of the Companys federal and state deferred tax assets. In 2011, the Company recorded a tax expense despite having a pre-tax loss. The tax expense in 2011 reflected the impact of tax provision true-ups and an increase in the valuation allowance related to the projected utilization of its federal and state deferred tax assets. The increases in the valuation allowance against our federal and state deferred tax assets during 2012 and 2011 were due to the Companys inability to project sufficient future taxable income. See Note 1 Summary of Significant Accounting Policies and Note 13 Income Taxes of the Notes to Consolidated Financial Statements for a further discussion of income taxes and a reconciliation of income tax at the federal statutory tax rate to actual tax expense (benefit).
Comparison of Financial Condition at December 31, 2012 and 2011
Total Assets
Total assets were $373.7 million at December 31, 2012, which represented a decrease of $40.0 million, or 10%, from December 31, 2011. During 2012, net loans held for investment decreased by $71.0 million, securities decreased by $5.6 million, office properties and equipment decreased by $2.0 million and deferred tax assets decreased by $850 thousand, while cash and cash equivalents increased by $32.8 million, loans held for sale increased by $6.1 million and REO increased by $1.5 million.
The C&Ds issued to us by the OTS effective September 9, 2010, which are now administered by the OCC with respect to the Bank, limit the increase in the Banks total assets during any quarter to an amount equal to the net interest credited on deposit liabilities during the prior quarter without the prior written notice to and receipt of notice of non-objection from the OCC.
Loans Receivable Held for Investment
Our gross loan portfolio decreased by $76.7 million to $263.1 million at December 31, 2012 from $339.8 million at December 31, 2011, as loan repayments, foreclosures and charge-offs exceeded loan originations during 2012. The decrease in our loan portfolio consisted of a $24.8 million decrease in our five or more units residential real estate loan portfolio, an $18.9 million decrease in our one-to-four family residential real estate loan portfolio, a $13.1 million decrease in our commercial real estate loan portfolio, a $12.8 million decrease in our church loan portfolio, a $3.1 million decrease in our construction loan portfolio, a $3.1 million decrease in our commercial loan portfolio, and a $825 thousand decrease in our consumer loan portfolio.
Loan originations for the year ended December 31, 2012 totaled $20.5 million, compared to $5.1 million for the year ended December 31, 2011. Loan repayments for the year ended December 31, 2012 totaled $70.6 million, compared to $40.6 million for the comparable period in 2011. The increase in loan repayments was primarily attributable to a higher level of refinancings by borrowers who could take advantage of historically low interest rates and new
35
financing opportunities in the stabilized commercial and single family markets. Loan charge-offs during 2012 totaled $7.1 million, compared to $15.4 million of charge-offs during 2011. Loans transferred to REO during 2012 totaled $9.8 million, compared to $9.3 million during 2011. Loans transferred to loans held for sale during 2012 totaled $9.7 million, compared to $2.5 million of loans transferred to loans held for sale during 2011.
Loans Receivable Held for Sale
Loans held for sale increased from $13.0 million at December 31, 2011 to $19.1 million at December 31, 2012. The $6.1 million increase during 2012 was primarily due to the transfer of $9.7 million of classified loans from the held for investment loan portfolio to the held for sale portfolio. This transfer included substantially all of the Banks non-performing single-family residential loans, which were subsequently sold in February 2013. During 2012, nonperforming loans sales totaled $2.9 million, compared to $1.3 million during 2011. Loan repayments during 2012 totaled $450 thousand, compared to $3.6 million during 2011. Loans held for sale that were transferred to REO during 2012 totaled $334 thousand, compared to $1.5 million during 2011.
Real Estate Owned
During 2012, REO increased by $1.5 million to $8.2 million at December 31, 2012, from $6.7 million at December 31, 2011. At December 31, 2012 the Banks REO consisted of thirteen commercial real estate properties, five of which are church buildings. During 2012, fifteen loans totaling $10.2 million were foreclosed and transferred to REO. As part of our efforts to reduce non-performing assets, fifteen REO properties were sold for total proceeds of $7.8 million and a corresponding net gain of $292 thousand was recorded during 2012.
Deposits
Deposits totaled $257.1 million at December 31, 2012, down $37.6 million, or 13%, from year-end 2011. This reflects our efforts to improve our net interest margin by reducing higher costing certificates of deposit. During 2012, core deposits (NOW, demand, money market and passbook accounts) decreased by $11.1 million and represented 34% of total deposits at December 31, 2012, compared to 33% of total deposits at December 31, 2011. Our certificates of deposit (CDs) decreased by $26.5 million during 2012 and represented 66% of total deposits at December 31, 2012, compared to 67% of total deposits at December 31, 2011. Of the $26.5 million decrease in CDs during 2012, $6.3 million were from brokered deposits. At December 31, 2012, brokered deposits represented 1% of total deposits, compared to 3% of total deposits at December 31, 2011.
The C&Ds issued to us by the OTS effective September 9, 2010, which are now administered by the OCC with respect to the Bank, prohibits the Bank from increasing the amount of its brokered deposits.
Borrowings
At December 31, 2012, borrowings consisted of advances from the FHLB of $79.5 million, junior subordinated debentures of $6.0 million and other borrowings of $5.0 million. During 2012, FHLB borrowings decreased by $3.5 million while subordinated debentures and other borrowings remained unchanged. At December 31, 2012 and 2011, FHLB advances were 21% and 20%, respectively, of total assets, and the weighted average cost of advances at those dates was 2.67% and 3.09%, respectively. The decrease in the weighted average cost of advances primarily resulted from the restructuring of $13.5 million of advances in the second quarter of 2012 and $6.5 million of advances in the fourth quarter of 2012.
Shareholders Equity
Shareholders equity was $18.0 million, or 4.82% of the Companys total assets, at December 31, 2012, compared to $18.3 million, or 4.42% of the Companys total assets, at December 31, 2011. At December 31, 2012, the Banks Total Risk-Based Capital ratio was 14.41%, its Tier 1 Risk-Based Capital ratio was 13.12%, and its Core Capital and Tangible Capital ratios were 8.82%. The Company is currently pursuing a Recapitalization Plan, described under Capital Resources below to increase equity capital and reduce debt and senior securities to further strengthen the Companys capital ratios, and position the Bank for future growth.
36
Capital Resources
Our principal subsidiary, Broadway Federal, must comply with capital standards established by the OCC in the conduct of its business. Failure to comply with such capital requirements may result in significant limitations on its business or other sanctions. We are not currently subject to separate holding company capital requirements, but by July 2015 the Dodd-Frank Act will, among other things, impose specific capital requirements on us as a savings and loan holding company as well. These requirements must be no less than those to which insured depository institutions are currently subject to. The current regulatory capital requirements and possible consequences of failure to maintain compliance are described in Part I, Item 1 Business-Regulation and in Notes 2 and 16 of the Notes to Consolidated Financial Statements.
On November 14, 2008, the Company issued 9,000 shares of the Companys Fixed Rate Cumulative Perpetual Preferred Stock, Series D, having a liquidation preference of $1,000 per share, together with a ten-year warrant to purchase 183,175 shares of Company common stock at $7.37 per share, to the U.S. Treasury Department for gross proceeds of $9.0 million. The sale of the Series D Preferred Stock was made pursuant to the U.S. Treasury Departments TARP Capital Purchase Program.
On December 8, 2009, the Company issued 6,000 shares of the Companys Fixed Rate Cumulative Perpetual Preferred Stock, Series E, having a liquidation preference of $1,000 per share, to the U.S. Treasury Department for gross proceeds of $6.0 million. The sale of the Series E Preferred Stock was made pursuant to the U.S. Treasury Departments TARP Capital Purchase Program. The warrant was subsequently retired without cost because of our status as a Certified Community Development Financial Institution.
We are pursuing our comprehensive recapitalization plan to improve the Companys capital structure. To date, we:
| Have obtained the agreement of the U.S. Treasury Department to exchange the shares of our Series D and E Fixed Rate Cumulative Perpetual Preferred Stock held by it for our common stock (or initially equivalents) at a discount of 50% of the liquidation amount, plus an undiscounted exchange of the accumulated but unpaid dividends on such preferred stock for common stock; |
| Have obtained the agreement of the holder of our Series A Perpetual Preferred Stock to exchange its holdings for common stock (or initially equivalents) at a discount of 50% of the liquidation amount, subject to documentation and certain terms and conditions and have reached agreements in principle with the holders of our Series B and Series C Preferred Stock regarding exchanges of their holdings for common stock (or initially equivalents) on a similar basis; |
| Have reached an agreement in principle with our senior bank lender regarding exchange of a portion of the $5 million outstanding amount borrowed under our line of credit, which is currently in default, for common stock (or initially equivalents) at 100% of the face amount to be exchanged; forgiveness of the accrued interest on the entire amount of the line of credit to the date of the exchange; and amending our credit agreement for the remainder of the facility that would be outstanding after the exchange. |
The conditions to each of the above proposed exchanges include that we concurrently complete private placements or other sales of our new shares of common stock. Based on the agreements in principle that we have reached, we anticipate that these exchanges and placements and sales of common stock would, if completed, result in the issuance of approximately 17.8 million new shares of the Companys common stock, which would constitute approximately 90% of the pro forma outstanding shares of the Companys common stock. The 17.8 million new shares of common stock exceed the Companys current unissued and authorized shares. We plan to seek existing shareholders approval to increase the Companys authorized shares, and issue the shares as replacements for the equivalents issued in the exchanges at the closing for the recapitalization.
There can be no assurance our recapitalization plan will be achieved on the currently contemplated terms, or at all. If we are unable to raise capital, we plan to continue to shrink assets and decrease NPAs, and implement strategies to increase earnings. Failure to maintain capital sufficient to meet the higher capital requirements could result in further regulatory action, which could include the appointment of a conservator or receiver for the Bank.
37
Liquidity
The objective of liquidity management is to ensure that we have the continuing ability to fund operations and meet other obligations on a timely and cost-effective basis. The Banks sources of funds include deposits, advances from the FHLB and other borrowings, proceeds from the sale of loans, mortgage-backed and investment securities, and principal and interest payments from loans and mortgage-backed and other investment securities. Primary uses of funds include withdrawal of and interest payments on deposits, originations of loans, purchases of mortgage-backed and other investment securities, and payment of operating expenses.
Net cash inflows from operating activities totaled $6.0 million and $21.5 million during 2012 and 2011, respectively. Net cash inflows from operating activities for 2012 were primarily attributable to proceeds from sales of loans receivable held for sale and interest payments received on loans and securities.
Net cash inflows from investing activities totaled $67.7 million and $45.3 million during 2012 and 2011, respectively. Net cash inflows from investing activities for 2012 were attributable primarily to principal repayments on loans and securities, proceeds from the sales of REOs and proceeds from sale of the headquarters building.
Net cash outflows from financing activities totaled $41.0 million and $57.2 million during 2012 and 2011, respectively. Net cash outflows from financing activities for 2012 were attributable primarily to net decreases in deposits and FHLB advances.
When the Bank has more funds than required for reserve requirements or short-term liquidity needs, the Bank sells federal funds to the Federal Reserve Bank or other financial institutions. Conversely, when the Bank has fewer funds than required, the Bank may borrow funds from the FHLB. The Bank is currently approved by the FHLB to borrow up to $100.0 million to the extent the Bank provides qualifying collateral and hold sufficient FHLB stock. That approved limit and collateral requirement would have permitted the Bank, as of year-end 2012, to borrow an additional $8.8 million.
At times we maintain a portion of our liquid assets in interest-bearing cash deposits with other banks, in overnight federal funds sold to other banks, and in securities available-for-sale that are not pledged. The Banks liquid assets at December 31, 2012 consisted of $64.4 million in cash and cash equivalents and $11.9 million in securities available-for-sale that are not pledged, compared to $31.6 million in cash and cash equivalents and $17.4 million in securities available-for-sale that are not pledged at December 31, 2011.
The Company has a tax sharing liability to the Bank which exceeds operating cash at the Company level. The liability was partially settled pursuant to the terms of the Tax Allocation Agreement between the Bank and the Company on March 30, 2012, which settlement consumed the Companys operating cash. During the second half of 2012, the Company sold 172,857 shares of its common stock held as treasury shares to certain directors and officers for $200,000. This capital was retained by the Company to help pay operating expenses.
Our ability to service our debt obligations and pay dividends and holding company expenses is dependent primarily on the recapitalization plan discussed herein under the caption Capital Resources. The Companys debt obligations, which are included in other borrowings, are described below.
On March 17, 2004, the Company issued $6.0 million of Floating Rate Junior Subordinated Debentures in a private placement. The debentures mature in 10 years and interest is payable quarterly at a rate per annum equal to the 3-month LIBOR plus 2.54%. The interest rate is determined as of each March 17, June 17, September 17, and December 17, and was 2.85% at December 31, 2012. The Company stopped paying interest on the debentures in September 2010. As disclosed previously, the Company is not permitted to make payments on any debts without prior notice to and receipt of written notice of non-objection from the FRB. In addition, under the terms of the subordinated debentures, the Company is not allowed to make payments on the subordinated debentures if the Company is in default on any of its senior indebtedness, which term includes the senior line of credit described below.
On February 28, 2010, the Company borrowed an aggregate of $5.0 million under its $5.0 million line of credit with another financial institution, and invested all of the proceeds in the equity capital of the Bank. Borrowings under this
38
line of credit are secured by the Companys assets. The interest rate on the line of credit adjusts annually, subject to a minimum of 6.00%, and increases by an additional 5% in the event of default. The full amount of this borrowing became due and payable on July 31, 2010. This senior line of credit has not been repaid and the Company is now in default under the line of credit agreement. The Company does not have sufficient cash available to repay the borrowing at this time and would require approval of the FRB to make any payment on this senior line of credit or to obtain a dividend from the Bank for such purpose. On April 7, 2011, the lender agreed to forbear from exercising its rights (other than increasing the interest rate by the default rate margin) pursuant to the line of credit agreement until January 1, 2012 subject to certain conditions. The lender has declined to extend the forbearance agreement. Further information regarding this borrowing is included in Note 11 Junior Subordinated Debentures and Other Borrowings of the Notes to Consolidated Financial Statements.
Due to the current regulatory cease and desist order that is in effect, the Bank is not allowed to make distributions to the Company without regulatory approval, and such approval is not likely to be given. Accordingly, the Company will not be able to meet its payment obligations within the foreseeable future unless the Company is able to secure new capital.
These conditions and the Companys operating losses raise substantial doubt about the Companys ability to continue as a going concern. These and related matters are discussed in Notes 2 and 11 of the Notes to Consolidated Financial Statements included in Item 8 Financial Statements and Supplementary Data.
Off-Balance-Sheet Arrangements and Contractual Obligations
We are a party to financial instruments with off-balance-sheet risk in the normal course of our business primarily in order to meet the financing needs of our customers. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are not recorded in the consolidated financial statements. Such instruments primarily include lending commitments and lease commitments as described below.
Lending commitments include commitments to originate loans and to fund lines of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate creditworthiness on a case-by-case basis. Our maximum exposure to credit risk is represented by the contractual amount of the instruments.
In addition to our lending commitments, we have contractual obligations related to operating lease commitments. Operating lease commitments are obligations under various non-cancelable operating leases on buildings and land used for office space and banking purposes.
The following table details our contractual obligations at December 31, 2012.
Less than one year |
More
than one year to three years |
More than three years to five years |
More than five years |
Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Certificates of deposit |
$ | 95,745 | $ | 60,268 | $ | 13,742 | $ | 213 | $ | 169,968 | ||||||||||
FHLB advances |
| 36,000 | 43,500 | | 79,500 | |||||||||||||||
Junior subordinated debentures |
| 6,000 | | | 6,000 | |||||||||||||||
Other borrowings |
5,000 | | | | 5,000 | |||||||||||||||
Commitments to originate loans |
141 | | | | 141 | |||||||||||||||
Commitments to fund unused lines of credit |
| 81 | | 318 | 399 | |||||||||||||||
Operating lease obligations |
339 | 398 | 467 | 893 | 2,097 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total contractual obligations |
$ | 101,225 | $ | 102,747 | $ | 57,709 | $ | 1,424 | $ | 263,105 | ||||||||||
|
|
|
|
|
|
|
|
|
|
39
Impact of Inflation and Changing Prices
Our consolidated financial statements including notes have been prepared in accordance with GAAP which require the measurement of financial position and operating results primarily 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 our operations. Unlike industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our 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.
Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. We consider the following to be critical accounting policies:
Allowance for Loan Losses
The determination of the allowance for loan losses is considered critical due to the high degree of judgment involved, the subjectivity of the underlying assumptions used, and the potential for changes in the economic environment that could result in material changes in the amount of the allowance for loan losses considered necessary. The allowance is evaluated on a regular basis by management and the Board of Directors and is based on a periodic review of the collectability of the loans in light of historical experience, the nature and size of the loan portfolio, adverse situations that may affect borrowers ability to repay, the estimated value of any underlying collateral, prevailing economic conditions and feedback from regulatory examinations. See Item 1, Business Asset Quality Allowance for Loan Losses for a full discussion of the allowance for loan losses.
Real Estate Owned (REO)
REO includes property acquired through foreclosure or deed in lieu of foreclosure and is recorded at the fair value, less estimated costs to sell, at the time of acquisition. The excess, if any, of the loan balance over the fair value of the property at the time of transfer from loans to REO is charged to the allowance for loan losses. Subsequent to the transfer to REO, if the fair value of the property less estimated selling costs is less than the carrying value of the property, the deficiency is charged to income and a valuation allowance is established. Operating costs after acquisition are expensed. Due to changing market conditions, there are inherent uncertainties in the assumptions made with respect to the estimated fair value of REO. Therefore, the amount ultimately realized may differ from the amounts reflected in the accompanying consolidated financial statements.
Income Taxes
Deferred tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, the forecasts of future income and tax planning strategies. This analysis is updated quarterly. Based on this analysis, the Company determined that a valuation allowance of $9.0 million was required as of December 31, 2012, resulting in $0 net deferred tax assets. The Company had recorded a valuation allowance of $8.2 million and net deferred tax assets of $850 thousand as of December 31, 2011. The decrease in net deferred tax assets from $850 thousand at December 31, 2011 to $0 at December 31, 2012 was due to the Companys inability to project future taxable income to be able to utilize its deferred tax assets and the execution of a tax planning strategy in 2012. See Note 13 Income Taxes of the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data.
40
This discussion has highlighted those accounting policies that management considers critical; however, all accounting policies are important, and therefore you are encouraged to review each of the policies included in Note 1 Summary of Significant Accounting Principles of the Notes to Consolidated Financial Statements beginning at page F-6 to gain a better understanding of how our financial performance is measured and reported.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
See Index to Consolidated Financial Statements of Broadway Financial Corporation and Subsidiaries.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None
ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of disclosure controls and procedures
As of December 31, 2012, an evaluation was performed under the supervision of the Companys Chief Executive Officer (CEO) and Interim Chief Financial Officer (Interim CFO) of the effectiveness of the design and operation of the Companys disclosure controls and procedures. Based on that evaluation, the Companys CEO and Interim CFO concluded that the Companys disclosure controls and procedures were effective as of December 31, 2012.
Managements annual report on internal control over financial reporting
The management of Broadway Financial Corporation is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rule 13a-15(f) under the Exchange Act. This system, which management has chosen to base on the framework set forth in Internal Control-Integrated Framework, published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and which is effected by the Companys board of directors, management and other personnel, is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time.
With the participation of the Companys CEO and Interim CFO, management has conducted an evaluation of the effectiveness of the Companys system of internal control over financial reporting. Based on this evaluation, management determined that the Companys system of internal control over financial reporting was effective as of December 31, 2012.
41
This annual report does not include an attestation report of the Companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only managements report in this annual report.
Changes in internal control over financial reporting
There were no significant changes in the Companys internal control over financial reporting identified in connection with the evaluation of internal control over financial reporting that occurred during the fourth quarter of 2012 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
/s/ Wayne-Kent A. Bradshaw |
/s/ Brenda Battey | |||
Wayne-Kent A. Bradshaw | Brenda Battey | |||
Chief Executive Officer | Interim Chief Financial Officer | |||
Los Angeles, CA | Los Angeles, CA | |||
April 1, 2013 | April 1, 2013 |
ITEM 9B. | OTHER INFORMATION |
None
42
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement, under the captions Election of Directors, Executive Officers, Code of Ethics and Section 16(a) Beneficial Ownership Reporting Compliance, to be filed with the Securities and Exchange Commission in connection with the Companys 2013 Annual Meeting of Shareholders (the Companys Proxy Statement).
ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item is incorporated herein by reference to the Companys Proxy Statement, under the caption Executive Compensation and Director Compensation.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item is incorporated herein by reference to the Companys Proxy Statement, under the caption Security Ownership of Certain Beneficial Owners and Management.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item is incorporated herein by reference to the Companys Proxy Statement, under the caption Certain Relationships and Related Transactions and Election of Directors.
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item is incorporated herein by reference to the Companys Proxy Statement, under the caption Ratification of the Appointment of the Independent Registered Public Accounting Firm.
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) | 1. See Index to Consolidated Financial Statements. |
2. Financial Statement Schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes included under Item 8, Financial Statements and Supplementary Data.
(b) | List of 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 |
Certificate of Incorporation of Registrant (contained in Exhibit 2.1) | |
3.2 |
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 Series A Preferred Stock (contained in Exhibit 2.1) | |
4.4 |
Form of Series B Preferred Stock Certificate (Exhibit 4.4 to Form 10-KSB filed by the Registrant for the fiscal year ended December 31, 2003) |
43
Exhibit Number* |
||
4.5 |
Form of Certificate of Designation for Series B Preferred Stock (Exhibit 4.5 to Form 10-KSB filed by the Registrant for the fiscal year ended December 31, 2003) | |
4.6 |
Form of Series C Preferred Stock Certificate (Exhibit 4.6 to Form 10-KSB filed by the Registrant for the fiscal year ended December 31, 2006) | |
4.7 |
Form of Certificate of Designation for Series C Preferred Stock (Exhibit 4.7 to Form 10-KSB filed by the Registrant for the fiscal year ended December 31, 2006) | |
4.8 |
Form of Series D Preferred Stock Certificate (Exhibit 4.8 to Form 8-K filed by the Registrant on November 19, 2008) | |
4.9 |
Form of Certificate of Designation for Fixed Rate Cumulative Perpetual Preferred Stock Series D (Exhibit 3.3 to Form 8-K filed by the Registrant on November 19, 2008) | |
4.11 |
Form of Series E Preferred Stock Certificate (Exhibit 4.2 to Form 8-K filed by the Registrant on December 9, 2009) | |
4.12 |
Form of Certificate of Designation for Fixed Rate Cumulative Perpetual Preferred Stock Series E (Exhibit 4.1 to Form 8-K filed by the Registrant on December 9, 2009) | |
10.1 |
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) | |
10.6 |
Broadway Financial Corporation Stock Option Plan for Outside Directors (Exhibit 99.1 to Form S-8, No. 333-17331, filed by the Registrant on December 5, 1996) | |
10.7 |
Broadway Financial Corporation Long Term Incentive Plan (Exhibit 99.2 to Form S-8, No. 333-17331, filed by the Registrant on December 5, 1996) | |
10.8 |
Broadway Financial Corporation 2008 Long Term Incentive Plan (Exhibit A to proxy statement filed by Registrant on Schedule 14A on November 17, 2009) | |
10.9 |
Stock Purchase Agreement Among Cathay General Bancorp, Broadway Financial Corporation and Broadway Federal Bank (Exhibit 10.9 to Form 10-KSB filed by the Registrant for the fiscal year ended December 31, 2004) | |
10.10 |
First Amendment to Stock Purchase Agreement Among Cathay General Bancorp, Broadway Financial Corporation and Broadway Federal Bank (Exhibit 10.10 to Form 10-KSB filed by the Registrant for the fiscal year ended December 31, 2004) | |
10.11 |
Second Amendment to Stock Purchase Agreement Among Cathay General Bancorp, Broadway Financial Corporation and Broadway Federal Bank (Exhibit 10.11 to Form 10-KSB filed by the Registrant for the fiscal year ended December 31, 2005) | |
10.12 |
Third Amendment to Stock Purchase Agreement Among Cathay General Bancorp, Broadway Financial Corporation and Broadway Federal Bank (Exhibit 10.12 to Form 10-KSB filed by the Registrant for the fiscal year ended December 31, 2005) | |
10.13 |
Preferred Stock Purchase Agreement Between Broadway Financial Corporation and National Community Investment Fund (Exhibit 10.1 to Form 8-K filed by the Registrant on April 6, 2006) | |
10.14 |
Deferred Compensation Plan (Exhibit 10.14 to Form 10-KSB filed by the Registrant for the fiscal year ended December 31, 2006) | |
10.15 |
Salary Continuation Agreement Between Broadway Federal Bank and Chief Executive Officer Paul C. Hudson (Exhibit 10.15 to Form 10-KSB filed by the Registrant for the fiscal year ended December 31, 2006) | |
10.16 |
Securities Purchase Agreement Between Broadway Financial Corporation and United States Department of the Treasury (Exhibit 10.16 to Form 8-K filed by the Registrant on November 19, 2008) | |
10.17 |
Letter Agreement, dated December 4, 2009, which includes the Securities Purchase Agreement Between Broadway Financial Corporation and United States Department of the Treasury (Exhibit 10.1 to Form 8-K filed by the Registrant on December 9, 2009) | |
10.18 |
Business Loan Agreement between Broadway Financial Corporation and Nara Bank, dated July 31, 2009 (Exhibit 10.18 to Form 10-K filed by the Registrant for the fiscal year ended December 31, 2009) |
44
Exhibit Number* |
||
10.19 |
Exchange Agreement by and between Broadway Financial Corporation and The United States Department of the Treasury | |
10.20 |
Exchange Agreement by and among Broadway Financial Corporation, the Insurance Exchange of the Automobile Club, and the Automobile Club of Southern California | |
10.21 |
Stock Purchase Agreements Between Broadway Financial Corporation and its Directors and Officers | |
21.1 |
List of Subsidiaries (Exhibit 21.1 to Form 10-KSB filed by the Registrant for the fiscal year ended December 31, 2007) | |
23.1 |
Consent of Crowe Horwath LLP | |
31.1 |
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 |
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 |
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 |
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
99.1 |
Order to Cease and Desist, issued by Office of Thrift Supervision to Broadway Financial Corporation, Order No.: WN-10-026, effective September 9, 2010 (Exhibit 99.1 to Form 8-K filed by the Registrant on September 16, 2010) | |
99.2 |
Order to Cease and Desist, issued by Office of Thrift Supervision to Broadway Federal Bank, f.s.b., Order No.: WN-10-025, effective September 9, 2010 (Exhibit 99.2 to Form 8-K filed by the Registrant on September 16, 2010) | |
99.3 |
Certification of Chief Executive Officer pursuant to Interim Final Rule - TARP Standards for Compensation and Corporate Governance at 31 CFR Part 30 | |
99.4 |
Certification of Chief Financial Officer pursuant to Interim Final Rule - TARP Standards for Compensation and Corporate Governance at 31 CFR Part 30 | |
101.INS |
XBRL Instance Document ** | |
101.SCH |
XBRL Taxonomy Extension Schema Document ** | |
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document ** | |
101.DEF |
XBRL Taxonomy Extension Definitions Linkbase Document ** | |
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document ** | |
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document ** |
* | Exhibits followed by a parenthetical reference are incorporated by reference herein from the document filed by the Registrant with the SEC described therein. Except as otherwise indicated, the SEC File No. for each incorporated document is 000-27464. |
** | Pursuant to SEC rules, these interactive data file exhibits shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act or Section 18 of the Exchange Act or otherwise subject to the liability of those sections. |
45
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BROADWAY FINANCIAL CORPORATION | ||
By: | /s/ Wayne-Kent A. Bradshaw | |
Wayne-Kent A. Bradshaw | ||
Chief Executive Officer | ||
Date: | April 1, 2013 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Wayne-Kent A. Bradshaw |
Date: April 1, 2013 | |||
Wayne-Kent A. Bradshaw | ||||
Chief Executive Officer and President | ||||
(Principal Executive Officer) | ||||
/s/ Brenda Battey |
Date: April 1, 2013 | |||
Brenda Battey | ||||
Interim Chief Financial Officer | ||||
(Principal Financial Officer and Principal Accounting Officer) | ||||
/s/ Virgil P. Roberts |
Date: April 1, 2013 | |||
Virgil P. Roberts | ||||
Chairman of the Board | ||||
/s/ Kellogg Chan |
Date: April 1, 2013 | |||
Kellogg Chan | ||||
Director | ||||
/s/ Robert C. Davidson, Jr. |
Date: April 1, 2013 | |||
Robert C. Davidson, Jr. | ||||
Director | ||||
/s/ Javier Leon |
Date: April 1, 2013 | |||
Javier Leon | ||||
Director | ||||
/s/ Albert Odell Maddox |
Date: April 1, 2013 | |||
Albert Odell Maddox | ||||
Director | ||||
/s/ Daniel A. Medina |
Date: April 1, 2013 | |||
Daniel A. Medina | ||||
Director | ||||
/s/ Paul C. Hudson |
Date: April 1, 2013 | |||
Paul C. Hudson | ||||
Director |
46
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
F-1 | ||||
F-2 | ||||
Consolidated Statements of Operations and Comprehensive Income (Loss) |
F-3 | |||
F-4 | ||||
F-5 | ||||
F-6 |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Broadway Financial Corporation
We have audited the accompanying consolidated statements of financial condition of Broadway Financial Corporation and Subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive income (loss), changes in shareholders equity, and cash flows for each of the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. 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 financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 2, the Company has a tax sharing liability to its consolidated subsidiary that exceeds its available cash, the Company is in default under the terms of a $5 million line of credit with another financial institution lender in which the stock of its subsidiary bank, Broadway Federal Bank (the Bank) is held as collateral for the line of credit and the Company and the Bank are both under formal regulatory agreements. Furthermore, the Company and the Bank are not in compliance with these agreements and the Companys and the Banks capital plan that was submitted under the agreements has been preliminarily approved subject to completion of its recapitalization. Failure to comply with these agreements exposes the Company and the Bank to further regulatory sanctions that may include placing the Bank into receivership. These matters raise substantial doubt about the ability of Broadway Financial Corporation to continue as a going concern. The ability of the Company to continue as a going concern is dependent on many factors, one of which is regulatory action, including acceptance of its capital plan. Managements plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Crowe Horwath LLP |
Sacramento, California |
April 1, 2013 |
F-1
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, | ||||||||
2012 | 2011 | |||||||
(In thousands, except share and per share) |
||||||||
Assets |
||||||||
Cash |
$ | 13,420 | $ | 12,127 | ||||
Federal funds sold |
50,940 | 19,470 | ||||||
|
|
|
|
|||||
Cash and cash equivalents |
64,360 | 31,597 | ||||||
Securities available-for-sale, at fair value |
13,378 | 18,979 | ||||||
Loans receivable held for sale, at lower of cost or fair value |
19,051 | 12,983 | ||||||
Loans receivable held for investment, net of allowance of $11,869 and $17,299 |
251,723 | 322,770 | ||||||
Accrued interest receivable |
1,250 | 1,698 | ||||||
Federal Home Loan Bank (FHLB) stock |
3,901 | 4,089 | ||||||
Office properties and equipment, net |
2,617 | 4,626 | ||||||
Real estate owned |
8,163 | 6,699 | ||||||
Bank owned life insurance |
2,688 | 2,609 | ||||||
Investment in affordable housing limited partnership |
1,528 | 1,675 | ||||||
Deferred tax assets |
0 | 850 | ||||||
Other assets |
5,034 | 5,162 | ||||||
|
|
|
|
|||||
Total assets |
$ | 373,693 | $ | 413,737 | ||||
|
|
|
|
|||||
Liabilities and shareholders equity |
||||||||
Liabilities: |
||||||||
Deposits |
$ | 257,071 | $ | 294,686 | ||||
FHLB advances |
79,500 | 83,000 | ||||||
Junior subordinated debentures |
6,000 | 6,000 | ||||||
Other borrowings |
5,000 | 5,000 | ||||||
Accrued interest payable |
1,941 | 1,302 | ||||||
Dividends payable |
2,104 | 1,219 | ||||||
Advance payments by borrowers for taxes and insurance |
711 | 813 | ||||||
Other liabilities |
3,359 | 3,441 | ||||||
|
|
|
|
|||||
Total liabilities |
355,686 | 395,461 | ||||||
|
|
|
|
|||||
Commitments and Contingencies (Notes 8 and 17) |
||||||||
Shareholders Equity: |
||||||||
Senior preferred cumulative and non-voting stock, $.01 par value, authorized, issued and outstanding 9,000 shares of Series D at December 31, 2012 and 2011; liquidation preference of $10,262 at December 31, 2012 and $9,731 at December 31, 2011 |
8,963 | 8,963 | ||||||
Senior preferred cumulative and non-voting stock, $.01 par value, authorized, issued and outstanding 6,000 shares of Series E at December 31, 2012 and 2011; liquidation preference of $6,842 at December 31, 2012 and $6,488 at December 31, 2011 |
5,974 | 5,974 | ||||||
Preferred non-cumulative and non-voting stock, $.01 par value, authorized 985,000 shares; issued and outstanding 55,199 shares of Series A, 100,000 shares of Series B and 76,950 shares of Series C at December 31, 2012 and 2011; liquidation preference of $552 for Series A, $1,000 for Series B and $1,000 for Series C at December 31, 2012 and 2011 |
3,657 | 3,657 | ||||||
Preferred stock discount |
(598 | ) | (994 | ) | ||||
Common stock, $.01 par value, authorized 8,000,000 shares at December 31, 2012 and 2011; issued 2,013,942 shares at December 31, 2012 and 2011; outstanding 1,917,422 shares at December 31, 2012 and 1,744,565 shares at December 31, 2011 |
20 | 20 | ||||||
Additional paid-in capital |
8,895 | 10,824 | ||||||
Accumulated deficit |
(7,988 | ) | (7,295 | ) | ||||
Accumulated other comprehensive income, net of taxes of $400 at December 31, 2012 and 2011 |
318 | 571 | ||||||
Treasury stock-at cost, 96,520 shares at December 31, 2012 and 269,377 shares at December 31, 2011 |
(1,234 | ) | (3,444 | ) | ||||
|
|
|
|
|||||
Total shareholders equity |
18,007 | 18,276 | ||||||
|
|
|
|
|||||
Total liabilities and shareholders equity |
$ | 373,693 | $ | 413,737 | ||||
|
|
|
|
See accompanying notes to consolidated financial statements.
F-2
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
Year Ended December 31, | ||||||||
2012 | 2011 | |||||||
(In thousands, except per share) | ||||||||
Interest Income: |
||||||||
Interest and fees on loans receivable |
$ | 19,279 | $ | 24,376 | ||||
Interest on mortgage-backed securities and other securities |
491 | 700 | ||||||
Other interest income |
121 | 39 | ||||||
|
|
|
|
|||||
Total interest income |
19,891 | 25,115 | ||||||
|
|
|
|
|||||
Interest Expense: |
||||||||
Interest on deposits |
3,246 | 4,493 | ||||||
Interest on borrowings |
3,180 | 3,558 | ||||||
|
|
|
|
|||||
Total interest expense |
6,426 | 8,051 | ||||||
|
|
|
|
|||||
Net interest income before provision for loan losses |
13,465 | 17,064 | ||||||
Provision for loan losses |
1,190 | 12,153 | ||||||
|
|
|
|
|||||
Net interest income after provision for loan losses |
12,275 | 4,911 | ||||||
|
|
|
|
|||||
Non-Interest Income: |
||||||||
Service charges |
593 | 692 | ||||||
Loan servicing fees, net |
(175 | ) | 13 | |||||
Net losses on sale of loans |
(253 | ) | (88 | ) | ||||
Net gains (losses) on sales of REO |
292 | (35 | ) | |||||
Gain on sale of office properties and equipment |
2,523 | 0 | ||||||
Gain on sale of securities |
50 | 0 | ||||||
Other |
103 | 131 | ||||||
|
|
|
|
|||||
Total non-interest income |
3,133 | 713 | ||||||
|
|
|
|
|||||
Non-Interest Expense: |
||||||||
Compensation and benefits |
6,239 | 6,541 | ||||||
Occupancy expense, net |
1,288 | 1,436 | ||||||
Information services |
882 | 868 | ||||||
Professional services |
692 | 962 | ||||||
(Recapture) provision for losses on loans held for sale |
(84 | ) | 1,612 | |||||
Provision for losses on REO |
1,218 | 2,654 | ||||||
FDIC insurance |
860 | 1,017 | ||||||
Office services and supplies |
447 | 539 | ||||||
Other |
2,449 | 2,408 | ||||||
|
|
|
|
|||||
Total non-interest expense |
13,991 | 18,037 | ||||||
|
|
|
|
|||||
Income (loss) before income taxes |
1,417 | (12,413 | ) | |||||
Income tax expense |
829 | 1,842 | ||||||
|
|
|
|
|||||
Net income (loss) |
$ | 588 | $ | (14,255 | ) | |||
|
|
|
|
|||||
Other comprehensive (loss) income, net of tax: |
||||||||
Unrealized gain (loss) on securities available for sale |
$ | (203 | ) | $ | 532 | |||
Reclassification of net gains included in net income |
(50 | ) | 0 | |||||
Income tax effect |
0 | (224 | ) | |||||
|
|
|
|
|||||
Other comprehensive (loss) income, net of tax |
(253 | ) | 308 | |||||
|
|
|
|
|||||
Comprehensive income (loss) |
$ | 335 | $ | (13,947 | ) | |||
|
|
|
|
|||||
Net income (loss) |
$ | 588 | $ | (14,255 | ) | |||
Dividends and discount accretion on preferred stock |
(1,281 | ) | (1,114 | ) | ||||
|
|
|
|
|||||
Loss available to common shareholders |
$ | (693 | ) | $ | (15,369 | ) | ||
|
|
|
|
|||||
Loss per common share-basic |
$ | (0.38 | ) | $ | (8.81 | ) | ||
|
|
|
|
|||||
Loss per common share-diluted |
$ | (0.38 | ) | $ | (8.81 | ) | ||
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders Equity
(In thousands, except per share)
Preferred Stock |
Preferred Stock Discount |
Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Income, Net |
Treasury Stock |
Total Shareholders Equity |
|||||||||||||||||||||||||
Balance at January 1, 2011 |
$ | 18,594 | $ | (1,380 | ) | $ | 20 | $ | 10,740 | $ | 8,074 | $ | 263 | $ | (3,451 | ) | $ | 32,860 | ||||||||||||||
Net loss for the year ended December 31, 2011 |
0 | 0 | 0 | 0 | (14,255 | ) | 0 | 0 | (14,255 | ) | ||||||||||||||||||||||
Unrealized gain on securities available-for-sale, net of tax |
0 | 0 | 0 | 0 | 0 | 308 | 0 | 308 | ||||||||||||||||||||||||
Treasury stock used for vested stock awards |
0 | 0 | 0 | (2 | ) | 0 | 0 | 7 | 5 | |||||||||||||||||||||||
Cash dividends accrued ($50 per senior preferred share of Series D) |
0 | 0 | 0 | 0 | (431 | ) | 0 | 0 | (431 | ) | ||||||||||||||||||||||
Cash dividends accrued ($50 per senior preferred share of Series E) |
0 | 0 | 0 | 0 | (297 | ) | 0 | 0 | (297 | ) | ||||||||||||||||||||||
Stock-based compensation expense |
0 | 0 | 0 | 86 | 0 | 0 | 0 | 86 | ||||||||||||||||||||||||
Accretion of preferred stock discount |
0 | 386 | 0 | 0 | (386 | ) | 0 | 0 | 0 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance at December 31, 2011 |
18,594 | (994 | ) | 20 | 10,824 | (7,295 | ) | 571 | (3,444 | ) | 18,276 | |||||||||||||||||||||
Net income for the year ended December 31, 2012 |
0 | 0 | 0 | 0 | 588 | 0 | 0 | 588 | ||||||||||||||||||||||||
Unrealized loss on securities available-for-sale, net of tax |
0 | 0 | 0 | 0 | 0 | (253 | ) | 0 | (253 | ) | ||||||||||||||||||||||
Treasury stock issued to certain directors and senior officers |
0 | 0 | 0 | (2,010 | ) | 0 | 0 | 2,210 | 200 | |||||||||||||||||||||||
Cash dividends accrued ($50 per senior preferred share of Series D) |
0 | 0 | 0 | 0 | (450 | ) | 0 | 0 | (450 | ) | ||||||||||||||||||||||
Cash dividends accrued ($50 per senior preferred share of Series E) |
0 | 0 | 0 | 0 | (300 | ) | 0 | 0 | (300 | ) | ||||||||||||||||||||||
Interest in unpaid dividends |
0 | 0 | 0 | 0 | (135 | ) | 0 | 0 | (135 | ) | ||||||||||||||||||||||
Stock-based compensation expense |
0 | 0 | 0 | 81 | 0 | 0 | 0 | 81 | ||||||||||||||||||||||||
Accretion of preferred stock discount |
0 | 396 | 0 | 0 | (396 | ) | 0 | 0 | 0 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance at December 31, 2012 |
$ | 18,594 | $ | (598 | ) | $ | 20 | $ | 8,895 | $ | (7,988 | ) | $ | 318 | $ | (1,234 | ) | $ | 18,007 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended December 31 | ||||||||
2012 | 2011 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 588 | $ | (14,255 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
Provision for loan losses |
1,190 | 12,153 | ||||||
(Recapture) provision for losses on loans held for sale |
(84 | ) | 1,612 | |||||
Provision for losses on REO |
1,218 | 2,654 | ||||||
Depreciation |
306 | 501 | ||||||
Net amortization of deferred loan origination costs |
140 | 45 | ||||||
Net amortization of premiums on mortgage-backed securities |
57 | 96 | ||||||
Amortization of investment in affordable housing limited partnership |
147 | 325 | ||||||
Stock-based compensation expense |
81 | 86 | ||||||
Earnings on bank owned life insurance |
(79 | ) | (87 | ) | ||||
Gain on sale of office properties and equipment |
(2,523 | ) | 0 | |||||
Gain on sale of securities |
(50 | ) | 0 | |||||
Net (gains) losses on sales of REO |
(292 | ) | 35 | |||||
Net losses on sales of loans |
253 | 88 | ||||||
Net change in: |
||||||||
Accrued interest receivable |
448 | 518 | ||||||
Deferred tax assets |
850 | 4,295 | ||||||
Other assets |
128 | (3,176 | ) | |||||
Accrued interest payable |
639 | 752 | ||||||
Other liabilities |
(82 | ) | 128 | |||||
|
|
|
|
|||||
Net cash provided by operating activities |
2,935 | 5,770 | ||||||
|
|
|
|
|||||
Cash flows from investing activities: |
||||||||
Net change in loans receivable held for investment |
50,233 | 35,904 | ||||||
Proceeds from sales and principal repayments of loans receivable held-for-sale |
3,097 | 15,746 | ||||||
Available-for-sale securities: |
||||||||
Sales |
1,050 | 0 | ||||||
Maturities, prepayments and calls |
4,291 | 2,511 | ||||||
Held-to-maturity securities: |
||||||||
Maturities, prepayments and calls |
0 | 2,207 | ||||||
Proceeds from sales of REO |
7,760 | 4,727 | ||||||
Net redemption of Federal Home Loan Bank stock |
188 | 0 | ||||||
Proceeds from sale of office properties and equipment |
4,237 | 0 | ||||||
Additions to office properties and equipment |
(11 | ) | (33 | ) | ||||
|
|
|
|
|||||
Net cash provided by investing activities |
70,845 | 61,062 | ||||||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Net change in deposits |
(37,615 | ) | (53,759 | ) | ||||
Proceeds from Federal Home Loan Bank advances |
29,500 | 9,500 | ||||||
Repayments on Federal Home Loan Bank advances |
(33,000 | ) | (13,500 | ) | ||||
Reissuance of treasury stock |
200 | 5 | ||||||
Net change in advance payments by borrowers for taxes and insurance |
(102 | ) | 541 | |||||
|
|
|
|
|||||
Net cash used in financing activities |
(41,017 | ) | (57,213 | ) | ||||
|
|
|
|
|||||
Net change in cash and cash equivalents |
32,763 | 9,619 | ||||||
Cash and cash equivalents at beginning of the year |
31,597 | 21,978 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of the year |
$ | 64,360 | $ | 31,597 | ||||
|
|
|
|
|||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid for interest |
$ | 5,787 | $ | 7,299 | ||||
Cash paid for income taxes |
3 | 980 | ||||||
Supplemental disclosures of non-cash investing and financing activities: |
||||||||
Transfers of loans receivable held for investment to REO |
$ | 9,817 | $ | 9,289 | ||||
Transfers of loans receivable held for sale to REO |
334 | 1,526 | ||||||
Transfers of loans receivable from loans receivable held for investment to loans receivable held-for-sale |
9,667 | 2,544 | ||||||
Transfers of securities from held-to-maturity securities to available-for-sale securities |
0 | 10,525 |
See accompanying notes to consolidated financial statements.
F-5
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
Note 1 Summary of Significant Accounting Policies
Nature of Operations and Principles of Consolidation
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 Banks 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 and commercial real estate located in Southern California. At December 31, 2012, the Bank operated three 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.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Broadway Federal Bank, f.s.b. and Broadway Service Corporation. All significant inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates
To prepare consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP), management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance and provision for loan losses, impaired loans, fair value of loans held for sale, classification of investment securities, fair value of real estate owned, deferred tax asset valuation allowance, disallowed deferred tax assets for regulatory capital, and fair values of investment securities and other financial instruments are particularly subject to change.
Cash Flows
Cash and cash equivalents include cash, deposits with other financial institutions with maturities less than 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, accrued interest receivable, other assets, deferred income taxes, other liabilities, and advance payments by borrowers for taxes and insurance.
Securities
Debt securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income (loss), net of tax.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Management evaluates securities for other-than-temporary impairment (OTTI) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Consideration is given to the financial condition and near-term prospects of the issuer, the length of time and the extent to which the fair value has been less than the cost, and the intent and ability of management to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuers financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers financial condition.
F-6
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Loans Receivable Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Also included in loans held for sale at December 31, 2012 were 30 non-performing loans secured by one-to-four units which were transferred from loans held for investment at the lower of cost or fair value, less estimated selling costs. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the amount allocated to the servicing rights. Gains and losses on sales of loans are based on the difference between the selling price and the carrying value of the related loan sold. When loans held for sale are sold, existing deferred loan fees or costs are an adjustment of the gain or loss on sale.
Loans Receivable Held for Investment
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of allowance for loan losses, loans in process, deferred loan fees and costs and unamortized premiums and discounts. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct loan origination costs are deferred, and recognized in income using the level-yield method without anticipating prepayments.
Interest income on all loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. A loan is moved to non-accrual status in accordance with the Companys policy, typically after 90 days of non-payment.
All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Concentration of Credit Risk
Most of the Companys business activity, excluding loans made to churches throughout the country, is with customers located within Southern California. Therefore, the Companys exposure to credit risk is significantly affected by changes in the economy in the Southern California area.
Loans Purchased
The Bank purchases or participates in loans originated by other institutions. The determination to purchase loans is based upon the Banks investment needs and market opportunities. Subject to regulatory restrictions applicable to savings institutions, the Banks current loan policies allow all loan types to be purchased. The determination to purchase specific loans or pools of loans is subject to the Banks 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.
F-7
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in managements judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.
A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (TDR) and classified as impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan-by-loan basis. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loans existing rate or at the fair value of collateral if repayment is expected solely from the collateral.
Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loans effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component covers non impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 10 quarters. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.
During 2012, we refined our historical loss rate calculation with the use of a migration to loss analysis, and re-assessed the application of the qualitative factors noted above for purposes of allocating the allowance for loan losses by loan category. As a result of our updated loss analyses, we modified certain general reserve rate percentages at December 31, 2012 to reflect our current estimates of the amount of probable incurred losses in our loan portfolio in determining our general valuation allowances.
F-8
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
The following portfolio segments have been identified: one to four units, five or more units, commercial real estate, church, construction, commercial loans, and consumer loans. One to four units, five or more units, commercial real estate, church and construction loans each consist of a single class. Classes within our commercial loan portfolio consist of sports and other loans. Classes within our consumer loan portfolio consist of loan on savings and other loans.
One to Four Units - Subject to adverse employment conditions in the local economy leading to increased default rate; decreased market values from oversupply in a geographic area; impact to borrowers ability to maintain payments in the event of incremental rate increases on adjustable rate mortgages.
Five or More Units - Subject to adverse various market conditions that cause a decrease in market value or lease rates; change in personal funding sources for tenants; oversupply of units in a specific region; a shift in population; reputational risks.
Commercial Real Estate - Subject to adverse conditions in the local economy which may lead to reduced cash flows due to vacancies and reduced rental rates; decreases in the value of underlying collateral.
Church - Subject to adverse economic and employment conditions leading to reduced cash flows from members donations and offerings; the stability, quality and popularity of church leadership.
Construction - Subject to adverse conditions in the local economy which may lead to reduced demand for new commercial, multi-family or single-family buildings or reduced lease or sale opportunities once the building is complete.
Commercial - Subject to industry conditions including decreases in product demand; intangible value of a professional sports franchise.
Consumer - Subject to adverse employment conditions in the local economy which may lead to higher default rate.
Real Estate Owned
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.
Office Properties and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 10 to 40 years. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 10 years. Leasehold improvements are amortized over the lease term or the estimated useful life of the asset whichever is shorter.
Federal Home Loan Bank (FHLB) stock
The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
F-9
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Bank-Owned Life Insurance
The Bank has purchased life insurance policies on a key executive. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Investment in Affordable Housing Limited Partnership
The Bank owns a less than 5% interest in an affordable housing limited partnership. The investment is recorded using the cost method and is being amortized over the life of the related tax credits. The tax credits are being recognized in the consolidated financial statements to the extent they are utilized on the Companys income tax returns. The investment is reviewed for impairment on an annual basis or on an interim basis if an event occurs that would trigger potential impairment.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Stock-Based Compensation
Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Companys common stock at the date of grant is used for restricted stock awards.
Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Income Taxes
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Retirement Plans
Employee 401(k) expense is the amount of matching contributions. Deferred compensation plan expense allocates the benefits over years of service. The cost of shares issued to the Employee Stock Ownership Plan (ESOP) but not yet allocated to participants is shown as a reduction of shareholders equity. There were no share issued to the ESOP that were not allocated to participants at December 31, 2012. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts. Dividends on allocated ESOP shares reduce retained earnings or increase accumulated deficit; dividends on unearned ESOP shares reduce debt and accrued interest, if any.
F-10
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
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. The Series C perpetual convertible preferred stock is non-voting and non-cumulative, with a par value of $0.01 per share and a liquidation preference of $13.00 per share. The Series C preferred stock is convertible at a conversion price of $13.00 per share, subject to certain anti-dilution adjustment provisions. The Series A, B and C preferred stocks have non-cumulative annual dividend rates of 5% of their liquidation preference. Dividends are accrued when declared.
The Series D and Series E preferred stock are cumulative and non-voting perpetual preferred stock with a par value of $0.01 per share and a liquidation preference of $1 thousand per share. Series D and E preferred stocks accrue cumulative compounding dividends at the rate of 5% of their liquidation preference per year for the first five years after issuance and 9% per year thereafter. Accretion of discount on preferred stock is shown as a reduction of retained earnings.
Earnings Per Common Share
Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net earnings (loss) and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on securities available-for-sale, net of tax, which are also recognized as separate components of equity.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that any such matters existed as of the balance sheet date that would have a material effect on the consolidated financial statements.
Restrictions on Cash
Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements. At December 31, 2012, the amount of cash reserves with Federal Reserve Bank was $2.6 million.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may limit the dividends paid by a bank to its holding company or by the holding company to its shareholders. (See Notes 2 and 16 for more specific disclosure.)
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
F-11
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Operating Segments
The Company operates as a single segment. The operating information used by management to assess performance and make operating decisions about the Company is the consolidated financial data presented in this report. For the years ended 2012 and 2011, the Company had one active operating subsidiary, Broadway Federal Bank. The Company has determined that banking is its one reportable business segment.
Reclassifications
Some items in the prior year consolidated financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year consolidated net earnings or shareholders equity.
New Accounting Standards
In May 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective for interim and annual reporting periods beginning after December 15, 2011. The adoption of this standard did not have a material effect on the Companys consolidated financial statements.
In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholders equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The amendments in this guidance are effective as of the beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. Early adoption is permitted. The adoption of this amendment had no impact on the Companys consolidated financial statements as the prior presentation of comprehensive income was in compliance with this amendment.
In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). The amendments in ASU 2011-11 require the disclosure of information on offsetting and related arrangements for financial and derivative instruments to enable users of its financial statements to understand the effect of those arrangements on it financial position. Amendments under ASU 2011-11 will be applied retrospectively for fiscal years, and interim periods within those years, beginning after January 1, 2013. The Company is evaluating the effect, if any, adoption of ASU 2011-11 will have on its consolidated financial statements.
In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive (ASU 2013-02). This guidance is the culmination of the FASBs deliberation on reporting reclassification adjustments from accumulated other comprehensive income (AOCI). The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income. However, the amendments require disclosure of amounts reclassified out of AOCI in its entirety, by component, on the face of the statement of operations or in the notes thereto. Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced to other disclosures that provide additional detail. This standard is effective prospectively for public entities for annual and interim reporting periods beginning after December 15, 2012. The Company is evaluating the effect, if any, adoption of ASU 2013-02 will have on its consolidated financial statements.
F-12
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Note 2 Going Concern, Regulatory Matters and Managements Plans for Recapitalization of the Company
Going Concern
The Companys financial statements have been prepared assuming that the Company will continue as a going-concern, which contemplates continuity of operations, and realization of assets and liquidation of liabilities in the ordinary course of business. The ability of the Company to continue as a going concern is dependent on many factors, one of which is regulatory action, including acceptance of its capital plan. The following discussion describes matters that raise substantial doubt about the Companys ability to continue as a going concern as well as managements plans for responding to these matters.
Holding Company Liquidity
The Company has a tax sharing liability to the Bank which exceeds operating cash at the Company level. The Company used its cash available at the holding company level to pay a substantial portion of this liability pursuant to the terms of the Tax Allocation Agreement between the Bank and the Company on March 30, 2012 and does not have cash available to pay its operating expenses. Additionally, the Company is deferring interest payments on its Floating Rate Junior Subordinated Debentures that mature in March 17, 2014, and is in default under the terms of a $5.0 million line of credit with another financial institution lender (see Note 11).
The Companys principal source of funds for the payment of operating expenses, as well as for the declaration and payment of dividends, is dividends received from the Bank. OCC regulations limit the amount of dividends that may be paid by the Bank without prior approval of the OCC. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current years net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. Based on the above limitation and further regulatory restrictions on dividends described below, the Bank may not declare dividends during the year 2013 without OCC approval, and such approval is not likely to be given. Accordingly, the Company will not be able to meet its payment obligations noted above within the foreseeable future unless the Company is able to secure new capital. There are additional dividend restrictions related to the Companys preferred stock purchase agreements with the U.S. Treasury as discussed in Note 16 under the caption Capital Purchase Program.
Regulatory Matters
As a result of significant deficiencies in the Companys and the Banks operations noted in a regulatory examination, the Company and the Bank entered into cease and desist orders (the Orders) issued by the OTS effective September 9, 2010, requiring, among other things, that the Company and the Bank take remedial actions to improve the Banks loan underwriting and internal asset review procedures, to reduce the amount of its non-performing assets and to improve other aspects of the Banks business, as well as the Companys management of its business and the oversight of the Companys business by the Board. Furthermore, the Orders, which are now administered by the OCC with respect to the Bank and the FRB with respect to the Company, require the Bank to attain, and thereafter maintain, a Tier 1 (Core) Capital to Adjusted Total Assets ratio of at least 8% and a Total Risk-Based Capital to Risk-Weighted Assets ratio of at least 12%, both of which ratios are greater than the respective 5% and 10% levels for such ratios that are generally required under OTS (now OCC) regulations. The Orders also prohibit the Bank from paying dividends to the Company, and prohibit the Company from paying dividends to its shareholders, without the prior written approval of the OCC and the FRB, respectively. In addition, the Company is not permitted to incur, issue, renew, repurchase, make payments on or increase any debt or redeem any capital stock without prior notice to and receipt of written notice of non-objection from the FRB.
F-13
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Additionally, the Orders issued by the OTS have imposed certain limitations on the Company and the Bank. These limitations include the following, among others:
| The Bank may not increase its total assets during any quarter in excess of an amount equal to the net interest credited on deposit liabilities during the prior quarter without the prior written notice to and receipt of notice of non-objection from the OCC. |
| Neither the Company nor the Bank may declare or pay any dividends or make any other capital distributions without the prior written approval of the OCC. |
| Neither the Company nor the Bank may make any changes in its directors or senior executive officers without prior notice to and receipt of notice of non-objection from the OCC. |
| The Company and the Bank are subject to limitations on severance and indemnification payments and on entering into or amending employment agreements and compensation arrangements, and on the payment of bonuses to Bank directors and officers. |
| The Company may not incur, issue, renew, repurchase, make payments on or increase any debt or redeem any capital stock without prior notice to and receipt of written notice of non-objection from the FRB. |
| The Bank is not permitted to increase the amount of its brokered deposits beyond the amount of interest credited without prior notice to and receipt of notice of non-objection from the OCC. |
The Orders require the submission of a capital plan that is acceptable to the FRB and the OCC. The capital plan of the Company and the Bank has been preliminarily approved by the FRB and OCC subject to the successful completion of the Companys recapitalization plan described below.
Managements Plans for Recapitalization of the Company and the Bank
Managements plan to address the conditions described above is to raise additional equity capital for the Company and exchange senior securities for common equity. The Companys ability to continue as a going concern is dependent on the timely implementation and success of this plan. There can be no assurance that managements plan will be achieved.
Management of the Company is pursuing a comprehensive recapitalization plan to strengthen and simplify the Companys capital structure. To date, the Company has entered into a written agreement with the U.S. Department of the Treasury pursuant to which the U.S. Treasury will exchange its holdings of the Companys Series D and Series E Fixed Rate Cumulative Perpetual Preferred Stock for common stock (or initially equivalents) at a discount of 50% of the liquidation amount, plus an undiscounted exchange of the accumulated but unpaid dividends on such preferred stock, for common stock (or initially equivalents). The exchange by the U.S. Treasury is subject to various conditions, including the exchange of the Companys other outstanding series of preferred stock at discounts of 50% of the aggregate liquidation values, the placement of at least $5 million of new common equity capital, and other conditions. The Exchange is expected to close contemporaneously with the closing of separate placements of common stock and exchange transactions with the holders of each other series of the Companys preferred stock. In addition, the Company has entered into a written agreement with the holder of its Series A Perpetual Preferred Stock pursuant to which the holder will exchange its holdings of Series A Preferred for common stock (or initially equivalents) at a discount of 50% of the liquidation amount. This exchange is subject to various conditions, including the exchange of the Companys other outstanding series of preferred stock, the placement of new common equity capital, and other conditions.
The Company has reached agreements in principle with the holders of its Series B Perpetual Preferred Stock and Series C Noncumulative Perpetual Convertible Preferred Stock to exchange their holdings for common stock (or initially equivalents) at a discount of 50% of the liquidation amount. Also, the Company has reached agreements in principle with its senior lender, pursuant to which the lender will exchange a portion of the line of credit, which is currently in default, for common stock (or initially equivalents) at 100% of the face amount to be exchanged; forgive the accrued interest on the entire amount of the line of credit to the date of the exchange; and enter into a modified credit agreement for the remainder of the facility that would be outstanding after the exchange. As presently contemplated, the series of transactions related to the exchange of debt and Series B and C Preferred Stock will reduce the Companys line of credit facility by approximately $2.5 million and eliminate the accrued interest on the line of credit.
F-14
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
As a condition to consummating these exchanges, the Company plans to concurrently complete private placements or other sales of the Companys common stock aggregating $5 million, or approximately $4 million if approved by the U.S. Department of the Treasury, or more in gross proceeds. The Company anticipates that these exchanges and placements and sales of common stock would, if completed, result in the issuance of approximately 17.8 million new shares of the Companys common stock, which would constitute approximately 90% of the pro forma outstanding shares of the Companys common stock. The 17.8 million new shares of common stock exceed the Companys current unissued and authorized shares. Accordingly, the Company plans to issue a form of common stock equivalent to the lender and holders of Preferred Stock in exchange for their securities to consummate the recapitalization, after which the Company plans to seek shareholder approval to increase the Companys authorized shares, and issue a portion of such authorized shares to replace the common stock equivalents issued in the recapitalization.
There can be no assurance that managements capital plan will be achieved. If the Company is unable to raise capital, management plans to continue to shrink assets, decrease nonperforming assets and implement strategies to increase earnings. Failure to maintain capital sufficient to meet the higher capital requirements could result in further regulatory action, which could include seizure of the Bank through the appointment of a conservator or receiver.
F-15
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Note 3 Securities
The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolios at December 31, 2012 and December 31, 2011 and the corresponding amounts of unrealized gains which are recognized in accumulated other comprehensive income (loss) were as follows:
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
December 31, 2012: |
||||||||||||||||
Residential mortgage-backed |
$ | 12,660 | $ | 718 | $ | 0 | $ | 13,378 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale securities |
$ | 12,660 | $ | 718 | $ | 0 | $ | 13,378 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2011: |
||||||||||||||||
Residential mortgage-backed |
$ | 17,008 | $ | 902 | $ | 0 | $ | 17,910 | ||||||||
U.S. Government and federal agency |
1,000 | 69 | 0 | 1,069 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale securities |
$ | 18,008 | $ | 971 | $ | 0 | $ | 18,979 | ||||||||
|
|
|
|
|
|
|
|
At December 31, 2012, the Banks investment portfolio consisted of residential mortgage-backed securities with an estimated remaining life of 4.7 years. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Securities pledged had a carrying amount of $1.5 million at December 31, 2012 and December 31, 2011, and were pledged to secure public deposits. At December 31, 2012 and December 31, 2011, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders equity. During the year ended December 31, 2012, $1.0 million of U.S Government federal agency bonds were sold and the Company recognized a gain of $50 thousand. There were no sales of securities during the year ended December 31, 2011. There were no securities with unrealized losses at December 31, 2012 and December 31, 2011.
F-16
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Note 4 Loans Receivable Held-for-Sale
Loans receivable held-for-sale at December 31, 2012 and December 31, 2011 were as follows:
December 31, | ||||||||
2012 | 2011 | |||||||
(In thousands) | ||||||||
One-to-four units |
$ | 7,916 | $ | 0 | ||||
Five or more units |
5,795 | 6,395 | ||||||
Commercial real estate |
1,358 | 1,712 | ||||||
Church |
4,300 | 5,550 | ||||||
Valuation allowance for unrealized losses |
(318 | ) | (674 | ) | ||||
|
|
|
|
|||||
Loans receivable held for sale, net |
$ | 19,051 | $ | 12,983 | ||||
|
|
|
|
|||||
Non-performing loans receivable held for sale (1) |
$ | 10,168 | $ | 5,612 | ||||
Valuation allowance |
0 | (382 | ) | |||||
|
|
|
|
|||||
Non-performing loans receivable held for sale, net |
$ | 10,168 | $ | 5,230 | ||||
|
|
|
|
|||||
Performing loans receivable held for sale |
$ | 9,201 | $ | 8,045 | ||||
Valuation allowance |
(318 | ) | (292 | ) | ||||
|
|
|
|
|||||
Performing loans receivable held for sale, net |
$ | 8,883 | $ | 7,753 | ||||
|
|
|
|
(1) | Net of charge-offs of $2.5 million and $953 thousand at December 31, 2012 and December 31, 2011. |
When management decides to sell certain loans held in portfolio, we reclassify them to held-for-sale at the lower of cost or fair value, less estimated selling costs. During the year ended December 31, 2012, 30 non-performing loans secured by one-to-four units, two non-performing loans secured by commercial real estate and two non-performing loans secured by churches, were transferred to held-for-sale. The loans had a carrying amount of $9.7 million, net of charge-offs of $3.6 million.
Certain delinquent and non-performing loans, primarily commercial real estate and church loans, totaling $2.9 million were sold during the year ended December 31, 2012. Net loss on sales of non-performing loans totaled $253 thousand for the year ended December 31, 2012. In February 2013, we sold all of the one-to-four units residential loans that were included in our loans held for sale at December 31, 2012.
During the year ended December 31, 2012, two loans receivable held-for-sale were transferred to REO. The loans were secured by commercial real estate properties, which had a total carrying amount of $334 thousand, net of charge-offs of $327 thousand. Two loans receivable held-for-sale secured by church buildings, which had a total carrying amount of $1.5 million, net of a charge-offs of $1.7 million, were transferred to REO during the year ended December 31, 2011.
Net lower of cost or market recoveries on non-performing loans receivable held-for-sale totaled $109 thousand for the year ended December 31, 2012, compared to $1.6 million of net lower of cost or market write-downs for the same period in 2011. Additionally, during 2012 and 2011, we increased our valuation allowance by $25 thousand and $48 thousand on loans held for sale that are still considered performing loans.
F-17
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Note 5 Loans Receivable Held for Investment
Loans at year-end were as follows:
December 31, | ||||||||
2012 | 2011 | |||||||
(In thousands) | ||||||||
Real estate: |
||||||||
One-to-four units |
$ | 57,733 | $ | 76,682 | ||||
Five or more units |
83,350 | 108,161 | ||||||
Commercial real estate |
41,124 | 54,259 | ||||||
Church |
76,254 | 89,099 | ||||||
Construction |
735 | 3,790 | ||||||
Commercial: |
||||||||
Sports |
1,711 | 1,996 | ||||||
Other |
2,115 | 4,900 | ||||||
Consumer: |
||||||||
Loan on savings |
0 | 821 | ||||||
Other |
104 | 108 | ||||||
|
|
|
|
|||||
Total gross loans receivable |
263,126 | 339,816 | ||||||
Less: |
||||||||
Loans in process |
74 | 202 | ||||||
Net deferred loan fees (costs) |
(557 | ) | (473 | ) | ||||
Unamortized discounts |
17 | 18 | ||||||
Allowance for loan losses |
11,869 | 17,299 | ||||||
|
|
|
|
|||||
Loans receivable, net |
$ | 251,723 | $ | 322,770 | ||||
|
|
|
|
The following tables present the activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2012 and 2011:
For the year ended December 31, 2012 | ||||||||||||||||||||||||||||||||
One-to-four units |
Five or more units |
Commercial real estate |
Church | Construction | Commercial | Consumer | Total | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Beginning balance |
$ | 4,855 | $ | 2,972 | $ | 3,108 | $ | 5,742 | $ | 249 | $ | 247 | $ | 126 | $ | 17,299 | ||||||||||||||||
Provision for loan losses |
2,318 | (747 | ) | 61 | 415 | (241 | ) | (561 | ) | (55 | ) | 1,190 | ||||||||||||||||||||
Recoveries |
25 | 1 | 60 | 15 | 0 | 412 | 7 | 520 | ||||||||||||||||||||||||
Loans charged off |
(5,138 | ) | (104 | ) | (544 | ) | (1,354 | ) | 0 | 0 | 0 | (7,140 | ) | |||||||||||||||||||
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|
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|
|
|
|||||||||||||||||
Ending balance |
$ | 2,060 | $ | 2,122 | $ | 2,685 | $ | 4,818 | $ | 8 | $ | 98 | $ | 78 | $ | 11,869 | ||||||||||||||||
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For the year ended December 31, 2011 | ||||||||||||||||||||||||||||||||
One-to-four units |
Five or more units |
Commercial real estate |
Church | Construction | Commercial | Consumer | Total | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Beginning balance |
$ | 4,579 | $ | 2,469 | $ | 3,493 | $ | 6,909 | $ | 74 | $ | 1,300 | $ | 1,634 | $ | 20,458 | ||||||||||||||||
Provision for loan losses |
1,172 | 939 | 4,144 | 2,616 | 175 | 2,796 | 311 | 12,153 | ||||||||||||||||||||||||
Recoveries |
0 | 2 | 15 | 4 | 0 | 67 | 24 | 112 | ||||||||||||||||||||||||
Loans charged off |
(896 | ) | (438 | ) | (4,544 | ) | (3,787 | ) | 0 | (3,916 | ) | (1,843 | ) | (15,424 | ) | |||||||||||||||||
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|||||||||||||||||
Ending balance |
$ | 4,855 | $ | 2,972 | $ | 3,108 | $ | 5,742 | $ | 249 | $ | 247 | $ | 126 | $ | 17,299 | ||||||||||||||||
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F-18
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2012 and 2011:
December 31, 2012 | ||||||||||||||||||||||||||||||||
One-to- four units |
Five or more units |
Commercial real estate |
Church | Construction | Commercial | Consumer | Total | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||||||
Ending allowance balance attributable to loans: |
||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 719 | $ | 125 | $ | 543 | $ | 1,276 | $ | 0 | $ | 0 | $ | 69 | $ | 2,732 | ||||||||||||||||
Collectively evaluated for impairment |
1,341 | 1,997 | 2,142 | 3,542 | 8 | 98 | 9 | 9,137 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total ending allowance balance |
$ | 2,060 | $ | 2,122 | $ | 2,685 | $ | 4,818 | $ | 8 | $ | 98 | $ | 78 | $ | 11,869 | ||||||||||||||||
|
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|
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Loans: |
||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment |
$ | 4,576 | $ | 3,766 | $ | 10,364 | $ | 25,328 | $ | 273 | $ | 0 | $ | 69 | $ | 44,376 | ||||||||||||||||
Loans collectively evaluated for impairment |
53,157 | 79,584 | 30,760 | 50,926 | 462 | 3,826 | 35 | 218,750 | ||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total ending loans balance |
$ | 57,733 | $ | 83,350 | $ | 41,124 | $ | 76,254 | $ | 735 | $ | 3,826 | $ | 104 | $ | 263,126 | ||||||||||||||||
|
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|
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|
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|
|
|
December 31, 2011 | ||||||||||||||||||||||||||||||||
One-to- four units |
Five or more units |
Commercial real estate |
Church | Construction | Commercial | Consumer | Total | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||||||
Ending allowance balance attributable to loans: |
||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 1,678 | $ | 161 | $ | 255 | $ | 1,683 | $ | 97 | $ | 0 | $ | 70 | $ | 3,944 | ||||||||||||||||
Collectively evaluated for impairment |
3,177 | 2,811 | 2,853 | 4,059 | 152 | 247 | 56 | 13,355 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total ending allowance balance |
$ | 4,855 | $ | 2,972 | $ | 3,108 | $ | 5,742 | $ | 249 | $ | 247 | $ | 126 | $ | 17,299 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Loans: |
||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment |
$ | 13,246 | $ | 3,837 | $ | 7,396 | $ | 31,494 | $ | 302 | $ | 0 | $ | 70 | $ | 56,345 | ||||||||||||||||
Loans collectively evaluated for impairment |
63,436 | 104,324 | 46,863 | 57,605 | 3,488 | 6,896 | 859 | 283,471 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total ending loans balance |
$ | 76,682 | $ | 108,161 | $ | 54,259 | $ | 89,099 | $ | 3,790 | $ | 6,896 | $ | 929 | $ | 339,816 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
The following table presents information related to loans individually evaluated for impairment by class of loans as of December 31, 2012 and 2011:
December 31, 2012 | December 31, 2011 | |||||||||||||||||||||||
Unpaid Principal Balance |
Recorded Investment |
Allowance for Loan Losses Allocated |
Unpaid Principal Balance |
Recorded Investment |
Allowance for Loan Losses Allocated |
|||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||
One-to-four units |
$ | 1,986 | $ | 1,484 | $ | 0 | $ | 6,904 | $ | 4,636 | $ | 0 | ||||||||||||
Five or more units |
2,038 | 1,819 | 0 | 2,946 | 2,871 | 0 | ||||||||||||||||||
Commercial real estate |
10,184 | 6,423 | 0 | 9,105 | 5,449 | 0 | ||||||||||||||||||
Church |
18,664 | 15,689 | 0 | 24,680 | 20,560 | 0 | ||||||||||||||||||
Construction |
279 | 273 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Sports |
3,888 | 0 | 0 | 4,000 | 0 | 0 | ||||||||||||||||||
Other |
0 | 0 | 0 | 285 | 0 | 0 | ||||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||
One-to-four units |
3,092 | 3,092 | 719 | 8,610 | 8,610 | 1,678 | ||||||||||||||||||
Five or more units |
1,947 | 1,947 | 125 | 966 | 966 | 161 | ||||||||||||||||||
Commercial real estate |
3,941 | 3,941 | 543 | 1,947 | 1,947 | 255 | ||||||||||||||||||
Church |
9,677 | 9,639 | 1,276 | 10,934 | 10,934 | 1,683 | ||||||||||||||||||
Construction |
0 | 0 | 0 | 302 | 302 | 97 | ||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Other |
69 | 69 | 69 | 70 | 70 | 70 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 55,765 | $ | 44,376 | $ | 2,732 | $ | 70,749 | $ | 56,345 | $ | 3,944 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality. For purposes of this disclosure, the unpaid principal balance is not reduced for net charge-offs.
The following table presents monthly average of individually impaired loans by class of loans and the related interest income for the years ended December 31, 2012 and 2011.
For the year ended December 31, 2012 | For the year ended December 31, 2011 | |||||||||||||||
Average Recorded Investment |
Cash Basis Income |
Average Recorded Investment |
Cash Basis Income |
|||||||||||||
|
|
|
|
|
|
|
|
|||||||||
(In thousands) | ||||||||||||||||
One-to-four units |
$ | 13,112 | $ | 528 | $ | 10,836 | $ | 486 | ||||||||
Five or more units |
2,964 | 86 | 3,199 | 153 | ||||||||||||
Commercial real estate |
7,922 | 230 | 11,687 | 483 | ||||||||||||
Church |
30,802 | 967 | 30,148 | 1,445 | ||||||||||||
Construction |
290 | 12 | 314 | 23 | ||||||||||||
Commercial: |
||||||||||||||||
Sports |
0 | 0 | 2,566 | 0 | ||||||||||||
Other |
0 | 0 | 297 | 16 | ||||||||||||
Consumer: |
||||||||||||||||
Loan on savings |
0 | 0 | 796 | 0 | ||||||||||||
Other |
70 | 5 | 0 | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 55,160 | $ | 1,828 | $ | 59,843 | $ | 2,606 | ||||||||
|
|
|
|
|
|
|
|
F-20
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Cash-basis interest income recognized represents cash received for interest payments on accruing impaired loans. Interest income that would have been recognized for the years ended December 31, 2012 and 2011 had loans performed in accordance with their original terms were $4.0 million and $5.1 million.
The following table presents the recorded investment in non-accrual loans by class of loans as of December 31, 2012 and 2011:
December 31, | ||||||||
2012 | 2011 | |||||||
(In thousands) | ||||||||
Loans receivable held for sale: |
||||||||
One-to-four units |
$ | 6,656 | $ | 0 | ||||
Five or more units |
1,956 | 2,496 | ||||||
Commercial real estate |
0 | 338 | ||||||
Church |
1,556 | 2,778 | ||||||
Loans receivable held for investment: |
||||||||
One-to-four units |
1,489 | 7,974 | ||||||
Five or more units |
2,312 | 3,450 | ||||||
Commercial real estate |
7,090 | 5,449 | ||||||
Church |
15,689 | 21,891 | ||||||
Construction |
273 | 302 | ||||||
Consumer: |
||||||||
Other |
69 | 70 | ||||||
|
|
|
|
|||||
Total non-accrual loans |
$ | 37,090 | $ | 44,748 | ||||
|
|
|
|
There were no loans 90 days or more delinquent that were accruing interest as of December 31, 2012 and 2011.
The following tables present the aging of the recorded investment in past due loans, including loans held for sale, as of December 31, 2012 and 2011 by class of loans:
December 31, 2012 | ||||||||||||||||||||
30-59 Days Past Due |
60-89 Days Past Due |
Greater than 90 Days Past Due |
Total Past Due |
Total Loans Not Past Due |
||||||||||||||||
(In thousands) | ||||||||||||||||||||
Loans receivable held for sale: |
||||||||||||||||||||
One-to-four units |
$ | 0 | $ | 871 | $ | 6,656 | $ | 7,527 | $ | 389 | ||||||||||
Five or more units |
0 | 0 | 1,956 | 1,956 | 3,839 | |||||||||||||||
Commercial real estate |
0 | 0 | 0 | 0 | 1,358 | |||||||||||||||
Church |
0 | 0 | 1,556 | 1,556 | 2,744 | |||||||||||||||
Loans receivable held for investment: |
||||||||||||||||||||
One-to-four units |
1,077 | 0 | 1,489 | 2,566 | 55,167 | |||||||||||||||
Five or more units |
587 | 554 | 2,312 | 3,453 | 79,897 | |||||||||||||||
Commercial real estate |
0 | 0 | 7,090 | 7,090 | 34,034 | |||||||||||||||
Church |
1,617 | 0 | 15,689 | 17,306 | 58,948 | |||||||||||||||
Construction |
0 | 0 | 273 | 273 | 462 | |||||||||||||||
Commercial: |
||||||||||||||||||||
Sports |
0 | 0 | 0 | 0 | 1,711 | |||||||||||||||
Other |
0 | 0 | 0 | 0 | 2,115 | |||||||||||||||
Consumer: |
||||||||||||||||||||
Other |
0 | 0 | 69 | 69 | 35 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 3,281 | $ | 1,425 | $ | 37,090 | $ | 41,796 | $ | 240,699 | ||||||||||
|
|
|
|
|
|
|
|
|
|
F-21
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
December 31, 2011 | ||||||||||||||||||||
30-59 Days Past Due |
60-89 Days Past Due |
Greater than 90 Days Past Due |
Total Past Due |
Total Loans Not Past Due |
||||||||||||||||
(In thousands) | ||||||||||||||||||||
Loans receivable held for sale: |
||||||||||||||||||||
Five or more units |
$ | 0 | $ | 0 | $ | 2,496 | $ | 2,496 | $ | 3,899 | ||||||||||
Commercial real estate |
0 | 0 | 338 | 338 | 1,374 | |||||||||||||||
Church |
0 | 0 | 2,778 | 2,778 | 2,772 | |||||||||||||||
Loans receivable held for investment: |
||||||||||||||||||||
One to four units |
921 | 2,464 | 7,974 | 11,359 | 65,323 | |||||||||||||||
Five or more units |
1,324 | 63 | 3,450 | 4,837 | 103,324 | |||||||||||||||
Commercial real estate |
2,247 | 525 | 5,449 | 8,221 | 46,038 | |||||||||||||||
Church |
2,647 | 1,440 | 21,891 | 25,978 | 63,121 | |||||||||||||||
Construction |
0 | 264 | 302 | 566 | 3,224 | |||||||||||||||
Commercial: |
||||||||||||||||||||
Sports |
0 | 0 | 0 | 0 | 1,996 | |||||||||||||||
Other |
125 | 0 | 0 | 125 | 4,775 | |||||||||||||||
Consumer: |
||||||||||||||||||||
Loan on savings |
0 | 0 | 0 | 0 | 821 | |||||||||||||||
Other |
0 | 0 | 70 | 70 | 38 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 7,264 | $ | 4,756 | $ | 44,748 | $ | 56,768 | $ | 296,705 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings
The Company has allocated $2.5 million and $2.6 million of specific reserves for loans the terms of which have been modified in troubled debt restructurings and were performing as of December 31, 2012 and December 31, 2011. At December 31, 2012, loans classified as a TDR totaled $41.1 million, of which $22.8 million were included in non-accrual loans and $18.3 million were on accrual status. At December 31, 2011, loans classified as a TDR totaled $37.1 million, of which $19.4 million were included in non-accrual loans and $17.7 million were on accrual status. TDRs on accrual status are comprised of loans that were accruing at the time of restructuring or loans that have complied with the terms of their restructured agreements for a satisfactory period of time, and for which the Bank anticipates full repayment of both principal and interest. TDRs that are on non-accrual can be returned to accrual status after a period of sustained performance, generally determined to be six months of timely payments as modified. As of December 31, 2012 and December 31, 2011, the Company has no commitment to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.
During the year ended December 31, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk. Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 10 months to 7 years. Modifications involving an extension of the maturity date were for periods ranging from 10 months to 5 years.
F-22
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
The following table presents loans by class modified as troubled debt restructurings that occurred during the years ended December 31, 2012 and 2011:
Year Ended December 31, 2012 | Year Ended December 31, 2011 | |||||||||||||||||||||||
Number of Loans |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
Number of Loans |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
One-to-four units |
2 | $ | 115 | $ | 115 | 9 | $ | 7,711 | $ | 7,745 | ||||||||||||||
Five or more units |
6 | 2,205 | 2,351 | 1 | 494 | 459 | ||||||||||||||||||
Commercial real estate |
6 | 4,515 | 4,716 | 0 | 0 | 0 | ||||||||||||||||||
Church |
13 | 7,036 | 7,123 | 12 | 9,211 | 8,681 | ||||||||||||||||||
Other |
1 | 0 | 0 | 1 | 70 | 70 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
28 | $ | 13,871 | $ | 14,305 | 23 | $ | 17,486 | $ | 16,955 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The troubled debt restructurings described above increased the allowance for loan losses by $778 thousand and $2.5 million for the years ended December 31, 2012 and 2011 and resulted in charge offs of $279 thousand and $928 thousand during the years ended December 31, 2012 and 2011.
A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the years ended December 31, 2012 and 2011:
Year Ended December 31, 2012 | Year Ended December 31, 2011 | |||||||||||||||
Number of Loans |
Pre-Modification Outstanding Recorded Investment |
Number of Loans |
Pre-Modification Outstanding Recorded Investment |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Commercial real estate |
0 | $ | 0 | 1 | $ | 418 | ||||||||||
Church |
4 | 3,211 | 0 | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
4 | $ | 3,211 | 1 | $ | 418 | ||||||||||
|
|
|
|
|
|
|
|
The terms of certain other loans were modified during 2012 and 2011 that did not meet the definition of a troubled debt restructuring. As of December 31, 2012 and 2011, these loans have a total recorded investment of $791 thousand and $7.2 million, respectively. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Companys internal underwriting policy.
F-23
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. For one-to-four family residential, consumer and other smaller balance homogenous loans, a credit grade is established at inception, and generally only adjusted based on performance. Information about payment status is disclosed elsewhere. The Company analyzes all other loans individually by classifying the loans as to credit risk. This analysis is performed at least on a quarterly basis. The Company uses the following definitions for risk ratings:
| Special Mention. Loans classified as special mention have a potential weakness that deserves managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institutions credit position at some future date. |
| Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. |
| Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as 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. |
| Loss. Loans classified as loss are considered uncollectible and of such little value that to continue to carry the loan as an active asset is no longer warranted. |
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Based on the most recent analysis performed, the risk category of loans by class of loans as of December 31, 2012 and December 31, 2011 was as follows:
December 31, 2012 | ||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Loss | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
One-to-four units |
$ | 55,613 | $ | 631 | $ | 1,489 | $ | 0 | $ | 0 | ||||||||||
Five or more units |
73,673 | 5,250 | 4,427 | 0 | 0 | |||||||||||||||
Commercial real estate |
25,605 | 2,541 | 12,921 | 57 | 0 | |||||||||||||||
Church |
33,532 | 19,502 | 23,220 | 0 | 0 | |||||||||||||||
Construction |
462 | 0 | 273 | 0 | 0 | |||||||||||||||
Commercial: |
||||||||||||||||||||
Sports |
0 | 1,711 | 0 | 0 | 0 | |||||||||||||||
Other |
1,877 | 141 | 97 | 0 | 0 | |||||||||||||||
Consumer: |
||||||||||||||||||||
Other |
35 | 0 | 69 | 0 | 0 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 190,797 | $ | 29,776 | $ | 42,496 | $ | 57 | $ | 0 | ||||||||||
|
|
|
|
|
|
|
|
|
|
F-24
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
December 31, 2011 | ||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Loss | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
One-to-four units |
$ | 63,483 | $ | 3,044 | $ | 9,846 | $ | 309 | $ | 0 | ||||||||||
Five or more units |
95,621 | 7,450 | 4,939 | 151 | 0 | |||||||||||||||
Commercial real estate |
36,098 | 6,721 | 11,364 | 76 | 0 | |||||||||||||||
Church |
37,532 | 13,100 | 37,873 | 594 | 0 | |||||||||||||||
Construction |
500 | 2,988 | 302 | 0 | 0 | |||||||||||||||
Commercial: |
||||||||||||||||||||
Sports |
0 | 1,996 | 0 | 0 | 0 | |||||||||||||||
Other |
2,363 | 2,369 | 168 | 0 | 0 | |||||||||||||||
Consumer: |
||||||||||||||||||||
Loan on savings |
821 | 0 | 0 | 0 | 0 | |||||||||||||||
Other |
108 | 0 | 0 | 0 | 0 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 236,526 | $ | 37,668 | $ | 64,492 | $ | 1,130 | $ | 0 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Note 6 Real Estate Owned
Real estate owned at December 31, 2012 and December 31, 2011 were as follows:
December 31, | ||||||||
2012 | 2011 | |||||||
(In thousands) | ||||||||
One-to-four units |
$ | 0 | $ | 759 | ||||
Commercial real estate |
3,090 | 3,374 | ||||||
Church |
5,619 | 2,913 | ||||||
Valuation allowance for unrealized losses |
(546 | ) | (347 | ) | ||||
|
|
|
|
|||||
Real estate owned |
$ | 8,163 | $ | 6,699 | ||||
|
|
|
|
Activity in the valuation allowance was as follows:
2012 | 2011 | |||||||
(In thousands) | ||||||||
Beginning valuation allowance |
$ | 347 | $ | 54 | ||||
Additions charged to expense |
1,218 | 2,654 | ||||||
Direct write-downs |
(1,019 | ) | (2,361 | ) | ||||
|
|
|
|
|||||
Ending valuation allowance |
$ | 546 | $ | 347 | ||||
|
|
|
|
Expenses related to foreclosed assets include:
2012 | 2011 | |||||||
(In thousands) | ||||||||
Net (gains) losses on sales |
$ | (292 | ) | $ | 35 | |||
Provision for unrealized losses |
1,218 | 2,654 | ||||||
Operating expenses |
592 | 499 | ||||||
|
|
|
|
|||||
Total |
$ | 1,518 | $ | 3,188 | ||||
|
|
|
|
F-25
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Note 7 Fair Value
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a companys own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate fair value:
The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities relationship to other benchmark quoted securities (Level 2 inputs).
The fair value of non-performing loans receivable held-for-sale is generally based upon the fair value of the collateral which is obtained from recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-performing loans held for sale are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated every nine months. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
F-26
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Appraisals for collateral-dependent impaired loans, non-performing loans held for sale and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, an independent third-party licensed appraiser reviews the appraisals for accuracy and reasonableness, reviewing the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.
Assets Measured on a Recurring Basis
Assets measured at fair value on a recurring basis are summarized below:
Fair Value Measurements at December 31, 2012 Using | ||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | |||||||||||||
(In thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Securities available-for-sale - residential mortgage-backed |
$ | 0 | $ | 13,378 | $ | 0 | $ | 13,378 | ||||||||
Fair Value Measurements at December 31, 2011 Using | ||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | |||||||||||||
(In thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Securities available-for-sale - residential mortgage-backed |
$ | 0 | $ | 17,910 | $ | 0 | $ | 17,910 | ||||||||
Securities available-for-sale U.S. government and federal agency |
0 | 1,069 | 0 | 1,069 |
There were no transfers between Level 1, Level 2, or Level 3 during the year ended December 31, 2012.
F-27
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Assets Measured on a Non- Recurring Basis
The following table provides information regarding our assets measured at fair value on a non-recurring basis at the dates indicated. The fair value measurement for all of these assets falls within Level 3 of the fair value hierarchy.
Fair Value at December 31, 2012 |
Gains (Losses) |
Fair Value at December 31, 2011 |
Gains (Losses) |
|||||||||||||
(In thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Non-performing loans receivable held-for-sale: |
||||||||||||||||
One-to-four units |
$ | 6,656 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Five or more units |
1,956 | 341 | 2,114 | (259 | ) | |||||||||||
Commercial real estate |
0 | (5 | ) | 338 | (215 | ) | ||||||||||
Church |
1,556 | (227 | ) | 2,778 | (1,089 | ) | ||||||||||
Impaired loans carried at fair value of collateral: |
||||||||||||||||
One-to-four units |
1,284 | (425 | ) | 6,201 | (1,005 | ) | ||||||||||
Five or more units |
1,679 | 3 | 874 | (151 | ) | |||||||||||
Commercial real estate |
3,385 | (419 | ) | 2,869 | (3,472 | ) | ||||||||||
Church |
6,649 | (813 | ) | 13,153 | (3,779 | ) | ||||||||||
Construction |
0 | 0 | 205 | (97 | ) | |||||||||||
Commercial |
0 | 0 | 0 | (2,974 | ) | |||||||||||
Other |
0 | 0 | 0 | (70 | ) | |||||||||||
Real estate owned: |
||||||||||||||||
One-to-four units |
0 | 0 | 718 | (394 | ) | |||||||||||
Five or more units |
0 | 0 | 0 | 0 | ||||||||||||
Commercial real estate |
2,752 | (397 | ) | 3,126 | (1,035 | ) | ||||||||||
Church |
5,411 | (512 | ) | 2,855 | (239 | ) |
F-28
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2012:
Fair Value | Valuation |
Unobservable |
Range (Weighted Average) |
|||||||
(Dollars in thousands) | ||||||||||
Nonperforming loans held for sale one-to-four units |
$6,656 | Sales comparison approach | Adjustment for differences between the comparable sales | -30% to 23% | ||||||
Nonperforming loans held for sale five or more units |
1,956 | Sales comparison approach | Adjustment for differences between the comparable sales | -13% to 17% | ||||||
Income approach | Capitalization rate | 6% to 8.5% | ||||||||
Nonperforming loans held for sale church |
1,556 | Sales comparison approach | Adjustment for differences between the comparable sales | -27% to 29% | ||||||
Impaired loans - one-to-four units |
1,284 | Sales comparison approach | Adjustment for differences between the comparable sales | -5% to 18% | ||||||
Impaired loans five or more units |
1,679 | Sales comparison approach | Adjustment for differences between the comparable sales | -26% to 16% | ||||||
Income approach | Capitalization rate | 6.5% to 9% | ||||||||
Impaired loans commercial real estate |
3,385 | Sales comparison approach | Adjustment for differences between the comparable sales | -17% to -1% | ||||||
Income approach | Capitalization rate | 7% to 9% | ||||||||
Impaired loans church |
6,649 | Sales comparison approach | Adjustment for differences between the comparable sales | -45% to 8% | ||||||
Income approach | Capitalization rate | 6.75% to 8% | ||||||||
Real estate owned commercial real estate |
2,752 | Sales comparison approach | Adjustment for differences between the comparable sales | -67% to 1% | ||||||
Income approach | Capitalization rate | 8% to 11% | ||||||||
Real estate owned church |
5,411 | Sales comparison approach | Adjustment for differences between the comparable sales | -12% to 7% | ||||||
Income approach | Capitalization rate | 11.5% |
F-29
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Fair Values of Financial Instruments
The carrying amounts and estimated fair values of financial instruments, at December 31, 2012 and December 31, 2011 were as follows:
|
Fair Value Measurements at December 31, 2012 Using | |||||||||||||||||||
Carrying Value |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Financial Assets: |
| |||||||||||||||||||
Cash and cash equivalents |
$ | 64,360 | $ | 64,360 | $ | 0 | $ | 0 | $ | 64,360 | ||||||||||
Securities available-for-sale |
13,378 | 0 | 13,378 | 0 | 13,378 | |||||||||||||||
Loans receivable held for sale |
19,051 | 0 | 0 | 19,051 | 19,051 | |||||||||||||||
Loans receivable held for investment |
251,723 | 0 | 0 | 252,043 | 252,043 | |||||||||||||||
Federal Home Loan Bank stock |
3,901 | N/A | N/A | N/A | N/A | |||||||||||||||
Accrued interest receivable |
1,250 | 0 | 42 | 1,208 | 1,250 | |||||||||||||||
Financial Liabilities: |
||||||||||||||||||||
Deposits |
$ | (257,071 | ) | $ | 0 | $ | (253,155 | ) | $ | 0 | $ | (253,155 | ) | |||||||
Federal Home Loan Bank advances |
(79,500 | ) | 0 | (84,769 | ) | 0 | (84,769 | ) | ||||||||||||
Junior subordinated debentures |
(6,000 | ) | 0 | 0 | (4,852 | ) | (4,852 | ) | ||||||||||||
Other borrowings |
(5,000 | ) | 0 | 0 | (4,205 | ) | (4,205 | ) | ||||||||||||
Accrued interest payable |
(1,941 | ) | 0 | (87 | ) | (1,854 | ) | (1,941 | ) | |||||||||||
Advance payments by borrowers for taxes and insurance |
(711 | ) | 0 | (711 | ) | 0 | (711 | ) |
December 31, 2011 | ||||||||
Carrying Amount |
Estimated Fair Value |
|||||||
Financial Assets: |
||||||||
Cash and cash equivalents |
$ | 31,597 | $ | 31,597 | ||||
Securities available-for-sale |
18,979 | 18,979 | ||||||
Loans receivable held for sale |
12,983 | 12,983 | ||||||
Loans receivable held for investment |
322,770 | 323,090 | ||||||
Federal Home Loan Bank stock |
4,089 | N/A | ||||||
Accrued interest receivable |
1,698 | 1,698 | ||||||
Financial Liabilities: |
||||||||
Deposits |
$ | (294,686 | ) | $ | (294,313 | ) | ||
Federal Home Loan Bank advances |
(83,000 | ) | (88,911 | ) | ||||
Junior subordinated debentures |
(6,000 | ) | (5,319 | ) | ||||
Other borrowings |
(5,000 | ) | (4,434 | ) | ||||
Advance payments by borrowers for taxes and insurance |
(813 | ) | (813 | ) | ||||
Accrued interest payable |
(1,302 | ) | (1,302 | ) |
The methods and assumptions, not previously presented, used to estimate fair values are described as follows:
(a) Cash and Cash Equivalents
The carrying amounts of cash and cash equivalents approximate fair values and are classified as Level 1.
(b) Loans receivable held for sale
The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors or appraisal reports adjusted by sales commission assumptions resulting in a Level 3 classification.
F-30
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
(c) Loans receivable held for investment
Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
(d) FHLB Stock
It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.
(e) Deposits and Advance Payments by Borrowers for Taxes and Insurance
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using discounted cash flow calculations that apply interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
(f) Federal Home Loan Bank Advances
The fair values of the Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.
(g) Junior Subordinated Debentures and Other Borrowings
The fair values of the Companys Junior subordinated debentures and other borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.
(h) Accrued Interest Receivable/Payable
The carrying amounts of accrued interest are classified the same as the related asset / liability.
Note 8 Office Properties and Equipment, net
Year-end office properties and equipment were as follows:
2012 | 2011 | |||||||
(In thousands) | ||||||||
Land |
$ | 572 | $ | 1,723 | ||||
Office buildings and improvements |
3,949 | 5,051 | ||||||
Furniture, fixtures and equipment |
2,091 | 2,120 | ||||||
|
|
|
|
|||||
6,612 | 8,894 | |||||||
Less accumulated depreciation |
(3,995 | ) | (4,268 | ) | ||||
|
|
|
|
|||||
Office properties and equipment, net |
$ | 2,617 | $ | 4,626 | ||||
|
|
|
|
F-31
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Depreciation expense was $306 thousand and $501 thousand for 2012 and 2011. During 2012, the main office building, which had a carrying amount of $1.7 million, was sold at a $2.5 million gain.
At December 31, 2012, the Company was obligated through 2021 under various non-cancelable operating leases on buildings and land used for office space and banking purposes. These operating leases contain escalation clauses which provide for increased rental expense, based primarily on increases in real estate taxes and cost-of-living-indices. The Company also leases certain office equipment. Rent expense under the operating leases was $373 thousand for 2012 and $252 thousand for 2011.
Rent commitments, before considering renewal options that generally are present, were as follows:
Premises | Equipment | Total | ||||||||||
Year ending December 31: | (In thousands) | |||||||||||
2013 |
$ | 311 | $ | 28 | $ | 339 | ||||||
2014 |
178 | 0 | 178 | |||||||||
2015 |
220 | 0 | 220 | |||||||||
2016 |
230 | 0 | 230 | |||||||||
2017 |
237 | 0 | 237 | |||||||||
Thereafter |
893 | 0 | 893 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 2,069 | $ | 28 | $ | 2,097 | ||||||
|
|
|
|
|
|
Note 9 Deposits
Deposits are summarized as follows:
December 31, | ||||||||
2012 | 2011 | |||||||
(In thousands) | ||||||||
NOW account and other demand deposits |
$ | 11,706 | $ | 15,143 | ||||
Non-interest bearing demand deposits |
21,513 | 24,072 | ||||||
Money market deposits |
16,829 | 21,872 | ||||||
Passbook |
37,055 | 37,084 | ||||||
Certificates of deposit |
169,968 | 196,515 | ||||||
|
|
|
|
|||||
Total |
$ | 257,071 | $ | 294,686 | ||||
|
|
|
|
At December 31, 2012 and 2011, brokered deposits totaled $2.9 million and $9.2 million, respectively. As disclosed in Note 2, the Bank is not permitted to increase the amount of its brokered deposits beyond the amount of interest credited without prior notice of non-objection from the OCC.
Certificates of deposit of $100 thousand or more were $121.2 million and $128.1 million at year end 2012 and 2011.
F-32
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Scheduled maturities of certificates of deposit for the next five years were as follows:
Maturity |
Amount | |||
(In thousands) | ||||
2013 |
$ | 95,745 | ||
2014 |
39,790 | |||
2015 |
20,478 | |||
2016 |
6,696 | |||
2017 |
7,046 | |||
Thereafter |
213 | |||
|
|
|||
$ | 169,968 | |||
|
|
Note 10Federal Home Loan Bank Advances
At year-end, advances from the Federal Home Loan Bank were as follows:
Amount | ||||
December 31, 2012 |
(In thousands | ) | ||
Maturities January 2014 to December 2017, fixed rates at rates from 0.91% to 4.70%, averaging 2.67% |
$ | 79,500 | ||
|
|
|||
December 31, 2011 |
||||
Maturities September 2012 to February 2018, fixed rates at rates from 0.91% to 4.81%, averaging 3.09% |
$ | 83,000 | ||
|
|
Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances were collateralized by $185.0 million and $205.8 million of first mortgage loans at year-end 2012 and 2011 under a blanket lien arrangement. Based on this collateral, the Companys holdings of FHLB stock and a general borrowing limit of $100.0 million, the Company is eligible to borrow up to an additional $8.8 million at year-end 2012.
Required payments over the next five years are as follows:
Amount | ||||
(In thousands) | ||||
2013 |
$ | 0 | ||
2014 |
30,500 | |||
2015 |
5,500 | |||
2016 |
7,000 | |||
2017 |
36,500 | |||
Thereafter |
0 | |||
|
|
|||
$ | 79,500 | |||
|
|
Note 11 Junior Subordinated Debentures and Other Borrowings
On March 17, 2004, the Company issued $6.0 million of Floating Rate Junior Subordinated Debentures in a private placement. The debentures mature in 10 years and interest is payable quarterly at a rate per annum equal to the 3-month LIBOR plus 2.54%. The interest rate is determined as of each March 17, June 17, September 17, and December 17, and was 2.85% at December 31, 2012. The Company stopped paying interest on the debentures in September 2010. The accrued interest on the debentures was $454 thousand as of December 31, 2012. Under the Cease and Desist Order applicable to the Company discussed in Note 2, the Company is not permitted to make payments on its debt without prior notice to and receipt of written notice of non-objection
F-33
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
from the Board of Governors of the Federal Reserve System, acting through the Federal Reserve Bank of San Francisco, (the FRB). In addition, under the terms of the subordinated debentures, the Company is not allowed to make payments on the subordinated debentures if the Company is in default on any of its senior indebtedness, which term includes the senior line of credit described below.
On February 28, 2010, the Company borrowed an aggregate of $5.0 million under its $5.0 million line of credit with another financial institution, and invested all of the proceeds in the equity capital of the Bank. The interest rate on the line of credit adjusts annually, subject to a minimum of 6.00% and increases by an additional 5% in the event of default. Borrowings under this line of credit are secured by the Companys investment in the Bank. The full amount of this borrowing became due and payable on July 31, 2010. This senior line of credit has not been repaid and the Company is now in default under the line of credit agreement. On April 7, 2011, the lender agreed to forbear from exercising its rights (other than increasing the interest rate by the default rate margin) pursuant to the line of credit agreement until January 1, 2012 subject to certain conditions. The lender has declined to extend the forbearance agreement. The accrued interest on the line of credit was $1.4 million as of December 31, 2012.
Managements plans to address these matters are described in Note 2 to these consolidated financial statements.
Note 12 Employee Benefit Plans
Broadway Federal 401(k) Plan
A 401(k) benefit plan allows employee contributions for substantially all employees up to 15% of their compensation, which are matched at a rate equal to 50% of the first 6% of the compensation contributed. Expense totaled $89 thousand and $91 thousand for 2012 and 2011.
ESOP Plan
Employees participate in an Employee Stock Ownership Plan (ESOP) after attaining certain age and service requirements. At the end of employment, participants will receive cash or shares at their election for their vested balance. Vesting occurs over seven years. Shares held by the ESOP and allocated to participants were 87,505 at December 31, 2012 and 2011. There are no shares unallocated as of December 31, 2012 and 2011. Dividends on allocated shares increase participant accounts. In addition to shares allocated, the Bank makes discretionary cash contributions to participant accounts. Cash contributions totaled $57 thousand for the year ended December 31, 2012 and $58 thousand for the year ended December 31, 2011. Compensation expense related to the ESOP was $61 thousand for 2012 and $53 thousand for 2011.
F-34
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Deferred Compensation Plan
The Bank has a deferred compensation agreement with its former Chief Executive Officer (CEO) whereby a stipulated amount will be paid to the CEO over a period of 15 years upon his retirement. The amount accrued under this agreement was $921 thousand at December 31, 2012 and $764 thousand at December 31, 2011, and is accrued over the period of active employment. Compensation expense was $157 thousand for 2012 and $150 thousand for 2011.
Note 13 Income Taxes
The Company and its subsidiaries are subject to U.S. federal and state income taxes. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. 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 tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Income tax expense (benefit) was as follows:
2012 | 2011 | |||||||
(In thousands) | ||||||||
Current |
||||||||
Federal |
$ | (29 | ) | $ | (2,261 | ) | ||
State |
8 | (192 | ) | |||||
Deferred |
||||||||
Federal |
431 | (1,732 | ) | |||||
State |
(282 | ) | (1,694 | ) | ||||
Change in valuation allowance |
701 | 7,721 | ||||||
|
|
|
|
|||||
Total |
$ | 829 | $ | 1,842 | ||||
|
|
|
|
Effective tax rates differ from the federal statutory rate of 34% applied to earnings before income taxes due to the following:
2012 | 2011 | |||||||
(In thousands) | ||||||||
Federal statutory rate times financial statement income (loss) |
$ | 482 | $ | (4,221 | ) | |||
Effect of: |
||||||||
State taxes, net of federal benefit |
104 | (885 | ) | |||||
Enterprise zone net interest deduction |
(356 | ) | (428 | ) | ||||
Earnings from bank owned life insurance |
(32 | ) | (36 | ) | ||||
Low income housing credits |
(167 | ) | (388 | ) | ||||
Change in valuation allowance |
701 | 7,721 | ||||||
Other, net |
97 | 79 | ||||||
|
|
|
|
|||||
Total |
$ | 829 | $ | 1,842 | ||||
|
|
|
|
F-35
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Year-end deferred tax assets and liabilities were due to the following:
2012 | 2011 | |||||||
(In thousands) | ||||||||
Deferred tax assets: |
||||||||
Allowance for loan losses |
$ | 3,235 | $ | 5,633 | ||||
Accrued liabilities |
191 | 181 | ||||||
State income taxes |
40 | 39 | ||||||
Deferred compensation |
404 | 339 | ||||||
Stock compensation |
251 | 218 | ||||||
Real estate owned |
623 | 0 | ||||||
Unrealized gain/loss on loans held for sale |
131 | 183 | ||||||
Net operating loss carryforward |
5,767 | 4,847 | ||||||
Non-accrual loan interest |
501 | 637 | ||||||
Basis difference on fixed assets |
117 | 101 | ||||||
Partnership investment |
0 | 10 | ||||||
General business credit |
470 | 332 | ||||||
Alternative minimum tax credit |
113 | 119 | ||||||
Other |
29 | 2 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
11,872 | 12,641 | ||||||
|
|
|
|
Deferred tax liabilities: |
||||||||
Deferred loan fees/costs |
(1,754 | ) | (1,878 | ) | ||||
Real estate owned |
(0 | ) | (465 | ) | ||||
Net unrealized appreciation on available-for-sale securities |
(295 | ) | (400 | ) | ||||
FHLB stock dividends |
(644 | ) | (644 | ) | ||||
Mortgage servicing rights |
(58 | ) | (149 | ) | ||||
Partnership investment |
(5 | ) | 0 | |||||
Prepaid expenses |
(82 | ) | (27 | ) | ||||
|
|
|
|
|||||
Total deferred tax liabilities |
(2,838 | ) | (3,563 | ) | ||||
Valuation allowance |
(9,034 | ) | (8,228 | ) | ||||
|
|
|
|
|||||
Net deferred tax assets |
$ | 0 | $ | 850 | ||||
|
|
|
|
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the existence of cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, the forecasts of future income and tax planning strategies. This analysis is updated quarterly. Based on this analysis, the Company determined that a valuation allowance of $9.0 million was required as of December 31, 2012, resulting in $0 net deferred tax assets. The Company had recorded a valuation allowance of $8.2 million and net deferred tax assets of $850 thousand as of December 31, 2011. The decrease in net deferred tax assets from $850 thousand at December 31, 2011 to $0 at December 31, 2012 was due to the Companys inability to project future taxable income to be able to utilize its deferred tax assets and the execution of a tax planning strategy in 2012.
As of December 31, 2012, the Company has federal net operating loss carryforwards of $11.3 million, expiring beginning in 2031 through 2032 and California net operating loss carryforwards of $26.9 million, expiring beginning in 2029 through 2032. The Company also has federal general business credit of $470 thousand, expiring beginning in 2030 through 2032, and alternative minimum tax credit carryforwards of $113 thousand, which can be carried forward indefinitely.
F-36
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Federal income tax laws previously allowed the Company additional bad debt deductions based on the reserve method of computing the federal bad debt deduction. This method of computing the Companys federal bad debt deduction was permitted to be used by the Company until the end of 1987. As of December 31, 1987, the tax bad debt reserve balance totaled $3.0 million. Accounting standards do not require a deferred tax liability to be recorded on this amount, which otherwise would total $1.0 million at year end 2012 and 2011. If the Bank were liquidated, or otherwise ceases to be a bank, or if tax laws were to change, this amount would be expensed.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
2012 | 2011 | |||||||
(In thousands) | ||||||||
Balance at beginning of year |
$ | 323 | $ | 214 | ||||
Additions based on tax positions related to the current year |
108 | 108 | ||||||
Additions for tax positions of prior year |
0 | 1 | ||||||
Reductions for tax positions of prior years |
0 | 0 | ||||||
Settlements |
0 | 0 | ||||||
|
|
|
|
|||||
Balance at end of year |
$ | 431 | $ | 323 | ||||
|
|
|
|
Of this total, $431 thousand represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the income tax provision in future periods. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. The Companys continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. During 2012 and 2011, $4 thousand and $3 thousand were accrued for potential interest related to these unrecognized tax benefits.
Federal tax years 2009 through 2012 remain open for the assessment of Federal income tax. California tax years 2008 through 2012 remain open for the assessment of California income tax.
Note 14 Related Party Transactions
Loans to principal officers, directors, and their affiliates during 2012 were as follows:
Amount | ||||
(In thousands) | ||||
Beginning balance |
$ | 439 | ||
Repayments |
439 | |||
|
|
|||
Ending balance |
$ | 0 | ||
|
|
F-37
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Note 15 Stock-Based Compensation
In 2008, we adopted the 2008 Long-Term Incentive Plan (2008 LTIP), which was approved by the shareholders. The 2008 LTIP replaced the Companys 1996 Long-Term Incentive Plan (1996 LTIP) and 1996 Stock Option Plan (Stock Option Plan), which have expired and are no longer effective except as to outstanding awards. The 2008 LTIP permits the grant of non-qualified and incentive stock options, stock appreciation rights, full value awards and cash incentive awards to the Companys non-employee directors and certain officers and employees for up to 351,718 shares of common stock. Option awards are generally granted with an exercise price equal to the market price of the Companys common stock at the date of grant; those option awards have vesting periods ranging from immediate vesting to 5 years and have 10-year contractual terms. The Company has a policy of using shares held as treasury stock to satisfy share option exercises. Currently, the Company has a sufficient number of treasury shares to satisfy expected share option exercises.
The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model. Expected volatilities are based on historical volatilities of the Companys common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
There were no options granted during 2012 and 2011. The Company recorded $81 thousand and $88 thousand of stock-based compensation expense for 2012 and 2011, respectively.
A summary of the activity in the plans for 2012 follows:
1996 and 2008 LTIP | Stock Option Plan | Total | ||||||||||||||||||||||
Number Outstanding |
Weighted Average Exercise Price |
Number Outstanding |
Weighted Average Exercise Price |
Number Outstanding |
Weighted Average Exercise Price |
|||||||||||||||||||
Outstanding at January 1, 2012 |
222,793 | $ | 6.57 | 4,282 | $ | 9.91 | 227,075 | $ | 6.63 | |||||||||||||||
Forfeited or expired |
(49,043 | ) | 7.91 | (2,854 | ) | 9.61 | (51,897 | ) | 8.00 | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Outstanding at December 31, 2012 |
173,750 | $ | 6.19 | 1,428 | $ | 10.49 | 175,178 | $ | 6.23 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Vested or expected to vest |
162,750 | $ | 6.20 | 1,428 | $ | 10.49 | 164,178 | $ | 6.24 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Exercisable at December 31, 2012 |
132,750 | $ | 6.48 | 1,428 | $ | 10.49 | 134,178 | $ | 6.53 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012, options outstanding and options exercisable had a weighted average remaining contractual term of 5.54 years and 5.37 years, respectively. Options outstanding and options exercisable had no intrinsic value at December 31, 2012.
There were no options exercised during 2012 and 2011. Unrecognized compensation cost related to nonvested stock options granted under the plans totaled $83 thousand as of December 31, 2012. The cost is expected to be recognized over a weighted average period of 1.1 years.
F-38
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Note 16 Regulatory Capital Matters and Capital Purchase Program
Regulatory Capital Matters
The Bank is subject to regulatory capital requirements now administered by the Office of the Comptroller of the Currency, or OCC, which is the statutory successor under the Dodd-Frank Act to the former Office of Thrift Supervision, or OTS. The capital requirements, which remain the same as when administered by the OTS, involve quantitative measures of assets, liabilities, and certain off balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the OCC. Failure to meet capital requirements can result in regulatory action.
Prompt corrective action regulations also administered by the OCC provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.
The Bank met the minimum capital requirements at December 31, 2012 to conform to the general regulatory definition of well-capitalized under the prompt corrective action regulations, as well as the higher capital standards under the cease and desist orders, however it cannot be considered well capitalized while under the cease and desist order. The Bank did not meet the minimum capital requirements under the cease and desist order at December 31, 2011.
Actual and normally required capital amounts and ratios at December 31, 2012 and December 31, 2011, together with the higher capital requirements that the Bank is required to meet under the cease and desist order applicable to it, are presented below.
Actual | Required for Capital Adequacy Purposes |
To Be Well Capitalized Under Prompt Corrective Action Regulations |
Capital Requirements under Cease and Desist Order |
|||||||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratios | Amount | Ratios | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
December 31, 2012: |
||||||||||||||||||||||||||||||||
Tangible Capital to adjusted total assets |
$ | 32,936 | 8.82 | % | $ | 5,603 | 1.50 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Tier 1(Core) Capital to adjusted total assets |
$ | 32,936 | 8.82 | % | $ | 14,940 | 4.00 | % | $ | 18,675 | 5.00 | % | $ | 29,881 | 8.00 | % | ||||||||||||||||
Tier 1(Core) Capital to risk weighted assets |
$ | 32,936 | 13.12 | % | N/A | N/A | $ | 15,067 | 6.00 | % | N/A | N/A | ||||||||||||||||||||
Total Capital to risk weighted assets |
$ | 36,183 | 14.41 | % | $ | 20,090 | 8.00 | % | $ | 25,112 | 10.00 | % | $ | 30,135 | 12.00 | % | ||||||||||||||||
December 31, 2011: |
||||||||||||||||||||||||||||||||
Tangible Capital to adjusted total assets |
$ | 30,961 | 7.27 | % | $ | 6,396 | 1.50 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Tier 1(Core) Capital to adjusted total assets |
$ | 30,961 | 7.27 | % | $ | 17,055 | 4.00 | % | $ | 21,319 | 5.00 | % | $ | 34,111 | 8.00 | % | ||||||||||||||||
Tier 1(Core) Capital to risk weighted assets |
$ | 30,961 | 10.31 | % | N/A | N/A | $ | 18,019 | 6.00 | % | N/A | N/A | ||||||||||||||||||||
Total Capital to risk weighted assets |
$ | 34,882 | 11.61 | % | $ | 24,026 | 8.00 | % | $ | 30,032 | 10.00 | % | $ | 36,039 | 12.00 | % |
F-39
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Capital Purchase Program
On November 14, 2008, as part of the Troubled Asset Relief Program (TARP) Capital Purchase Program, the Company entered into a Letter Agreement and Securities Purchase Agreement (collectively, the Purchase Agreement) with the United States Department of the Treasury (the U.S. Treasury). Under the Purchase Agreement, the Company agreed to sell 9,000 shares of newly authorized Fixed Rate Cumulative Perpetual Preferred Stock, Series D, par value $.01 per share and liquidation preference of $1 thousand per share (the Series D Preferred Stock), for a total price of $9.0 million. Cumulative dividends accrue on the Series D Preferred Stock at the rate of 5% per year for the first five years and 9% per year thereafter. The shares may be redeemed by the Company at any time, subject to regulatory approval.
On December 4, 2009, the Company entered into another Purchase Agreement with the U.S. Treasury, pursuant to which the Company sold 6,000 shares of newly authorized Fixed Rate Cumulative Perpetual Preferred Stock, Series E, par value $.01 per share and liquidation preference of $1 thousand per share (the Series E Preferred Stock), for a total price of $6.0 million. Cumulative dividends accrue on the Series E Preferred Stock at the rate of 5% per year for the first five years and 9% per year thereafter. The shares may be redeemed by the Company at any time, subject to regulatory approval.
The Company ceased paying dividends to the U.S. Treasury on May 15, 2010. At December 31, 2012, accumulated dividends totaled $2.1 million.
Pursuant to the terms of the Purchase Agreements, the ability of the Company to declare or pay dividends or other distributions on, or purchase, redeem or otherwise acquire for consideration, shares of its Common Stock is subject to restrictions, including a restriction against increasing dividends from the last quarterly cash dividend per share ($0.05) declared on the Common Stock prior to November 14, 2008. The redemption, purchase or other acquisition of trust preferred securities of the Company or its affiliates also are restricted. These restrictions terminate on the earlier of (a) the third anniversary of the date of issuance of the Preferred Stock or (b) the date on which the Preferred Stock has been redeemed in whole or the U.S. Treasury has transferred all of the Preferred Stock to third parties, except that, after the third anniversary of the date of issuance of the Preferred Stock, if the Preferred Stock remains outstanding at such time, the Company may not increase its common dividends per share without obtaining the consent of the U.S. Treasury.
The Purchase Agreement also subjects the Company to certain executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (EESA). In this connection, as a condition to the closing of the transaction, the Companys Senior Executive Officers (as defined in the Purchase Agreement) (the Senior Executive Officers), (i) voluntarily waived any claim against the U.S. Treasury or the Company for any changes to such officers compensation or benefits that are required to comply with the regulation issued by the U.S. Treasury under the TARP Capital Purchase Program and acknowledged that the regulation may require modification of the compensation, bonus, incentive and other benefit plans, arrangements and policies and agreements as they relate to the period the U.S. Treasury owns the Preferred Stock of the Company; and (ii) entered into a letter agreement with the Company amending the Benefit Plans with respect to such Senior Executive Officers as may be necessary, during the period that the U.S. Treasury owns the Preferred Stock of the Company, as necessary to comply with Section 111(b) of the EESA.
F-40
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Note 17 Loan Commitments and Other Related Activities
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amounts of financial instruments with off-balance-sheet risk at year-end were as follows:
2012 | 2011 | |||||||
(In thousands) | ||||||||
Commitments to make loans variable rates |
$ | 141 | $ | 300 | ||||
Unused lines of credit variable rates |
399 | 4,783 |
Commitments to make loans are generally made for periods of 60 days or less. At year-end 2012, loan commitments consisted of one multi-family residential loan with an initial five year interest rate of 3.75%.
Note 18 Parent Company Only Condensed Financial Information
Condensed financial information of Broadway Financial Corporation follows:
Condensed Balance Sheet
December 31,
2012 | 2011 | |||||||
(In thousands) | ||||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 120 | $ | 641 | ||||
Investment in bank subsidiary |
33,268 | 31,568 | ||||||
Other assets |
340 | 227 | ||||||
|
|
|
|
|||||
Total assets |
$ | 33,728 | $ | 32,436 | ||||
|
|
|
|
|||||
Liabilities and shareholders equity |
||||||||
Junior subordinated debentures |
$ | 6,000 | $ | 6,000 | ||||
Other borrowings |
5,000 | 5,000 | ||||||
Dividends payable |
2,103 | 1,219 | ||||||
Due to bank subsidiary |
521 | 674 | ||||||
Other liabilities |
2,097 | 1,267 | ||||||
Shareholders equity |
18,007 | 18,276 | ||||||
|
|
|
|
|||||
Total liabilities and shareholders equity |
$ | 33,728 | $ | 32,436 | ||||
|
|
|
|
F-41
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Condensed Statements of Operations
Years ended December 31,
2012 | 2011 | |||||||
(In thousands) | ||||||||
Interest income |
$ | 0 | $ | 1 | ||||
Interest expense |
743 | 858 | ||||||
Other expense |
542 | 548 | ||||||
|
|
|
|
|||||
Loss before income tax and undistributed subsidiary income (loss) |
(1,285 | ) | (1,405 | ) | ||||
Income taxes benefit (expense) |
0 | (594 | ) | |||||
Equity in undistributed subsidiary income (loss) |
1,873 | (12,256 | ) | |||||
|
|
|
|
|||||
Net earnings (loss) |
$ | 588 | $ | (14,255 | ) | |||
|
|
|
|
Condensed Statements of Cash Flows
Years ended December 31,
2012 | 2011 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities |
||||||||
Net income (loss) |
$ | 588 | $ | (14,255 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
||||||||
Equity in undistributed subsidiary (income) loss |
(1,873 | ) | 12,256 | |||||
Change in other assets |
(113 | ) | 608 | |||||
Change in other liabilities |
830 | 977 | ||||||
|
|
|
|
|||||
Net cash used in operating activities |
(568 | ) | (414 | ) | ||||
|
|
|
|
|||||
Cash flows from investing activities |
||||||||
Investment in bank subsidiary |
0 | 0 | ||||||
|
|
|
|
|||||
Net cash used in investing activities |
0 | 0 | ||||||
|
|
|
|
|||||
Cash flows from financing activities |
||||||||
Due to bank subsidiary |
(153 | ) | 674 | |||||
Reissuance of treasury stock |
200 | 5 | ||||||
|
|
|
|
|||||
Net cash provided by financing activities |
47 | 679 | ||||||
|
|
|
|
|||||
Net change in cash and cash equivalents |
(521 | ) | 265 | |||||
Beginning cash and cash equivalents |
641 | 376 | ||||||
|
|
|
|
|||||
Ending cash and cash equivalents |
$ | 120 | $ | 641 | ||||
|
|
|
|
F-42
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2012 and 2011
Note 19 Loss Per Common Share
The factors used in the loss per common share computation follow:
2012 | 2011 | |||||||
Basic | (Dollars in thousands, except share and per share) |
|||||||
Net income (loss) |
$ | 588 | $ | (14,255 | ) | |||
Less: Preferred stock dividends and accretion |
(1,281 | ) | (1,114 | ) | ||||
|
|
|
|
|||||
Loss available to common shareholders |
$ | (693 | ) | $ | (15,369 | ) | ||
|
|
|
|
|||||
Weighted average common shares outstanding |
1,807,911 | 1,744,330 | ||||||
|
|
|
|
|||||
Loss per common share - basic |
$ | (0.38 | ) | $ | (8.81 | ) | ||
|
|
|
|
|||||
Diluted |
||||||||
Net income (loss) |
$ | 588 | $ | (14,255 | ) | |||
Less: Preferred stock dividends and accretion |
(1,281 | ) | (1,114 | ) | ||||
|
|
|
|
|||||
Loss available to common shareholders |
$ | (693 | ) | $ | (15,369 | ) | ||
|
|
|
|
|||||
Weighted average common shares outstanding for basic earnings per common share |
1,807,911 | 1,744,330 | ||||||
Add: dilutive effects of assumed exercises of stock options |
0 | 0 | ||||||
|
|
|
|
|||||
Average shares and dilutive potential common shares |
1,807,911 | 1,744,330 | ||||||
|
|
|
|
|||||
Loss per common share - diluted |
$ | (0.38 | ) | $ | (8.81 | ) | ||
|
|
|
|
Stock options for 175,178 shares and 227,075 shares of common stock were not considered in computing diluted earnings per common share for 2012 and 2011, respectively, because they were anti-dilutive.
F-43
Exhibit 10.19
EXECUTION COPY
EXCHANGE AGREEMENT
by and between
BROADWAY FINANCIAL CORPORATION
and
THE UNITED STATES DEPARTMENT OF THE TREASURY
Dated as of February 10, 2012
TABLE OF CONTENTS
Page | ||||||
ARTICLE I THE CLOSING; CONDITIONS TO THE CLOSING |
2 | |||||
Section 1.1 |
The Closing |
2 | ||||
Section 1.2 |
Interpretation |
5 | ||||
ARTICLE II EXCHANGE |
5 | |||||
Section 2.1 |
Preferred Exchange; Dividend Exchange |
5 | ||||
Section 2.2 |
Exchange Documentation |
6 | ||||
Section 2.3 |
Status of Preferred Shares after Closing |
6 | ||||
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY |
6 | |||||
Section 3.1 |
Existence and Power |
6 | ||||
Section 3.2 |
Authorization and Enforceability |
7 | ||||
Section 3.3 |
Exchange Shares and Underlying Common Shares |
8 | ||||
Section 3.4 |
Non-Contravention |
8 | ||||
Section 3.5 |
Anti-Takeover Provisions and Rights Plan |
10 | ||||
Section 3.6 |
No Company Material Adverse Effect |
10 | ||||
Section 3.7 |
Offering of Securities |
10 | ||||
Section 3.8 |
Brokers and Finders |
10 | ||||
ARTICLE IV COVENANTS |
11 | |||||
Section 4.1 |
Commercially Reasonable Efforts |
11 | ||||
Section 4.2 |
Expenses |
11 | ||||
Section 4.3 |
Charter Amendment |
11 | ||||
Section 4.4 |
Exchange Listing |
12 | ||||
Section 4.5 |
Access, Information and Confidentiality |
12 | ||||
Section 4.6 |
Executive Compensation |
13 | ||||
Section 4.7 |
Certain Notifications Until Closing |
14 | ||||
Section 4.8 |
Sufficiency of Authorized Common Stock |
15 | ||||
Section 4.9 |
Monthly Lending Reports |
15 | ||||
Section 4.10 |
Status Reports |
15 | ||||
Section 4.11 |
Agreements Relating to Other Transactions |
16 | ||||
Section 4.12 |
Issuance of Underlying Common Shares or Exchange Common Stock |
16 | ||||
Section 4.13 |
Remaining Certification and Disclosure Requirements |
16 | ||||
Section 4.14 |
Transferability Restrictions Related to Long-Term Restricted Stock |
16 |
-i-
ARTICLE V ADDITIONAL AGREEMENTS |
17 | |||||
Section 5.1 |
Unregistered Exchange Shares and Underlying Common Shares | 17 | ||||
Section 5.2 |
Legend | 17 | ||||
Section 5.3 |
Certain Transactions | 18 | ||||
Section 5.4 |
Transfer of Exchange Shares and Underlying Common Shares | 19 | ||||
Section 5.5 |
Registration Rights | 19 | ||||
Section 5.6 |
Voting Matters | 20 | ||||
Section 5.7 |
Restriction on Dividends and Repurchases | 21 | ||||
Section 5.8 |
Repurchase of Investor Securities | 22 | ||||
Section 5.9 |
Bank Holding Company Status | 22 | ||||
Section 5.10 |
Compliance with Employ American Workers Act | 22 | ||||
Section 5.11 |
Observer to the Board of Directors | 23 | ||||
ARTICLE VI MISCELLANEOUS |
23 | |||||
Section 6.1 |
Termination | 23 | ||||
Section 6.2 |
Survival of Representations and Warranties | 24 | ||||
Section 6.3 |
Amendment | 24 | ||||
Section 6.4 |
Waiver of Conditions | 24 | ||||
Section 6.5 |
Governing Law; Submission to Jurisdiction, etc. | 24 | ||||
Section 6.6 |
Notices | 25 | ||||
Section 6.7 |
Definitions | 26 | ||||
Section 6.8 |
Assignment | 28 | ||||
Section 6.9 |
Severability | 29 | ||||
Section 6.10 |
No Third-Party Beneficiaries | 29 | ||||
Section 6.11 |
Entire Agreement, etc | 29 | ||||
Section 6.12 |
Counterparts and Facsimile | 29 | ||||
Section 6.13 |
Specific Performance | 29 | ||||
LIST OF ANNEXES | ||||||
ANNEX A: |
OTHER PREFERRED EXCHANGE SHARES |
|||||
ANNEX B: |
FORM OF NEW CERTIFICATE OF DESIGNATIONS |
|||||
ANNEX C: |
FORM OF OPINION |
|||||
ANNEX D: |
FORM OF WAIVER |
|||||
LIST OF SCHEDULES | ||||||
SCHEDULE A: |
CAPITALIZATION |
|||||
SCHEDULE B: |
COMPANY MATERIAL ADVERSE EFFECT |
-ii-
Term |
Section | |
Affiliate | 6.7(b) | |
Agreement | Preamble | |
Benefit Plans | 1.1(d)(viii) | |
Business Combination | 6.7(c) | |
Capitalization Date | 3.1(b) | |
Charter | 1.1(d)(i) | |
Charter Amendment | 3.3(b)(i) | |
Charter Amendment Approval Date | 4.3(c) | |
Closing | 1.1(a) | |
Closing Date | 1.1(a) | |
Code | 3.4(c) | |
Common Stock | Recitals | |
Common Stock Equivalents | Recitals | |
Company | Preamble | |
Company Material Adverse Effect | 6.7(d) | |
Company Subsidiaries | 4.5(a) | |
Compensation Regulations | 1.1(d)(viii) | |
Conversion Requirements | Recitals | |
Designated Matters | 6.7(e) | |
Dividend Exchange | Recitals | |
EAWA | 6.7(f) | |
EESA | 1.1(d)(viii) | |
Equity Offering, | Recitals | |
Exchange | Recitals | |
Exchange Act | 5.3(b) | |
Exchange Common Stock | 2.1(a) | |
Exchange Common Stock Equivalents | 2.1(a) | |
Exchange Shares | Recitals | |
Fixed Rate Cumulative Perpetual Preferred Stock, Series E | Recitals | |
GAAP | 5.7(a)(ii) | |
Governmental Entities | 1.1(c) | |
Information | 4.5(c) | |
Investor | Preamble | |
Junior Stock | 6.7(g) | |
New Certificate of Designations | 1.1(d)(i) | |
Observer | 5.11 | |
Other Conversion Shares | 3.3(b)(i) | |
Other Preferred Exchange | Recitals | |
Other Series of Preferred Stock | 6.7(h) | |
Other Transactions | 4.10 | |
Parity Stock | 6.7(i) | |
Preferred Exchange | Recitals | |
Preferred Shares | Recitals | |
Preferred Stock | 6.7(j) |
-iii-
Term |
Section | |
Previously Disclosed | 6.7(k) | |
Proxy Statement | 4.3(a) | |
Recapitalization | Recitals | |
Relevant Period | 1.1(d)(viii) | |
SEC | 3.4(b) | |
Section 4.6 Employee | 4.6(b) | |
Securities Purchase Agreement | Recitals | |
Securities Purchase Agreements | Recitals | |
Senior Executive Officers | 1.1(d)(viii) | |
Series D Preferred Stock | Recitals | |
Series D Securities Purchase Agreement | Recitals | |
Series E Preferred Stock | Recitals | |
Series E Securities Purchase Agreement | Recitals | |
Share Dilution Amount | 5.7(a)(ii) | |
Shareholder Proposals | 4.3(b) | |
Status Report | 4.10(d) | |
subsidiary | 6.7(a) | |
Targeted Completion Date | 4.10 | |
Transfer | 5.4 | |
Underlying Common Shares | 3.3(b)(i) |
-iv-
EXCHANGE AGREEMENT, dated as of February 10, 2012 (this Agreement) by and between Broadway Financial Corporation, a Delaware corporation (the Company), and the United States Department of the Treasury (the Investor). All capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed to them in the Securities Purchase Agreement.
BACKGROUND
WHEREAS, the Investor is, as of the date hereof, the beneficial owner of 9,000 shares of the Companys preferred stock designated as Fixed Rate Cumulative Perpetual Preferred Stock, Series D, having a liquidation amount of $1,000 per share (the Series D Preferred Stock), and 6,000 shares of the Companys preferred stock designated as Fixed Rate Cumulative Perpetual Preferred Stock, Series E, having a liquidation amount of $1,000 per share (the Series E Preferred Stock and together with the Series D Preferred Stock, the Preferred Shares);
WHEREAS, the Company issued the Series D Preferred Stock pursuant to that certain Securities Purchase Agreement Standard Terms incorporated into a Letter Agreement, dated as of November 14, 2008, as amended from time to time, between the Company and the Investor (the Series D Securities Purchase Agreement);
WHEREAS, the Company issued the Series E Preferred Stock pursuant to that certain Securities Purchase Agreement Standard Terms incorporated into a Letter Agreement, dated as of December 4, 2009, as amended from time to time, between the Company and the Investor (the Series E Securities Purchase Agreement, and together with the Series D Securities Purchase Agreement, the Securities Purchase Agreements and each, a Securities Purchase Agreement);
WHEREAS, the Company intends to (i) exchange all shares of the Other Series of Preferred Stock (as defined below) for (x) if the Shareholder Proposals (as defined below) have been approved by the Requisite Shareholder Votes (as defined below) and the Charter Amendment (as defined below) has been filed (together, the Conversion Requirements), shares of the Companys common stock, par value $0.01 per share (the Common Stock) in such amounts as set forth on Annex A attached hereto, or (y), if the Conversion Requirements have not been completed, shares of the Companys Preferred Stock designated as Series F Common Stock Equivalents (the Common Stock Equivalents) in such amounts as set forth on Annex A attached hereto, which Common Stock Equivalents will convert to shares of Common Stock upon completion of the Conversion Requirements (such exchange as described in clauses (x) or (y), as applicable, the Other Preferred Exchange), and (ii) issue shares of Common Stock (or Common Stock Equivalents) for aggregate gross proceeds to the Company of not less than $5,000,000 (the Equity Offering, and together with the Other Preferred Exchange and the Exchange (as defined below), the Recapitalization);
WHEREAS, the Company and the Investor desire, in connection with the foregoing recapitalization of the Company, (i) to exchange (the Preferred Exchange) all of the Preferred Shares beneficially owned and held by the Investor for (x) if the Conversion Requirements have been completed, shares of Common Stock or (y) if the Conversion Requirements have not been completed, shares of Common Stock Equivalents, and (ii) to exchange (the Dividend Exchange, and together with the Preferred Exchange, the Exchange) all accrued and unpaid dividends on the Preferred Shares as of the Closing Date for (x) if the Conversion Requirements have been completed, shares of Common Stock or (y) if the Conversion Requirements have not been completed, shares of Common Stock Equivalents (such Common Stock or Common Stock Equivalents, as applicable, described in clauses (i) and (ii), the Exchange Shares).
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained in this Agreement, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the parties hereby agree as follows:
ARTICLE I
THE CLOSING; CONDITIONS TO THE CLOSING
Section 1.1 The Closing.
(a) The closing of the Exchange (the Closing) will take place at the offices of Paul, Weiss, Rifkind, Wharton & Garrison LLP, 1285 Avenue of the Americas, New York, New York, 10019, or remotely via the electronic or other exchange of documents and signature pages, as the parties may agree. The Closing shall take place five business days after all of the conditions set forth in Section 1.1(c) and (d) shall have been satisfied or waived, or at such other place, time and date as shall be agreed between the Company and the Investor. The time and date on which the Closing occurs is referred to in this Agreement as the Closing Date.
(b) Subject to the fulfillment or waiver of the conditions to the Closing in this Section 1.1, at the Closing (i) the Company will deliver the Exchange Shares to the Investor, as evidenced by one or more certificates dated the Closing Date and registered in the name of the Investor or its designee(s) (or if shares of Common Stock are uncertificated, cause the transfer agent for the Common Stock to register the Exchange Shares in the name of the Investor and deliver reasonably satisfactory evidence of such registration to the Investor (if applicable)) and (ii) the Investor will deliver the certificate representing the Preferred Shares to the Company.
(c) The respective obligations of each of the Investor and the Company to consummate the Exchange are subject to the fulfillment (or waiver by the Company and the Investor, as applicable) prior to the Closing of the conditions that (i) any approvals or authorizations of all United States and other governmental, regulatory or judicial authorities (collectively, Governmental Entities) required for the consummation of the Exchange shall have been obtained or made in form and substance reasonably satisfactory to each party and shall be in full force and effect and all waiting periods
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required by United States and other applicable law, if any, shall have expired and (ii) no provision of any applicable United States or other law and no judgment, injunction, order or decree of any Governmental Entity shall prohibit consummation of the Exchange as contemplated by this Agreement.
(d) The obligation of the Investor to consummate the Exchange is also subject to the fulfillment (or waiver by the Investor) at or prior to the Closing of each of the following conditions:
(i) if the Conversion Requirements have not been completed prior to the Closing Date, the Company shall have duly adopted and filed with the State of Delaware the amendment to its certificate of incorporation (the Charter) in substantially the form attached hereto as Annex B (the New Certificate of Designations) and such filing shall have been accepted;
(ii) the Company shall have completed the Other Preferred Exchange on terms satisfactory to the Investor in its sole discretion;
(iii) the Company shall have completed the Equity Offering;
(iv) (A) the representations and warranties of the Company set forth in Article III of this Agreement shall be true and correct in all respects as though made on and as of the Closing Date (other than representations and warranties that by their terms speak as of another date, which representations and warranties shall be true and correct in all respects as of such other date) and (B) the Company shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing;
(v) the Investor shall have received a certificate signed on behalf of the Company by a senior executive officer certifying to the effect that the conditions set forth in Section 1.1(d) have been satisfied;
(vi) the Company shall have delivered certificates in proper form or, with the prior consent of the Investor, evidence in book-entry form, evidencing the Exchange Shares to the Investor or its designee(s);
(vii) the Company shall have delivered to the Investor written opinions from counsel to the Company, addressed to the Investor and dated as of the Closing Date, in substantially the form attached hereto as Annex C;
(viii) (A) the Company shall have effected such changes to its compensation, bonus, incentive and other benefit plans, arrangements and agreements (including golden parachute, severance and employment agreements) (collectively, Benefit Plans) with respect to its Senior Executive Officers and any other employee of the Company or its Affiliates subject to Section 111 of the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009, or otherwise from time to time (EESA), as implemented by any guidance, rule or regulation thereunder, as the
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same shall be in effect from time to time (collectively, the Compensation Regulations) (and to the extent necessary for such changes to be legally enforceable, each of its Senior Executive Officers and other employees shall have duly consented in writing to such changes), as may be necessary, during the period in which any obligation of the Company arising from financial assistance under the Troubled Asset Relief Program remains outstanding (such period, as it may be further described in the Compensation Regulations, the Relevant Period), in order to comply with Section 111 of EESA or the Compensation Regulations and (B) the Investor shall have received a certificate signed on behalf of the Company by a Senior Executive Officer certifying to the effect that the condition set forth in Section 1.1(d)(viii)(A) has been satisfied; Senior Executive Officers means the Companys senior executive officers as defined in Section 111 of the EESA and the Compensation Regulations; and
(ix) none of the following shall have occurred with respect to the Company or any Company Subsidiary:
(A) the Company or any Company Subsidiary shall have (1) dissolved (other than pursuant to a consolidation, amalgamation or merger); (2) become insolvent or unable to pay its debts or failed or admitted in writing its inability generally to pay its debts as they become due; (3) made a general assignment, arrangement or composition with or for the benefit of its creditors; (4) instituted or have instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors rights, or a petition shall have been presented for its winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition shall have resulted in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation; (5) had a resolution passed for its winding-up, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger); (6) sought or shall have become subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets; (7) had a secured party take possession of all or substantially all its assets or had a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or substantially all its assets; (8) caused or shall have been subject to any event with respect to it which, under the applicable laws of any jurisdiction, had an analogous effect to any of the events specified in clauses (1) to (7) (inclusive); or (9) taken any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts;
(B) a Governmental Entity in any jurisdiction shall have (1) commenced an action or proceeding against the Company or any Company Subsidiary; or (2) issued or entered a temporary restraining
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order, preliminary or permanent injunction or other order applicable to the Company or any Company Subsidiary, which in the case of (1) and (2) shall have had or shall be reasonably expected to have a Company Material Adverse Effect;
(C) any fact, circumstance, event, change, occurrence, condition or development shall have occurred since September 30, 2011 (other than as set forth on Schedule B) that, individually or in the aggregate, shall have had or shall be reasonably likely to have a Company Material Adverse Effect; or
(D) any Regulatory Event not otherwise existing on the date hereof.
Section 1.2 Interpretation. When a reference is made in this Agreement to Recitals, Articles, Sections, Annexes or Schedules such reference shall be to a Recital, Article or Section of, or Annex or Schedule to, this Agreement, unless otherwise indicated. The terms defined in the singular have a comparable meaning when used in the plural, and vice versa. References to herein, hereof, hereunder and the like refer to this Agreement as a whole and not to any particular section or provision, unless the context requires otherwise. The table of contents and headings contained in this Agreement are for reference purposes only and are not part of this Agreement. Whenever the words include, includes or including are used in this Agreement, they shall be deemed followed by the words without limitation. No rule of construction against the draftsperson shall be applied in connection with the interpretation or enforcement of this Agreement, as this Agreement is the product of negotiation between sophisticated parties advised by counsel. All references to $ or dollars mean the lawful currency of the United States of America. Except as expressly stated in this Agreement, all references to any statute, rule or regulation are to the statute, rule or regulation as amended, modified, supplemented or replaced from time to time (and, in the case of statutes, include any rules and regulations promulgated under the statute) and to any section of any statute, rule or regulation include any successor to the section. References to a business day shall mean any day except Saturday, Sunday and any day on which banking institutions in the State of New York or California generally are authorized or required by law or other governmental actions to close.
ARTICLE II
EXCHANGE
Section 2.1 Preferred Exchange; Dividend Exchange.
(a) On the terms and subject to the conditions set forth in this Agreement, upon the Closing (i) the Company agrees to issue to the Investor, in exchange for its 15,000 Preferred Shares, including the accrued and unpaid dividends thereon as of the Closing Date: (x) if the Exchange Shares are Common Stock Equivalents (such Exchange Shares, the Exchange Common Stock Equivalents), such number of Exchange Shares as shall have an aggregate liquidation preference equal to (A) 50% of the liquidation
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preference of all of the Preferred Shares beneficially owned and held by the Investor, plus (B) 100% of the accrued and unpaid dividends on all of the Preferred Shares beneficially owned and held by the Investor through and including the Closing Date, (in each case rounded up to the nearest whole number of Exchange Shares), or (y) if the Exchange Shares are Common Stock (such Exchange Shares, the Exchange Common Stock), such number of Exchange Shares equal to (A) (1) 50% of the liquidation preference of all of the Preferred Shares beneficially owned and held by the Investor, plus (2) 100% of the accrued and unpaid dividends on all of the Preferred Shares beneficially owned and held by the Investor through and including the Closing Date, divided by (B) the lowest price per share of Common Stock paid by investors in the Equity Offering (in each case rounded up to the nearest whole number of Exchange Shares); and (ii) the Investor agrees to deliver to the Company the Preferred Shares in exchange for such number of Exchange Shares.
(b) Following consummation of the Exchange, no further cash dividends shall be payable in respect of the Preferred Shares outstanding immediately prior to the Closing Date.
Section 2.2 Exchange Documentation.
Settlement of the Exchange will take place on the Closing Date, at which time the Investor will cause delivery of the Preferred Shares to be made to the Company or its designated agent and the Company will cause delivery of the Exchange Shares to be made to the Investor or its designated agent.
Section 2.3 Status of Preferred Shares after Closing.
The Preferred Shares exchanged for the Exchange Shares pursuant to this Article II are being reacquired by the Company and shall have the status of authorized but unissued shares of Preferred Stock of the Company undesignated as to series and may be designated or redesignated and issued or reissued, as the case may be, as part of any series of preferred stock of the Company; provided that such shares shall not be reissued as Preferred Shares.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as Previously Disclosed, the Company represents and warrants to the Investor as of the date hereof and as of the Closing Date that:
Section 3.1 Existence and Power.
(a) Organization, Authority and Significant Subsidiaries. The Company is duly organized, validly existing and in good standing under the laws of the State of Delaware and has all necessary power and authority to own, operate and lease its properties and to carry on its business in all material respects as it is being currently
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conducted, and except as has not, individually or in the aggregate, had and would not reasonably be expected to have a Company Material Adverse Effect, has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification; each subsidiary of the Company that is a significant subsidiary within the meaning of Rule 1-02(w) of Regulation S-X under the Securities Act, including, without limitation, Broadway Federal Bank, f.s.b., has been duly organized and is validly existing in good standing under the laws of its jurisdiction of organization. The Charter and bylaws of the Company, copies of which have been provided to the Investor prior to the date hereof, are true, complete and correct copies of such documents as in full force and effect as of the date hereof.
(b) Capitalization. The authorized capital stock of the Company, and the outstanding capital stock of the Company (including securities convertible into, or exercisable or exchangeable for, capital stock of the Company) as of the most recent fiscal month-end preceding the date hereof (the Capitalization Date) is set forth on Schedule A. The outstanding shares of capital stock of the Company have been duly authorized and are validly issued and outstanding, fully paid and nonassessable, and subject to no preemptive rights (and were not issued in violation of any preemptive rights). As of the date hereof, the Company does not have outstanding any securities or other obligations providing the holder the right to acquire Common Stock that is not reserved for issuance as specified on Schedule A, and the Company has not made any other commitment to authorize, issue or sell any Common Stock except pursuant to this Agreement and pursuant to the Recapitalization. Since the Capitalization Date, except pursuant to this Agreement or pursuant to the Recapitalization, the Company has not issued any shares of Common Stock other than (i) shares issued upon the exercise of stock options or delivered under other equity-based awards or other convertible securities or warrants which were issued and outstanding on the Capitalization Date and disclosed on Schedule A and (ii) shares disclosed on Schedule A.
Section 3.2 Authorization and Enforceability.
(a) The Company has the corporate power and authority to execute and deliver this Agreement and to carry out its obligations hereunder and thereunder (which includes the issuance of the Exchange Shares and, if applicable, the Underlying Common Shares (as defined below)).
(b) The execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of the Company and its stockholders, and no further approval or authorization is required on the part of the Company or its stockholders. This Agreement is a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, subject to the Bankruptcy Exceptions.
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Section 3.3 Exchange Shares and Underlying Common Shares.
(a) The Exchange Shares have been duly and validly authorized by all necessary action, and, when issued and delivered pursuant to this Agreement, such Exchange Shares will be duly and validly issued and fully paid and nonassessable, will not be issued in violation of any preemptive rights, will represent nonassessable undivided beneficial interests in the assets of the Company, will not subject the holder thereof to personal liability and, if such shares are Exchange Common Stock Equivalents, such shares will rank pari passu with or senior to all other series or classes of Preferred Stock, whether or not issued or outstanding.
(b) The Board of Directors has approved:
(i) an amendment to the Charter reflecting an increase in the number of authorized shares of Common Stock sufficient to issue the greater of (x) all shares of Common Stock to be issued (I) upon conversion of the Common Stock Equivalents that may be issued pursuant to the Other Preferred Exchange and the Equity Offering (such converted shares, the Other Conversion Shares) and (II) upon conversion of the Exchange Common Stock Equivalents that may be issued pursuant to the Exchange (such converted shares, the Underlying Common Shares) or (y) all shares of Exchange Common Stock that may be issued pursuant to the Other Preferred Exchange, the Equity Offering and the Exchange (such amendment as described in clauses (x) or (y), as applicable, the Charter Amendment);
(ii) if the Conversion Requirements have not been completed prior to the Closing Date, (1) the New Certificate of Designations, (2) the issuance of the Exchange Common Stock Equivalents; (3) the issuance of the Underlying Common Shares, (4) the issuance of the Common Stock Equivalents to be issued in the Other Preferred Exchange and (5) the issuance of the Other Conversion Shares;
(iii) if the Conversion Requirements have been completed prior to the Closing Date, (1) the issuance of the Exchange Common Stock and (2) the issuance of the Common Stock to be issued in the Other Preferred Exchange.
(c) After the Shareholder Proposals have been approved and the Charter Amendment has been filed, the Underlying Common Shares, when issued in accordance with the terms of the New Certificate of Designations, will be validly issued, fully paid and nonassessable.
Section 3.4 Non-Contravention.
(a) The execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby and thereby, and compliance by the Company with the provisions hereof and thereof, will not (A) violate, conflict with, or result in a breach of any provision of, or constitute a default
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(or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company or any Company Subsidiary under any of the terms, conditions or provisions of (i) its organizational documents or (ii) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Company or any Company Subsidiary is a party or by which it or any Company Subsidiary may be bound, or to which the Company or any Company Subsidiary or any of the properties or assets of the Company or any Company Subsidiary may be subject, or (B) subject to compliance with the statutes and regulations referred to in the next paragraph, violate any statute, rule or regulation or any judgment, ruling, order, writ, injunction or decree applicable to the Company or any Company Subsidiary or any of their respective properties or assets except, in the case of clauses (A)(ii) and (B), for those occurrences that, individually or in the aggregate, have not had and would not reasonably be expected to have a Company Material Adverse Effect.
(b) Other than the approval of the Office of Thrift Supervision, or its successors, the Office of the Comptroller of the Currency and the Federal Reserve Board, filing of the New Certificate of Designations as contemplated by Section 1.1(d)(i) with the State of Delaware, any current report on Form 8-K required to be filed with the Securities and Exchange Commission (SEC), such filings and approvals as are required to be made or obtained under any state blue sky laws and such consents and approvals as have been made or obtained, no notice to, filing with or review by, or authorization, consent or approval of, any Governmental Entity is required to be made or obtained by the Company in connection with the consummation by the Company of the Exchange except for any such notices, filings, reviews, authorizations, consents and approvals the failure of which to make or obtain would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.
(c) Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, (A) the execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby (including for this purpose the consummation of the Exchange) and compliance by the Company with the provisions hereof will not (1) result in any payment (including any severance payment, payment of unemployment compensation, excess parachute payment (within the meaning of the Internal Revenue Code of 1986, as amended (the Code)), golden parachute payment (as defined in the EESA, as implemented by the Compensation Regulations) or forgiveness of indebtedness or otherwise) becoming due to any current or former employee, officer or director of the Company or any Company Subsidiary from the Company or any Company Subsidiary under any benefit plan or otherwise, (2) increase any benefits otherwise payable under any benefit plan, (3) result in any acceleration of the time of payment or vesting of any such benefits, (4) require the funding or increase in the funding of any such benefits or (5) result in any limitation on the right of the Company or any Company Subsidiary to amend, merge, terminate or receive a reversion of assets from any benefit plan or related trust and (B) neither the Company nor any Company Subsidiary has taken, or permitted
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to be taken, any action that required, and no circumstances exist that will require the funding, or increase in the funding, of any benefits or resulted, or will result, in any limitation on the right of the Company or any Company Subsidiary to amend, merge, terminate or receive a reversion of assets from any benefit plan or related trust.
Section 3.5 Anti-Takeover Provisions and Rights Plan.
The Board of Directors has taken all necessary action to ensure that the transactions contemplated by this Agreement and the consummation of the transactions contemplated hereby and thereby including the conversion of the Exchange Shares in accordance with the terms of the New Certificate of Designations will be exempt from any anti-takeover or similar provisions of the Companys Charter and bylaws, and any other provisions of any applicable moratorium, control share, fair price, interested stockholder or other anti-takeover laws and regulations of any jurisdiction. The Company has taken all actions necessary to render any stockholders rights plan of the Company inapplicable to this Agreement, the Exchange Shares and the consummation of the transactions contemplated hereby and thereby including the conversion of the Exchange Shares in accordance with the terms of the New Certificate of Designations.
Section 3.6 No Company Material Adverse Effect.
Since September 30, 2011, no fact, circumstance, event, change, occurrence, condition or development has occurred that, individually or in the aggregate, has had or would reasonably be likely to have a Company Material Adverse Effect, except as disclosed on Schedule B.
Section 3.7 Offering of Securities.
Neither the Company nor any person acting on its behalf has taken any action (including any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of the Exchange Shares under the Securities Act and the rules and regulations of the SEC promulgated thereunder), which might subject the offering, issuance or sale of the Exchange Shares to the Investor pursuant to this Agreement to the registration requirements of the Securities Act.
Section 3.8 Brokers and Finders.
No broker, finder or investment banker is entitled to any financial advisory, brokerage, finders or other fee or commission in connection with this Agreement or the transactions contemplated hereby based upon arrangements made by or on behalf of the Company or any Company Subsidiary for which the Investor could have any liability.
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ARTICLE IV
COVENANTS
Section 4.1 Commercially Reasonable Efforts.
Subject to the terms and conditions of this Agreement, each of the parties will use its commercially reasonable efforts in good faith to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or desirable, or advisable under applicable laws, so as to permit consummation of the Exchange, including transactions constituting the Recapitalization, as promptly as practicable and otherwise to enable consummation of the transactions contemplated hereby and shall use commercially reasonable efforts to cooperate with the other party to that end.
Section 4.2 Expenses.
If requested by the Investor, the Company shall pay all reasonable out of pocket and documented costs and expenses associated with the Exchange, including, but not limited to, the reasonable fees, disbursements and other charges of the Investors legal counsel and financial advisors.
Section 4.3 Charter Amendment.
If the Conversion Requirements have not been completed prior to the Closing Date:
(a) Promptly following the date of this Agreement, the Company shall prepare and, in no event more than 30 days after the Closing Date, file with the Commission a proxy statement soliciting the votes of the shareholders of the Company to approve the Shareholder Proposals, containing the information required by Schedule 14A in accordance with all applicable rules and regulations of the SEC (the Proxy Statement). The Company shall use its best efforts to cause the SEC to clear the Proxy Statement for mailing to stockholders. As soon as reasonably practicable after the SEC has cleared the Proxy Statement, the Company shall mail the Proxy Statement to the holders of its Common Stock. The Company shall provide the Investor with a copy of the Proxy Statement and all modifications thereto prior to filing or delivery to the SEC (and the Investor shall have a reasonable period to review and comment on such Proxy Statement), and the Company shall consult with the Investor in connection therewith.
(b) Promptly following the clearance of the Proxy Statement by the SEC, the Company shall call and hold a meeting of its shareholders to (i) approve the Charter Amendment and (ii) approve the issuance of, as applicable, (x) the Underlying Common Shares and the Other Conversion Shares or (y) the Exchange Common Stock and the Common Stock to be delivered in the Other Preferred Exchange ((i) and (ii) together, the Shareholder Proposals). The Company shall use its reasonable best efforts to solicit or cause to be solicited from its shareholders proxies in favor of adoption of the Shareholder Proposals and take all other action necessary or advisable to secure the Requisite Shareholder Vote in respect of each Shareholder Proposal.
(c) Immediately upon the approval by the shareholders of the Company of the Shareholder Proposals (such date, the Charter Amendment Approval Date), the Company will file with the State of Delaware the Charter Amendment
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Section 4.4 Exchange Listing.
If requested by the Investor, the Company shall, at the Companys expense, cause the Exchange Common Stock Equivalents, to the extent the Exchange Common Stock Equivalents comply with applicable listing requirements, to be listed on the Nasdaq Global Select Market or other national stock exchange, subject to official notice of issuance, and shall maintain such listing for so long as any Common Stock is listed on such exchange. At the Investors request, the Company agrees to take such action as may be necessary to change the minimum denominations of the Exchange Common Stock Equivalents to $25 or such other amount as the Investor shall reasonably request. As soon as reasonably practicable following the Closing, the Company shall, at its expense, cause the Underlying Common Shares or the Exchange Common Stock, as applicable, to be listed on the same national securities exchange on which the Common Stock is listed, subject to official notice of issuance, and shall maintain such listing for so long as any Common Stock is listed on such exchange.
Section 4.5 Access, Information and Confidentiality.
(a) From the date hereof until the date when the Investor no longer holds any debt or equity securities of the Company or an Affiliate of the Company acquired pursuant to this Agreement, the Company will permit the Investor and its agents, consultants, contractors and advisors (i) acting through the Companys Appropriate Federal Banking Agency, to examine the corporate books and make copies thereof and to discuss the affairs, finances and accounts of the Company and the subsidiaries of the Company (the Company Subsidiaries) with the principal officers of the Company, all upon reasonable notice and at such reasonable times and as often as the Investor may reasonably request and (ii) to review any information material to the Investors investment in the Company provided by the Company to its Appropriate Federal Banking Agency.
(b) From the date hereof until the date when the Investor no longer holds any debt or equity securities of the Company or an Affiliate of the Company acquired pursuant to this Agreement, the Company shall permit, and shall cause each of the Companys Subsidiaries to permit (A) the Investor and its agents, consultants, contractors, (B) the Special Inspector General of the Troubled Asset Relief Program, and (C) the Comptroller General of the United States access to personnel and any books, papers, records or other data, in each case, to the extent relevant to ascertaining compliance with the financing terms and conditions; provided that prior to disclosing any information pursuant to clause (B) or (C), the Special Inspector General of the Troubled Asset Relief Program and the Comptroller General of the United States shall have agreed, with respect to documents obtained under this Agreement in furtherance of its function,
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to follow applicable law and regulation (and the applicable customary policies and procedures) regarding the dissemination of confidential materials, including redacting confidential information from the public version of its reports and soliciting the input from the Company as to information that should be afforded confidentiality, as appropriate.
(c) The Investor will use reasonable best efforts to hold, and will use reasonable best efforts to cause its agents, consultants, contractors, advisors, and United States executive branch officials and employees, to hold, in confidence all non-public records, books, contracts, instruments, computer data and other data and information (collectively, Information) concerning the Company furnished or made available to it by the Company or its representatives pursuant to this Agreement (except to the extent that such information can be shown to have been (i) previously known by such party on a non-confidential basis, (ii) in the public domain through no fault of such party or (iii) later lawfully acquired from other sources by the party to which it was furnished (and without violation of any other confidentiality obligation)); provided that nothing herein shall prevent the Investor from disclosing any Information to the extent required by applicable laws or regulations or by any subpoena or similar legal process. The Investor understands that the Information may contain commercially sensitive confidential information entitled to an exception from a Freedom of Information Act request.
(d) Nothing in this Section shall be construed to limit the authority that the Special Inspector General of the Troubled Asset Relief Program, the Comptroller General of the United States or any other applicable regulatory authority has under law.
Section 4.6 Executive Compensation.
(a) Benefit Plans. During the Relevant Period, the Company shall take all necessary action to ensure that the Benefit Plans of the Company and its Affiliates comply in all respects with, and shall take all other actions necessary to comply with, Section 111 of the EESA, as implemented by the Compensation Regulations, and neither the Company nor any Affiliate shall adopt any new Benefit Plan (i) that does not comply therewith or (ii) that does not expressly state and require that such Benefit Plan and any compensation thereunder shall be subject to any relevant Compensation Regulations adopted, issued or released on or after the date any such Benefit Plan is adopted. To the extent that EESA and/or the Compensation Regulations are amended or otherwise change during the Relevant Period in a manner that requires changes to then-existing Benefit Plans, or that requires other actions, the Company and its Affiliates shall effect such changes to its or their Benefit Plans, and take such other actions, as promptly as practicable after it has actual knowledge of such amendments or changes in order to be in compliance with this Section 4.6(a) (and shall be deemed to be in compliance for a reasonable period to effect such changes). In addition, the Company and its Affiliates shall take all necessary action, other than to the extent prohibited by applicable law or regulation applicable outside of the United States, to ensure that the consummation of the transactions contemplated by this Agreement will not accelerate the vesting, payment or distribution of any equity-based awards, deferred cash awards or any nonqualified deferred compensation payable by the Company or any of its Affiliates.
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(b) Additional Waivers. After the Closing Date, in connection with the hiring or promotion of a Section 4.6 Employee and/or the promulgation of applicable Compensation Regulations or otherwise, to the extent any Section 4.6 Employee shall not have executed a waiver with respect to the application to such Section 4.6 Employee of the Compensation Regulations, the Company shall use its best efforts to (i) obtain from such Section 4.6 Employee a waiver in substantially the form attached hereto as Annex D and (ii) deliver such waiver to the Investor as promptly as possible, in each case, within sixty days of the Closing Date or, if later, within sixty days of such Section 4.6 Employee becoming subject to the requirements of this Section. Section 4.6 Employee means (A) each Senior Executive Officer and (B) any other employee of the Company or its Affiliates determined at any time to be subject to Section 111 of EESA and the Compensation Regulations.
(c) Clawback. In the event that any Section 4.6 Employee receives a payment in contravention of the provisions of this Section 4.6, the Company shall promptly provide such individual with written notice that the amount of such payment must be repaid to the Company in full within fifteen business days following receipt of such notice or such earlier time as may be required by the Compensation Regulations and shall promptly inform the Investor (i) upon discovering that a payment in contravention of this Section 4.6 has been made and (ii) following the repayment to the Company of such amount and shall take such other actions as may be necessary to comply with the Compensation Regulations.
(d) Limitation on Deductions. During the Relevant Period, the Company agrees that it shall not claim a deduction for remuneration for federal income tax purposes in excess of $500,000 for each Senior Executive Officer, which would not be deductible if Section 162(m)(5) of the Code applied to the Company.
(e) Amendment to Prior Agreement. The parties agree that, effective as of the date hereof, Section 4.10 of each of the Securities Purchase Agreements shall be amended in its entirety by replacing such Section 4.10 with the provisions set forth in this Section 4.6 and any terms included in this Section 4.6 that are not otherwise defined in such Securities Purchase Agreement shall have the meanings ascribed to such terms in this Agreement.
Section 4.7 Certain Notifications Until Closing.
From the date hereof until the Closing, the Company shall promptly notify the Investor of (i) any fact, event or circumstance of which it is aware and which would reasonably be likely to cause any representation or warranty of the Company contained in this Agreement to be untrue or inaccurate in any material respect or to cause any covenant or agreement of the Company contained in this Agreement not to be complied with or satisfied in any material respect and (ii) except as Previously Disclosed, any fact, circumstance, event, change, occurrence, condition or development of which the Company is aware and which, individually or in the aggregate, has had or would reasonably be likely to have a Company Material Adverse Effect; provided, however, that delivery of any notice pursuant to this Section 4.7 shall not limit or affect any rights of or remedies available to the Investor; provided, further, that a failure to
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comply with this Section 4.7 shall not constitute a breach of this Agreement or the failure of any condition set forth in Section 1.1 to be satisfied unless the underlying Company Material Adverse Effect or material breach would independently result in the failure of a condition set forth in Section 1.1 to be satisfied.
Section 4.8 Sufficiency of Authorized Common Stock.
During the period from the Charter Amendment Approval Date until the date on which all the Exchange Common Stock Equivalents have been converted, the Company shall at all times have reserved for issuance, free of preemptive or similar rights, a sufficient number of authorized and unissued shares of Common Stock to effectuate such conversion. Nothing in this Section 4.8 shall preclude the Company from satisfying its obligations in respect of the conversion of Exchange Common Stock Equivalents by delivery of shares of Common Stock which are held in the treasury of the Company.
Section 4.9 Monthly Lending Reports.
During the Relevant Period, the Company will detail in monthly reports submitted to the Investor the information required by the CPP Monthly Lending Reports, as published on www.financialstability.gov from time to time.
Section 4.10 Status Reports.
The Company has informed the Investor that the Company intends to pursue certain other transactions described below (the Other Transactions) each with a target date for consummation as indicated (a Targeted Completion Date):
(a) The closings of the transactions constituting the Recapitalization on or before the Closing Date;
(b) The filing of the New Certificate of Designations on or before the Closing Date (if applicable);
(c) The approval of the Shareholder Proposals on or before 120 days after the Closing Date; and
(d) The filing of the Charter Amendment on or before 10 days after approval of the Shareholder Proposals.
The Company will use its commercially reasonable efforts to consummate each of the Other Transactions by its applicable Targeted Completion Date. Until all of the Other Transactions have been consummated (or the Company and the Investor agree that one or more of the Other Transactions is no longer susceptible to consummation on terms and conditions that are in the Companys best interest), the Company shall provide the Investor with a reasonably detailed written report regarding the status of each of the Other Transactions at least once every two weeks and more frequently if reasonably requested by the Investor; provided, however, that if any one or more of the Other Transactions is not consummated by the time of its Targeted
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Completion Date, the Company shall, with respect to any such non-consummated Other Transaction, (x) within five business days after the Targeted Completion Date for such Other Transaction provide to the Investor a reasonably detailed written description of the status of such Other Transaction including the Companys best estimate of the steps and timeline to complete such Other Transaction (the Status Report) and (y) thereafter, no less frequently than monthly and more frequently if reasonably requested by the Investor until such Other Transactions have been consummated, provide to the Investor an updated version of the Status Report.
Section 4.11 Agreements Relating to Other Transactions.
The Company will not, without the prior written consent of the Investor, (i) agree to any amendment, waiver or modification of any agreement relating to the Recapitalization or (ii) enter into any agreements relating to the Recapitalization.
Section 4.12 Issuance of Underlying Common Shares or Exchange Common Stock.
Following the effectiveness of the Charter Amendment that has been approved pursuant to the Stockholder Proposals, but no later than the issuance by the Company to the Investor of the Underlying Common Shares or the Exchange Common Stock, as applicable, the Company shall deliver to the Investor a customary legal opinion from counsel to the Company, addressed to the Investor, covering the due and valid issuance of such securities; provided that the failure to deliver such legal opinion shall not affect the Companys obligation to deliver such securities.
Section 4.13 Remaining Certification and Disclosure Requirements.
The Company acknowledges and agrees to continue to comply with the certification and disclosure requirements set forth in the Compensation Regulations, including without limitation those submissions that are required with respect to the final portion of the Relevant Period (see, for example, Sections 30.7(c) and (d), Sections 30.11(b) and (c) and Section 30.15(a)(3) of the Compensation Regulations and FAQ-14 in the Frequently Asked Questions to the Compensation Regulations, available at www.financialstability.gov). For this purpose, the Relevant Period will not end so long as Investor holds Common Stock.
Section 4.14 Transferability Restrictions Related to Long-Term Restricted Stock.
The Company acknowledges that any long-term restricted stock (as defined in Section 30.1 of the Compensation Regulations) awarded by the Company that has otherwise vested may not become transferable, or payable in the case of a restricted stock unit, at any time earlier than as permitted under the schedule set forth in the definition of long-term restricted stock in Section 30.1 of the Compensation Regulations. For this purpose, (a) aggregate financial assistance received (for purposes of the definition of long-term restricted stock) continues to include the full original liquidation amount with respect to 15,000 Preferred Shares regardless of
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the value of the Common Stock on the date of the conversion, and (b) repayments (as defined in Section 30.1 of the Compensation Regulations) include the net proceeds received by Investor upon the sale of the Common Stock (see FAQ-15 in the Frequently Asked Questions to the Compensation Regulations, available at www.financialstability.gov). Following the Relevant Period, in the event that any long-term restricted stock awarded by the Company will not become transferable, or payable in the case of a restricted stock unit, under the terms of the Compensation Regulations, the Company shall cancel such long-term restricted stock and/or restricted stock units.
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.1 Unregistered Exchange Shares and Underlying Common Shares.
The Investor acknowledges that the Exchange Shares and any Underlying Common Shares, if applicable, have not been registered under the Securities Act or under any state securities laws. The Investor (a) is acquiring the Exchange Shares pursuant to an exemption from registration under the Securities Act solely for investment with no present intention to distribute them to any person in violation of the Securities Act or any applicable U.S. state securities laws, (b) will not sell or otherwise dispose of any of the Exchange Shares or the Underlying Common Shares except in compliance with the registration requirements or exemption provisions of the Securities Act and any applicable U.S. state securities laws, and (c) has such knowledge and experience in financial and business matters and in investments of this type that it is capable of evaluating the merits and risks of the Exchange and of making an informed investment decision.
Section 5.2 Legend.
(a) The Investor agrees that all certificates or other instruments representing the Exchange Common Stock or Underlying Common Shares, as applicable, will bear a legend substantially to the following effect:
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT RELATING THERETO IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS.
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(b) The Investor agrees that all certificates or other instruments representing the Exchange Common Stock Equivalents will bear a legend substantially to the following effect:
THE SECURITIES REPRESENTED BY THIS INSTRUMENT ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT RELATING THERETO IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS. EACH PURCHASER OF THE SECURITIES REPRESENTED BY THIS INSTRUMENT IS NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. ANY TRANSFEREE OF THE SECURITIES REPRESENTED BY THIS INSTRUMENT BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT IT IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), (2) AGREES THAT IT WILL NOT OFFER, SELL OR OTHERWISE TRANSFER THE SECURITIES REPRESENTED BY THIS INSTRUMENT EXCEPT (A) PURSUANT TO A REGISTRATION STATEMENT WHICH IS THEN EFFECTIVE UNDER THE SECURITIES ACT, (B) FOR SO LONG AS THE SECURITIES REPRESENTED BY THIS INSTRUMENT ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) TO THE ISSUER OR (D) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THE SECURITIES REPRESENTED BY THIS INSTRUMENT ARE TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND.
(c) In the event that any Exchange Shares or Underlying Common Shares (i) become registered under the Securities Act or (ii) are eligible to be transferred without restriction in accordance with Rule 144 or another exemption from registration under the Securities Act (other than Rule 144A), the Company shall issue new certificates or other instruments representing such Exchange Shares or Underlying Common Shares, which shall not contain the applicable legend in Section 5.2(a) above; provided that the Investor surrenders to the Company the previously issued certificates or other instruments.
Section 5.3 Certain Transactions.
(a) The Company will not merge or consolidate with, or sell, transfer or lease all or substantially all of its property or assets to, any other party unless the successor, transferee or lessee party (or its ultimate parent entity), as the case may be (if not the Company), expressly assumes the due and punctual performance and observance of each and every covenant, agreement and condition of this Agreement to be performed and observed by the Company.
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(b) Without the prior written consent of the Investor, until such time as the Investor shall cease to own any securities of the Company acquired pursuant to this Agreement (including, for the avoidance of doubt, the Exchange Shares and the Underlying Common Shares), the Company shall not permit any of its significant subsidiaries (as such term is defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act)) to (i) engage in any merger, consolidation, statutory share exchange or similar transaction following the consummation of which such significant subsidiary is not wholly-owned by the Company, (ii) dissolve or sell all or substantially all of its assets or property other than in connection with an internal reorganization or consolidation involving wholly-owned subsidiaries of the Company or (iii) issue or sell any shares of its capital stock or any securities convertible or exercisable for any such shares, other than issuances or sales in connection with an internal reorganization or consolidation involving wholly-owned subsidiaries of the Company.
Section 5.4 Transfer of Exchange Shares and Underlying Common Shares.
Subject to compliance with applicable securities laws, the Investor shall be permitted to transfer, sell, assign or otherwise dispose of (Transfer) all or a portion of the Exchange Shares or Underlying Common Shares, as applicable, at any time, and the Company shall take all steps as may be reasonably requested by the Investor to facilitate the Transfer of the Exchange Shares or Underlying Common Shares. The Investor shall deliver to the Company a written notice of its intent to effect any Transfer at least thirty (30) days in advance of such Transfer.
Section 5.5 Registration Rights.
(a) The Exchange Shares and the Underlying Common Shares, if applicable, shall be Registrable Securities under the Securities Purchase Agreements and the Exchange Common Stock Equivalents shall be Preferred Shares under the Securities Purchase Agreements and, upon their issuance, the provisions of Section 4.5 of each of the Securities Purchase Agreements shall be applicable to them, including with the benefit, to the extent available, of the tacking of any holding period from the date of issuance of the Preferred Shares. The Investor acknowledges that, on the date hereof, the Company is not eligible to file a registration statement on Form S-3 covering the Exchange Shares and the Company shall not be obligated to file a Shelf Registration Statement (as defined in Section 4.5 of each of the Securities Purchase Agreements) unless and until requested to do so in writing by the Investor.
(b) In connection with any underwritten offering of the Exchange Shares or Underlying Common Shares, if applicable, by the Investor, the Company shall cause each of its directors, officers and all holders of its shares who beneficially own in excess of four (4) percent of the then outstanding shares of the Company, to execute and deliver customary lock up agreements, in such form and for such time period as may be requested by the managing underwriter.
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(c) Notwithstanding anything to the contrary set forth in the Securities Purchase Agreements, all Selling Expenses (as defined in Section 4.5 of each of the Securities Purchase Agreements) relating to any offering of the Exchange Shares or the Underlying Common Shares, if applicable, shall be borne by the Company.
(d) Section 4.5(a)(vi) of each of the Securities Purchase Agreements is hereby amended and restated as follows:
If either (x) the Company grants piggyback registration rights to one or more third parties to include their securities in an underwritten offering under the Shelf Registration Statement pursuant to Section 4.5(a)(ii) or (y) a Piggyback Registration under Section 4.5(a)(iv) relates to an underwritten offering, and in either case, following consultation with the Investor, the managing underwriters advise the Company and the Investor that in their reasonable opinion the number of securities requested to be included in such offering exceeds the number which can be sold without adversely affecting the marketability of such offering (including any adverse effect on the per share offering price), the Company will include in such offering only such number of securities that in the reasonable opinion of such managing underwriters can be sold without adversely affecting the marketability of the offering (including an adverse effect on the per share offering price), which securities will be so included in the following order of priority: (A) first, in either case, the Registrable Securities of the Investor, (B) second, in the case of a Piggyback Registration under Section 4.5(iv), the securities the Company proposes to sell, (C) third, the Registrable Securities of all other Holders who have requested inclusion of Registrable Securities pursuant to Section 4.5(a)(ii) or Section 4.5(a)(iv), as applicable, pro rata on the basis of the aggregate number of such securities or shares owned by each such person and (D) fourth, any other securities of the Company that have been requested to be so included, subject to the terms of this Agreement.
Section 5.6 Voting Matters.
(a) The Investor agrees that it will vote, or cause to be voted, or exercise its right to consent (or cause its right to consent to be exercised) with respect to, all Exchange Common Stock or Underlying Common Shares, as applicable, beneficially owned by it and its controlled Affiliates (and which are entitled to vote on such matter) with respect to each matter on which holders of Common Stock are entitled to vote or consent, other than a Designated Matter, in the same proportion (for, against or abstain) as all other shares of the Companys Common Stock (other than those shares held by holders of greater than 20% of the Companys Common Stock) are voted or consents are given with respect to each such matter. The Investor agrees to attend all meetings of the Companys stockholders in person or by proxy for purposes of obtaining a quorum. In order to effectuate the foregoing agreements, to the maximum extent permitted by applicable law, the Investor hereby grants a proxy appointing each of the Chief Executive Officer and the Chief Financial Officer of the Company attorney-in-fact and proxy for it and its controlled Affiliates with full power of substitution, for and in the name of it and
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its controlled Affiliates, to vote, express consent or dissent, or otherwise to utilize such voting power in the manner and solely on the terms provided by this Section 5.6 with respect to the Exchange Common Stock or Underlying Common Shares, as applicable, and the Investor hereby revokes any and all previous proxies granted with respect to the Exchange Common Stock or Underlying Common Shares, as applicable, for purposes of the matters contemplated in this Section 5.6; provided that such proxy may only be exercised if the Investor fails to comply with the terms of this Section 5.6. The proxy granted hereby is irrevocable prior to the termination of this Agreement, is coupled with an interest and is granted in consideration of the Company entering into this Agreement and issuing the Exchange Shares to the Investor.
(b) The Investor shall retain the right to vote in its sole discretion all Exchange Common Stock or Underlying Common Shares, as applicable, beneficially owned by it and its controlled Affiliates (and which are entitled to vote on such matter) on any Designated Matter.
Section 5.7 Restriction on Dividends and Repurchases.
(a) Until the earlier of (i) November 14, 2011, or (ii) such time as the Investor ceases to own any debt or equity securities of the Company or an Affiliate of the Company acquired pursuant to this Agreement, neither the Company nor any Company Subsidiary shall, without the consent of the Investor:
(i) declare or pay any dividend or make any distribution on the Common Stock (other than (A) regular quarterly cash dividends of not more than the amount of the last quarterly cash dividend per share declared or, if lower, publicly announced an intention to declare, on the Common Stock prior to November 14, 2008, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction and (B) dividends payable solely in shares of Common Stock); or
(ii) redeem, purchase or acquire any shares of Common Stock or other capital stock or other equity securities of any kind of the Company, or any trust preferred securities issued by the Company or any Affiliate of the Company, other than (A) redemptions, purchases or other acquisitions of shares of Common Stock or other Junior Stock, in each case in this clause (A) in connection with the administration of any employee benefit plan in the ordinary course of business (including purchases to offset the Share Dilution Amount (as defined below) pursuant to a publicly announced repurchase plan) and consistent with past practice; provided that any purchases to offset the Share Dilution Amount shall in no event exceed the Share Dilution Amount, (B) purchases or other acquisitions by a broker-dealer subsidiary of the Company solely for the purpose of market-making, stabilization or customer facilitation transactions in trust preferred securities of the Company or an Affiliate of the Company, Junior Stock or Parity Stock in the ordinary course of its business, (C) purchases by a broker-dealer subsidiary of the Company of trust preferred securities or capital stock of the Company or an Affiliate of the Company for resale pursuant to an offering by the
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Company of such trust preferred securities or capital stock underwritten by such broker-dealer subsidiary, (D) any redemption or repurchase of rights pursuant to any stockholders rights plan, (E) the acquisition by the Company or any of the Company Subsidiaries of record ownership in Junior Stock, Parity Stock or trust preferred securities of the Company or an Affiliate of the Company for the beneficial ownership of any other persons (other than the Company or any other Company Subsidiary), including as trustees or custodians, and (F) the exchange or conversion of Junior Stock for or into other Junior Stock or of Parity Stock or of trust preferred securities of the Company or an Affiliate of the Company for or into other Parity Stock (with the same or lesser aggregate liquidation amount) or Junior Stock, in each case set forth in this clause (F), solely to the extent required pursuant to binding contractual agreements entered into prior to the date hereof or any subsequent agreement for the accelerated exercise, settlement or exchange thereof for Common Stock. Share Dilution Amount means the increase in the number of diluted shares outstanding (determined in accordance with United States generally accepted accounting principles (GAAP), and as measured from the date of the Companys most recently filed consolidated financial statements prior to the Closing Date) resulting from the grant, vesting or exercise of equity-based compensation to employees and equitably adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction.
(b) The parties agree that, effective as of the date hereof, Section 4.8 of each of the Securities Purchase Agreements shall be amended in its entirety by replacing such Section 4.8 with the provisions set forth in this Section 5.7 and any terms included in this Section 5.7 that are not otherwise defined in such Securities Purchase Agreement shall have the meanings ascribed to such terms in this Agreement.
Section 5.8 Repurchase of Investor Securities.
From and after the date of this Agreement, the agreements set forth in Section 4.9 of each of the Securities Purchase Agreements shall be applicable following the Transfer by the Investor of all of the Exchange Shares held by the Investor to one or more third parties not affiliated with the Investor. For the avoidance of doubt, the Exchange Shares may not be repurchased by the Company pursuant to this Section 5.8 or Section 4.9 of the Securities Purchase Agreements.
Section 5.9 Bank Holding Company Status.
The Company shall maintain its status as a savings and loan holding company for as long as the Investor owns any debt or equity securities of the Company or an Affiliate of the Company acquired pursuant to this Agreement.
Section 5.10 Compliance with Employ American Workers Act.
Until the Company is no longer deemed a recipient of funding under Title I of EESA or Section 13 of the Federal Reserve Act for purposes of the EAWA, as the same may be determined pursuant to any regulations or other legally binding guidance promulgated under
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EAWA, the Company shall comply, and the Company shall take all necessary action to ensure that its subsidiaries comply, in all respects with the provisions of the EAWA and any regulations or other legally binding guidance promulgated under the EAWA.
Section 5.11 Observer to the Board of Directors.
So long as the Investor and its Affiliates beneficially own at least 5% of the issued and outstanding Common Stock (treating all securities beneficially owned by the Investor and its Affiliates that are convertible into or exchangeable or exercisable for Common Stock as converted, exchanged or exercised), the Investor shall be entitled to designate one individual to serve as an observer (the Observer) to the Board of Directors of the Company, which designation may be changed from time to time in the sole discretion of the Investor. The Observer shall be entitled to (i) attend all meetings of the Board of Directors of the Company and the board of directors of each subsidiary of the Company, including any committee meetings of such boards of directors, (ii) receive notices of such meetings concurrently with the members of the Board of Directors of the Company or such boards of directors or committees thereof and (iii) receive all information provided to members of the Board of Directors of the Company or such boards of directors or committees thereof at such meetings.
The Observer shall have no voting rights and his or her presence shall not be required for determining a quorum at any meeting he or she is entitled to attend pursuant to this Section 5.11.
ARTICLE VI
MISCELLANEOUS
Section 6.1 Termination.
This Agreement may be terminated at any time prior to the Closing:
(a) by either the Investor or the Company if the Closing shall not have occurred by June 30, 2012; provided, however, that in the event the Closing has not occurred by such date, the parties will consult in good faith to determine whether to extend the term of this Agreement, it being understood that the parties shall be required to consult only until the fifth day after such date and not be under any obligation to extend the term of this Agreement thereafter; provided, further, that the right to terminate this Agreement under this Section 6.1(a) shall not be available to any party whose breach of any representation or warranty or failure to perform any obligation under this Agreement shall have caused or resulted in the failure of the Closing to occur on or prior to such date;
(b) by either the Investor or the Company in the event that any Governmental Entity shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable; or
(c) by the mutual written consent of the Investor and the Company.
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In the event of termination of this Agreement as provided in this Section 6.1, this Agreement shall forthwith become void and there shall be no liability on the part of either party hereto except that nothing herein shall relieve either party from liability for any breach of this Agreement.
Section 6.2 Survival of Representations and Warranties.
The representations and warranties of the Company made herein or in any certificates delivered in connection with the Closing shall survive the Closing without limitation.
Section 6.3 Amendment.
No amendment of any provision of this Agreement will be effective unless made in writing and signed by an officer or a duly authorized representative of each of the Company and the Investor; provided that the Investor may unilaterally amend any provision of this Agreement to the extent required to comply with any changes after the date hereof in applicable federal statutes. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative of any rights or remedies provided by law.
Section 6.4 Waiver of Conditions.
The conditions to each partys obligation to consummate the Exchange are for the sole benefit of such party and may be waived by such party in whole or in part to the extent permitted by applicable law. No waiver will be effective unless it is in a writing signed by a duly authorized officer of the waiving party that makes express reference to the provision or provisions subject to such waiver.
Section 6.5 Governing Law; Submission to Jurisdiction, etc.
This Agreement and any claim, controversy or dispute arising under or related to this Agreement, the relationship of the parties, and/or the interpretation and enforcement of the rights and duties of the parties shall be enforced, governed, and construed in all respects (whether in contract or in tort) in accordance with the federal law of the United States if and to the extent such law is applicable, and otherwise in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within such State. Each of the parties hereto agrees (a) to submit to the exclusive jurisdiction and venue of the United States District Court for the District of Columbia and the United States Court of Federal Claims for any and all civil actions, suits or proceedings arising out of or relating to this Agreement or the Exchange contemplated hereby and (b) that notice may be served upon (i) the Company at the address and in the manner set forth for notices to the Company in Section 6.6 and (ii) the Investor at the address and in the manner set forth for notices to the Investor in Section 6.6, but otherwise in accordance with federal law. To the extent permitted by applicable law, each of the parties hereto hereby unconditionally waives trial by jury in any civil legal action or proceeding relating to this Agreement or the Exchange contemplated hereby.
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Section 6.6 Notices.
Any notice, request, instruction or other document to be given hereunder by any party to the other will be in writing and will be deemed to have been duly given (a) on the date of delivery if delivered personally, or by facsimile, upon confirmation of receipt, or (b) on the second business day following the date of dispatch if delivered by a recognized next day courier service. All notices hereunder shall be delivered as set forth below or pursuant to such other instructions as may be designated in writing by the party to receive such notice.
If to the Company:
Broadway Financial Corporation.
4800 Wilshire Boulevard
Los Angeles, CA 90010
Attention: Wayne-Kent A. Bradshaw
President & Chief Operating Officer
Telephone: (323) 556-3248
Facsimile: (323) 634-1717
With a copy to:
Mayer Brown LLP
350 South Grand Avenue
Los Angeles, California 90071
Attention: James R. Walther, Esq.
Telephone: (213) 229-9597
Facsimile: (213) 625-0248
If to the Investor:
United States Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220
Attention: Chief Counsel Office of Financial Stability
Facsimile: (202) 927-9225
Email: OFSChiefCounselNotices@do.treas.gov
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With a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison LLP
1285 Avenue of the Americas
New York, New York 10019
Attention: John C. Kennedy, Esq.
David K. Lakhdhir, Esq.
Telephone: (212) 373-3000
Facsimile: (212) 757-3990
Section 6.7 Definitions.
(a) When a reference is made in this Agreement to a subsidiary of a person, the term subsidiary means any corporation, partnership, joint venture, limited liability company or other entity (x) of which such person or a subsidiary of such person is a general partner or (y) of which a majority of the voting securities or other voting interests, or a majority of the securities or other interests of which having by their terms ordinary voting power to elect a majority of the board of directors or persons performing similar functions with respect to such entity, is directly or indirectly owned by such person and/or one or more subsidiaries thereof.
(b) The term Affiliate means, with respect to any person, any person directly or indirectly controlling, controlled by or under common control with, such other person. For purposes of this definition, control (including, with correlative meanings, the terms controlled by and under common control with) when used with respect to any person, means the possession, directly or indirectly, of the power to cause the direction of management and/or policies of such person, whether through the ownership of voting securities by contract or otherwise.
(c) The term Business Combination means a merger, consolidation, statutory share exchange or similar transaction that requires the approval of the Companys stockholders.
(d) The term Company Material Adverse Effect means a material adverse effect on the business, results of operation or financial condition of the Company and its consolidated subsidiaries taken as a whole; provided, however, that Company Material Adverse Effect shall not be deemed to include: (i) the effects of (A) changes after the date hereof in general business, economic or market conditions (including changes generally in prevailing interest rates, credit availability and liquidity, currency exchange rates and price levels or trading volumes in the United States or foreign securities or credit markets), or any outbreak or escalation of hostilities, declared or undeclared acts of war or terrorism, in each case generally affecting the industries or geographic areas in which the Company and its subsidiaries operate, (B) changes or proposed changes after the date hereof in GAAP or regulatory accounting requirements, or authoritative interpretations thereof, (C) changes or proposed changes after the date hereof in securities, banking and other laws of general applicability or related policies or interpretations of Governmental Entities (in the case of each of these clauses (A), (B) and
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(C), other than changes or occurrences to the extent that such changes or occurrences have or would reasonably be expected to have a materially disproportionate adverse effect on the Company and its consolidated subsidiaries taken as a whole relative to comparable U.S. banking or financial services organizations), (D) changes in the market price or trading volume of the Common Stock or any other equity, equity-related or debt securities of the Company or its consolidated subsidiaries (it being understood and agreed that the exception set forth in this clause (D) does not apply to the underlying reason giving rise to or contributing to any such change); (E) actions or omissions of the Company or any Company Subsidiary expressly required by the terms of the Exchange; or (ii) the ability of the Company to consummate the Exchange and the other transactions contemplated by this Agreement and perform its obligations hereunder on a timely basis.
(e) The term Designated Matters means (i) the election and removal of directors, (ii) the approval of any Business Combination, (iii) the approval of a sale of all or substantially all of the assets or property of the Company, (iv) the approval of a dissolution of the Company, (v) the approval of any issuance of any securities of the Company on which holders of Common Stock are entitled to vote, (vi) the approval of any amendment to the Charter or bylaws of the Company on which holders of Common Stock are entitled to vote and (vii) the approval of any other matters reasonably incidental to the foregoing subclauses (i) through (vi) as determined by the Investor.
(f) The term EAWA means the Employ American Workers Act (Section 1611 of Division A, Title XVI of the American Recovery and Reinvestment Act of 2009), Public Law No. 111-5, effective as of February 17, 2009, as may be amended and in effect from time to time.
(g) The term Junior Stock means the Common Stock and any other class or series of stock of the Company the terms of which expressly provide that it ranks junior to the Exchange Shares as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Company.
(h) The term Other Series of Preferred Stock means the Series A Noncumulative Perpetual Preferred Stock, Series B Noncumulative Perpetual Preferred Stock, Series C Noncumulative Perpetual Convertible Preferred Stock and Series A Junior Participating Preferred Shares, each of the Company.
(i) The term Parity Stock means any class or series of stock of the Company the terms of which do not expressly provide that such class or series will rank senior or junior to the Exchange Shares as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Company (in each case without regard to whether dividends accrue cumulatively or non-cumulatively).
(j) The term Preferred Stock means any and all series of preferred stock of the Company.
(k) The term Previously Disclosed means information set forth or incorporated in the Companys Annual Report on Form 10-K for the most recently
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completed fiscal year of the Company filed with the SEC prior to the date hereof or in its other reports and forms filed with or furnished to the SEC under Section 13(a), 14(a) or 15(d) of the Exchange Act on or after the last day of the most recently completed fiscal year of the Company and prior to the date hereof.
(l) The term Regulatory Event means, with respect to the Company, that (i) the Federal Deposit Insurance Corporation or any other governmental authority shall be appointed as conservator or receiver for the Company; (ii) the Company shall have been considered in troubled condition for the purposes of 12 U.S.C. Sec. 1831i or any regulation promulgated thereunder; (iii) the Company shall qualify as Undercapitalized, Significantly Undercapitalized, or Critically Undercapitalized as those terms are defined in 12 C.F.R. Sec. 208.43; or (iv) the Company shall have become subject to any formal or informal regulatory action requiring the Company to materially improve its capital, liquidity or safety and soundness.
(m) The term Requisite Shareholder Vote means, in respect of each of the Shareholder Proposals, that such Shareholder Proposal shall have been approved by a majority of the votes cast on such Shareholder Proposal at any meeting for the purpose of voting thereon provided that the total vote cast on such Shareholder Proposal represents over fifty percent (50%) in interest of all securities entitled to vote thereon.
(n) To the extent any securities issued pursuant to this Agreement or the transactions contemplated hereby are registered in the name of a designee of the Investor pursuant to Section 1.1 or 6.8 or transferred to an Affiliate of the Investor, all references herein to the Investor holding or owning any debt or equity securities of the Company, Exchange Shares, Underlying Common Shares or Registrable Securities (and any like variations thereof) shall be deemed to refer to the Investor, together with such designees and/or Affiliates, holding or owning any debt or equity securities, Exchange Shares, Underlying Common Shares or Registrable Securities (and any like variations thereof), as applicable.
Section 6.8 Assignment.
Neither this Agreement nor any right, remedy, obligation nor liability arising hereunder or by reason hereof shall be assignable by any party hereto without the prior written consent of each other party, and any attempt to assign any right, remedy, obligation or liability hereunder without such consent shall be void, except (a) an assignment, in the case of a Business Combination where such party is not the surviving entity, or a sale of substantially all of its assets, to the entity which is the survivor of such Business Combination or the purchaser in such sale, (b) as provided in Sections 5.4 and 5.5 and (c) an assignment by the Investor of this Agreement to an Affiliate of the Investor; provided that if the Investor assigns this Agreement to an Affiliate, the Investor shall be relieved of its obligations under this Agreement but (i) all rights, remedies and obligations of the Investor hereunder shall continue and be enforceable and exercisable by such Affiliate, and (ii) the Companys obligations and liabilities hereunder shall continue to be outstanding.
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Section 6.9 Severability.
If any provision of this Agreement, or the application thereof to any person or circumstance, is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, will remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties.
Section 6.10 No Third-Party Beneficiaries.
Nothing contained in this Agreement, expressed or implied, is intended to confer upon any person or entity other than the Company and the Investor any benefit, right or remedies, except that (i) the provisions of Section 4.5 shall inure to the benefit of the persons referred to in that Section and (ii) the provisions of Section 5.5 shall inure to the benefit of the persons holding Exchange Shares during any tacked holding period, as contemplated by that Section.
Section 6.11 Entire Agreement, etc.
This Agreement (including the Annexes and Schedules hereto) constitutes the entire agreement, and supersedes all other prior agreements, understandings, representations and warranties, both written and oral, between the parties, with respect to the subject matter hereof. For the avoidance of doubt, the Securities Purchase Agreements shall remain in full force and effect, but shall be deemed amended hereby, and any provisions in this Agreement that supplement, duplicate or contradict any provision of the Securities Purchase Agreements shall be deemed to supersede the corresponding provision of the Securities Purchase Agreements from and after the effective date hereof.
Section 6.12 Counterparts and Facsimile.
For the convenience of the parties hereto, this Agreement may be executed in any number of separate counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts will together constitute the same agreement. Executed signature pages to this Agreement may be delivered by facsimile and such facsimiles will be deemed as sufficient as if actual signature pages had been delivered.
Section 6.13 Specific Performance.
The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms. It is accordingly agreed that the parties shall be entitled (without the necessity of posting a bond) to specific performance of the terms hereof, this being in addition to any other remedies to which they are entitled at law or equity.
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[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.
BROADWAY FINANCIAL CORPORATION | ||||
By: | /s/ Wayne-Kent A. Bradshaw | |||
Name: | Wayne-Kent A. Bradshaw | |||
Title: | President & Chief Executive Officer | |||
UNITED STATES DEPARTMENT OF THE TREASURY | ||||
By: | /s/ Timothy G. Massad | |||
Name: | Timothy G. Massad | |||
Title: | Assistant Secretary for Financial Stability |
ANNEX A
OTHER PREFERRED EXCHANGE SHARES
The terms of the Other Preferred Exchanges have not been finalized as of the date of execution of this Agreement, but will be determined before the Closing. Accordingly, the Company will provide an updated Annex A to the Investor at the Closing. Based upon current information for the Companys stock price, the proposed Equity Offering, and negotiations that have occurred to-date with the holders of the Other Series of Preferred Stock, the Company has made the following estimates for the Other Preferred Exchanges:
(A) In the event that the Conversion Requirements have been met prior to the Closing:
At September 30, 2011 | ||||||||||||||||||||||||
#
Shares of Preferred Stock |
Aggregate Liquidation Preference (1) |
Estimated Exchange Discount |
Value of Common Stk to be issued in the Exchange |
Assumed Stock Price for Equity Offering |
Estimated # Shares of Common Stock Issued |
|||||||||||||||||||
Series A |
55,199 | $ | 551,990 | 50.0 | % | $ | 275,995 | $ | 1.75 | 157,711 | ||||||||||||||
Series B |
100,000 | 1,000,000 | 50.0 | % | 500,000 | 1.75 | 285,714 | |||||||||||||||||
Series C |
76,950 | 1,000,350 | 50.0 | % | 500,175 | 1.75 | 285,814 | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Total Other Series of Preferred Stock |
$ | 2,552,340 | $ | 1,276,170 | 729,240 | |||||||||||||||||||
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|
|
|
|
|
(1) | Total per amount recorded on the Companys Balance Sheet |
(B) In the event that the Conversion Requirements have not been met prior to the Closing:
At September 30, 2011 | Estimated Exchange Discount |
Value of Series F Common Stock Equivalents Issued in the Exchange |
Liquidation Amount of Series F Common Equivalents |
Estimated # Shares of Series F Common Equivalents Issued |
||||||||||||||||||||
#
Shares of Preferred Stock |
Aggregate Liquidation Preference (1) |
|||||||||||||||||||||||
Series A |
55,199 | $ | 551,990 | 50.0 | % | $ | 275,995 | $ | 1,000.00 | 276 | ||||||||||||||
Series B |
100,000 | 1,000,000 | 50.0 | % | 500,000 | 1,000.00 | 500 | |||||||||||||||||
Series C |
76,950 | 1,000,350 | 50.0 | % | 500,175 | 1,000.00 | 500 | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Total Other Series of Preferred Stock |
$ | 2,552,340 | $ | 1,276,170 | 1,276 | |||||||||||||||||||
|
|
|
|
|
|
(1) | Total per amount recorded on the Companys Balance Sheet |
ANNEX B
FORM OF NEW CERTIFICATE OF DESIGNATIONS
ANNEX C
FORM OF OPINION
Subject to customary limitations, qualifications, and exceptions to be set forth in the letter as delivered at Closing:
a) | The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the corporate power and authority to own, operate and lease its properties and to carry on its business as it is currently conducted. |
b) | Broadway Federal Bank is a federal savings bank duly organized, validly existing and in good standing under the laws of the United States and has the full corporate power and authority to own, operate and lease its properties and to carry on its business as it is currently conducted. |
c) | The outstanding shares of capital stock of the Company have been duly authorized and are validly issued and outstanding, fully paid and nonassessable, are subject to no preemptive rights and were not issued in violation of any preemptive rights. |
d) | The Company has the corporate power and authority to execute and deliver the Agreement and to perform its obligations thereunder (which includes the issuance of the Exchange Shares and the Underlying Common Shares, if applicable). |
e) | The Agreement constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms. |
f) | The execution, delivery and performance by the Company of the Agreement, and the consummation of the transactions contemplated thereby, have been duly authorized by all necessary corporate action on the part of the Company, and, subject to receipt of the Requisite Shareholder Votes, no further approval or authorization is required in connection with such execution, delivery and performance, either on the part of the Company or its shareholders, including, without limitation, by any applicable rule or requirement of any national stock exchange. |
g) | The Exchange Shares have been duly and validly authorized, and, when issued and delivered pursuant to the Agreement, the Exchange Shares will be duly and validly issued, fully paid and nonassessable, will not be issued in violation of any preemptive rights, rights of first refusal or similar rights and, if the Exchange Shares are Common Stock Equivalents, such shares will rank pari passu with or senior to all other series or classes of Preferred Stock, whether or not issued or outstanding, with respect to the payment of dividends and the distribution of assets in the event of any dissolution, liquidation or winding up of the Company, and will not subject the holder thereof to personal liability. |
h) | If applicable, the Underlying Common Shares have been duly authorized by the Board of Directors of the Company and after the Shareholder Proposals have been approved and the Charter Amendment has been filed, the Underlying Common Shares, when issued in accordance with the terms of the New Certificate of Designations will be validly issued, fully paid and nonassessable and will not be issued in violation of any preemptive rights, rights of first refusal or similar rights. |
i) | The execution, delivery and performance by the Company of the Agreement and the consummation of the transactions contemplated thereby, and compliance by the Company with the provisions thereof, will not (A) violate, conflict with, or result in a breach of any provision of the Companys Articles of Incorporation or By-laws or (B) constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company or any Company Subsidiary under any of the terms, conditions or provisions of its organizational documents or under any material agreement, contract, indenture, lease, mortgage, power of attorney, evidence of indebtedness, letter of credit, license, instrument, obligation, purchase or sales order, or other commitment, whether oral or written, to which it is a party or by which it or any of its properties is bound or (C) subject to compliance with the statute and regulations referred to in Section 3.5(b) of the Agreement violate any statute, rule or regulation or any judgment, ruling, order, writ, injunction or decree applicable to the Company or any Company Subsidiary or any of their respective properties or assets except, in the case of clause (C), for those occurrences that, individually or in the aggregate, have not had and would not reasonably be expected to have a Company Material Adverse Effect. |
j) | Other than the filing of any current report on Form 8-K required to be filed with the SEC, such filings and approvals as are required to be made or obtained under any state blue sky laws and such consents and approvals that have been made or obtained, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any Governmental Entity is required to be made or obtained by the Company in connection with the consummation by the Company of the Exchange. |
k) | The Company is not and, after giving effect to the issuance of the Exchange Shares pursuant to the Agreement, the issuance of the Underlying Common Shares, if applicable, the issuance of Other Conversion Shares, if applicable and the issuance of Common Stock Equivalents issued in the Recapitalization, if applicable, as contemplated by this Agreement, would not be on the date hereof an investment company or an entity controlled by an investment company, as such terms are defined in the Investment Company Act of 1940, as amended. |
ANNEX D
FORM OF WAIVER
In consideration for the benefits I will receive as a result of the participation of BROADWAY FINANCIAL CORPORATION (together with its subsidiaries and affiliates, the Company), which is either my employer or the sole shareholder of my employer, in the United States Department of the Treasurys (the Treasury) Capital Purchase Program and/or any other economic stabilization program implemented by the Treasury under the Emergency Economic Stabilization Act of 2008 (as amended, supplemented, or otherwise modified, the EESA) (any such program, including the Capital Purchase Program, a Program), I hereby voluntarily waive any claim against the United States (and each of its departments and agencies) or the Company or my employer, or any of their respective directors, officers, employees and agents for any changes to my compensation or benefits that are required to comply with the executive compensation and corporate governance requirements of Section 111 of the EESA, as implemented by any guidance or regulations issued and/or to be issued thereunder, including without limitation the provisions for the Capital Purchase Program, as implemented by any guidance or regulation thereunder, including the rules set forth in 31 C.F.R. Part 30, or any other guidance or regulations under the EESA and the applicable requirements of the Exchange Agreement by and among the Company and the Treasury dated as of February 10, 2012 (such requirements, the Limitations).
I acknowledge that the Limitations may require modification or termination of the employment, compensation, bonus, incentive, severance, retention and other benefit plans, arrangements, policies and agreements (including so-called golden parachute agreements), whether or not in writing, that I may have with the Company or my employer or in which I may participate as they relate to the period the United States holds any equity or debt securities of the Company acquired through a Program or for any other period applicable under such Program or Limitations, as the case may be, and I hereby consent to all such modifications.
This waiver includes all claims I may have under the laws of the United States or any other jurisdiction (whether or not in existence as of the date hereof) related to the requirements imposed by the Limitations, including without limitation a claim for any compensation or other payments or benefits I would otherwise receive, any challenge to the process by which the Limitations are or were adopted and any tort or constitutional claim about the effect of these Limitations on my employment relationship and I hereby agree that I will not at any time initiate, or cause or permit to be initiated on my behalf, any such claim against the United States, the Company, my employer or their respective directors, officers, employees or agents in or before any local, state, federal or other agency, court or body.
I agree that, in the event and to the extent that the Compensation Committee of the Board of Directors of the Company or similar governing body (the Committee) reasonably determines that any compensatory payment and benefit provided to me, including any bonus or incentive compensation based on materially inaccurate financial statements or performance criteria, would cause the Company to fail to be in compliance with the Limitations (such payment or benefit, an Excess Payment), upon notification from the Company, I shall repay such Excess Payment to
the Company within 15 business days. In addition, I agree that the Company shall have the right to postpone any such payment or benefit for a reasonable period of time to enable the Committee to determine whether such payment or benefit would constitute an Excess Payment.
I understand that any determination by the Committee as to whether or not, including the manner in which, a payment or benefit needs to be modified, terminated or repaid in order for the Company to be in compliance with Section 111 of the EESA and/or the Limitations shall be a final and conclusive determination of the Committee which shall be binding upon me. I further understand that the Company is relying on this letter from me in connection with its participation in a Program.
IN WITNESS WHEREOF, I execute this waiver on my own behalf, thereby communicating my acceptance and acknowledgement to the provisions herein.
Respectfully, |
|
Name: |
Title: |
Date: |
SCHEDULE A
Capitalization
Authorized Capital Stock of the Company (as of December 31, 2011)
Common Stock: 8,000,000 shares, $.01 par value
Preferred Stock: 1,000,000, $.01 par value
Outstanding Capital Stock of the Company (as of December 31, 2011)
Common Stock: 1,744,565 shares
Preferred Stock:
55,199 shares of Series A non-cumulative, non-voting Preferred Stock
100,000 shares of Series B non-cumulative, non-voting Preferred Stock
76,950 shares of Series C non-cumulative, non-voting Preferred Stock
15,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock:
9,000 shares of Series D
6,000 shares of Series E
As of December 31, 2011, 439,190 shares of common stock have been reserved for issuance under the following equity based benefit plans:
2008 Long-Term Incentive Plan
SCHEDULE B
Company Material Adverse Effect
Fact, circumstance, event, change, occurrence, condition, or development that has occurred since September 30, 2011, that individually or in the aggregate, has had, or would reasonably be likely to have, a Company Material Adverse Effect:
The Company incurred a loss for the quarter ended September 30, 2011. Information regarding the Companys financial condition and results of operations as of September 30, 2011 and its results of operations for the three months then ended is contained in the press release issued by the Company that is attached to the Form 8-K filed by the Company with the Securities and Exchange Commission on November 15, 2011.
During September 2011 the Office of the Comptroller of the Currency (OCC) conducted a full review of the Companys loan portfolio and processes. After the review by the OCC, the Company established additional reserves for possible loan losses that created a loss for the third quarter. In addition, as a result of the losses that the Company incurred for the nine months ended September 30, 2011 and its inability to project sufficient taxable income in the near future, the Company increased its valuation allowances against its deferred tax assets as of September 30, 2011, which increased the loss for the third quarter by approximately $3 million, and raised additional accounting issues. The Company delayed the completion of its financial statements as of and for the quarter ended September 30, 2011, and therefore delayed the filing of its third quarter 2011 Form 10-Q as it attempted to resolve questions relating to when a payment is due under the tax sharing agreement between the Company and its wholly-owned subsidiary, Broadway Federal Bank, f.s.b. (the Bank), the required amount of such payment, and the effect of such payment, when made, on the cash position of the Company on a separate company basis.
On November 22, 2011, the Company received a deficiency letter from the Nasdaq Listing Qualifications Department stating that the Company is not in compliance with Nasdaq Listing Rule 5250(c)(1) because the Company had not yet filed with the Securities and Exchange Commission (the SEC) its Quarterly Report on Form 10-Q for the third quarter of 2011. Rule 5250(c)(1) requires that Nasdaq listed companies file their required periodic financial reports with the SEC on a timely basis. The Company filed its Quarterly Report on Form 10-Q for the third quarter of 2011 on December 21, 2011.
Due to the Companys recent history of quarterly losses, uncertainty regarding the Companys ability to complete its capital raising efforts, the Companys default under the terms of a $5 million line of credit with another lender, and the issues relating to the Companys tax sharing agreement summarized in the preceding paragraph, the Company included a going concern qualification in the notes to the Companys financial statements for the third quarter, which are included in the Quarterly Report on Form 10-Q. Also, as of January 1, 2012, the Companys forbearance agreement with the lender of its $5 million line of credit expired.
The Company is required to obtain prior approval of its federal banking regulatory agencies, the OCC and the Federal Reserve Board (acting through the Federal Reserve Bank of San Francisco)
to make any changes in the responsibilities of, or to hire new, senior executive officers. The Company is seeking such approval to promote the Companys current President and Chief Operating Officer, Mr. Wayne-Kent Bradshaw, to the position of Chief Executive Officer of the Company and of the Bank. The current Chief Executive Officer of both companies, Mr. Paul C. Hudson, would remain chairman of the boards of directors of both companies and have continuing executive responsibilities. The Federal Reserve Bank of San Francisco has informed the Company that it does not object to these changes and the OCC has informed the Company that it has no objection to implementation of these changes on an interim basis, pending the OCCs final decision on the matter, which is expected by March 17, 2012. In addition, the Company has begun to seek approval for the addition of a new director of the Company and the Bank to fill a vacancy that arose in the fourth quarter of 2011.
Exhibit 10.20
EXCHANGE AGREEMENT
This Exchange Agreement (Agreement) is entered into by and among the Interinsurance Exchange of the Automobile Club, located at 3333 Fairview Road, Costa Mesa, California 92626 (IEAC), the Automobile Club of Southern California, located at 3333 Fairview Road, Costa Mesa, California 92626 (the Club, and, collectively with IEAC, AAA) and Broadway Financial Corporation, located at 4800 Wilshire Boulevard, Los Angeles, California 90010 (Broadway) with reference to the following facts:
WHEREAS, Broadway desires to acquire all of the issued and outstanding shares of its Noncumulative Perpetual Preferred Stock, Series A (the Series A Preferred Stock) in exchange for shares of its common stock (Common Stock) on the terms and conditions set forth in this Agreement; and
WHEREAS, AAA is currently the owner of 55,199 shares, comprising all of the issued and outstanding shares, of the Series A Preferred Stock; and
WHEREAS, AAA is willing to exchange the Series A Preferred Stock held by it for Common Stock on the terms and conditions set forth in this Agreement (the AAA Exchange); and
WHEREAS, concurrently with the AAA Exchange, Broadway proposes (i) to issue shares of its Common Stock to the United States Department of Treasury (the Treasury Department) in exchange for all of the issued and outstanding shares of Broadways Fixed Rate Cumulative Perpetual Preferred Stock, Series D and Broadways Fixed Rate Cumulative Perpetual Preferred Stock, Series E (collectively, the TARP Preferred Stock) held by the Treasury Department and comprising all of the issued and outstanding shares of the TARP Preferred Stock (the Treasury Exchanges), and (ii) to enter into and complete exchanges of its Common Stock for all of the issued and outstanding shares of Broadways Series B Noncumulative Perpetual Preferred Stock and Series C Noncumulative Perpetual Convertible Preferred Stock with the holders of such respective series of preferred stock (the Other Preferred Stock Exchanges, and, collectively with Treasury Exchanges, the Other Exchanges); and
WHEREAS, concurrently with the AAA Exchange and the Other Exchanges described above, Broadway proposes to sell Common Stock to investors for cash in a private placement transaction (the Equity Offering).
NOW THEREFORE, in consideration of the mutual covenants herein set forth, the parties hereto agree as follows:
1. SHARE EXCHANGE. On the terms and subject to the conditions set forth herein, AAA agrees to transfer to Broadway all of its right, title and interest in and to the shares of Series A Preferred Stock of which the Club, IEAC or a nominee of either of them is the registered owner (the Shares) in exchange for and against delivery of Common Stock at an exchange ratio equal to (A) 50% of the aggregate liquidation preference of all of the shares of Series A Preferred Stock exchanged, divided by (B) the per share value assigned to the Common
1
Stock in connection with Broadways exchange of Common Stock with the Treasury Department for the TARP Preferred Stock held by the Treasury Department, which value Broadway and the Treasury Department have agreed will be the lowest price per share paid by the investors in the Equity Offering.
2. CLOSING. The completion of the transactions contemplated by this Agreement (the Closing) shall take place concurrently with the completion of the Treasury Exchanges prior to June 30, 2012 (or such later date to which AAA consents) (the Closing Date), as follows: AAA shall deliver or cause to be delivered the Shares to be exchanged hereunder to Broadway or Broadways agent in such manner as shall be acceptable to Broadway and effective to convey all right, title and interest of AAA in the Shares to Broadway against delivery by Broadway through the transfer agent for Broadway Common Stock, or such other means as shall be acceptable to AAA, of the number of shares of Common Stock provided for herein, registered in such names as AAA shall specify to Broadway at least three (3) business days prior to the Closing.
3. CONDITIONS TO CLOSING. The obligation of AAA to consummate the AAA Exchange is also subject to the fulfillment (or waiver by AAA) at or prior to the Closing of each of the following conditions:
(a) Broadway shall complete the Other Exchanges concurrently with the AAA Exchange.
(b) Broadway shall complete the Equity Offering concurrently with the AAA Exchange.
(c) The representations and warranties of Broadway set forth in this Agreement shall be true and correct in all material respects as though made on and as of the Closing Date (other than representations and warranties that by their terms speak as of another date, which representations and warranties shall be true and correct in all respects as of such other date).
(d) Broadway shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing.
4. MUTUAL REPRESENTATIONS AND WARRANTIES. Broadway hereby makes the following representations and warranties to AAA, and IEAC and Club each hereby makes the following representations and warranties to Broadway:
(a) Broadway is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware. Club is a corporation duly incorporated, validly existing and in good standing under the laws of California. IEAC is an interinsurance exchange, duly formed, validly existing and in good standing under the laws of California.
(b) (i) Each has full power and authority to enter into this Agreement and to consummate the transactions contemplated hereby, and (ii) the person or entity who has executed this Agreement is duly authorized to do so and thereby bind the party on whose behalf he, she or it is purporting to act.
(c) This Agreement is a valid and binding agreement, enforceable against each party in accordance with its terms.
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5. REPRESENTATIONS AND WARRANTIES OF BROADWAY. Broadway hereby makes the following representations and warranties to AAA:
(a) Upon issuance, the Common Stock to be issued by Broadway pursuant hereto (i) will be duly and validly authorized and issued, fully paid and nonassessable, and AAA will acquire such Common Stock free and clear of any liens, encumbrances, pledges, security interests or other restrictions or claims of third parties, and (ii) will, when considered with the 85,232 shares of Common Stock that AAA currently owns, will comprise less than 5% of Broadways issued and outstanding shares of Common Stock.
(b) Broadway is a certified Community Development Financial Institution and that its business strategy emphasizes serving the credit and other banking needs of the low-to-moderate income communities it serves.
(c) Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will violate, result in a breach of any of the terms or provisions of, constitute a default (or in any event that, with the giving of notice or the passage of time or both would constitute a default) under, accelerate any obligations under, or conflict with, (i) Broadways charter, articles or certificate of incorporation or bylaws, or other organizational documents, if applicable, or any agreement, indenture or other instrument to which Broadway is a party or by which Broadway or Broadways properties are bound, (ii) any judgment, decree, order or award of any court, governmental body or arbitrator to which Broadway is subject, or (iii) any law, rule or regulation applicable to Broadway.
(d) Neither Broadway nor any person acting on its behalf has taken any action (including any offering of any securities of Broadway under circumstances which would require the integration of such offering with the offering of the Common Stock or Common Stock Equivalents (as defined below) under the Securities Act of 1933, as amended, (the Act) and the rules and regulations of the Securities and Exchange Commissions promulgated thereunder), which might subject the offering, issuance or sale of the Common Stock or Common Stock Equivalents to AAA pursuant to this Agreement to the registration requirements of the Act.
(e) No broker, finder or investment banker is entitled to any financial advisory, brokerage, finders or other fee or commission in connection with this Agreement or the transactions contemplated hereby based upon arrangements made by or on behalf of Broadway or any subsidiary of Broadway for which AAA could have any liability.
6. REPRESENTATIONS AND WARRANTIES OF AAA. IEAC and Club each hereby represents and warrants to Broadway that it is the sole legal and beneficial owner of the Shares to be exchanged by it pursuant to this Agreement, and, upon the Closing, Broadway will acquire the Shares free and clear of any liens, encumbrances, pledges, security interests or other restrictions or claims of third parties.
7. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations, warranties and agreements of each party hereto shall survive the Closing.
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8. RETIREMENT OR PURCHASE OF COMMON STOCK. Should Broadway at any time and for any reason desire to retire or repurchase shares of its outstanding Common Stock, Broadway shall give AAA thirty (30) days prior written notice of such intent. Such notice shall specify the number of outstanding shares of Common Stock prior to such retirement or repurchase, and the number of outstanding shares of Common Stock after giving effect to such retirement or repurchase. Upon receipt of such notice, AAA shall have the right to sell to Broadway, at the Fair Market Value, the minimum number of shares of Common Stock that would result in AAA owning less than 5% of the outstanding shares of Common Stock of Broadway after giving effect to such retirement or repurchase and such sale by AAA to Broadway. Within ten (10) days after the receipt of such notice by AAA, AAA shall notify Broadway in writing of its intent to exercise its rights to sell shares of Common Stock to Broadway pursuant to this Section 8, which shall include the number of shares of Common Stock to be sold by AAA to Broadway in accordance with this Section 8, the owner of such shares and the proposed closing date, which date shall be no later than the business day preceding the date of the retirement or repurchase. Such option shall be in effect as long as AAA maintains a beneficial ownership in Broadway Common Stock.
9. TRANSFER OF COMMON STOCK. Subject to compliance with applicable securities laws, AAA shall be permitted to transfer, sell, assign or otherwise dispose of (Transfer) all or a portion of AAAs Common Stock at any time, and Broadway shall take all steps as may be reasonably requested by AAA to facilitate the Transfer of Common Stock.
10. ISSUANCE OF EQUITY SECURITIES. Broadway agrees not to issue equity securities ranking senior to the Common Stock for a period of two (2) years from the Closing Date, except in the following circumstances: (i) in connection with the provisions of a shareholders rights plan of Broadway; (ii) in connection with a rights offering or other distribution to shareholders of Common Stock in proportion to their respective ownership interests; or (iii) if approved by the shareholders of Common Stock.
11. POSSIBLE COMMON STOCK EQUIVALENT TRANSACTION.
(a) Broadway does not currently have sufficient authorized but unissued shares of Common Stock available under its certificate of incorporation to enable it to complete the AAA Exchange, each of the Other Exchanges, and the Equity Offering. In addition, issuance of Common Stock for such purposes would ordinarily require approval by Broadways stockholders pursuant to Rule 5635 of the corporate governance rules of the Nasdaq Stock Market. Accordingly, Broadway has agreed with the Treasury Department that Broadway will, as a condition to completion of the exchange with the Treasury Department, either: (i) obtain the required Broadway stockholder approval under the Nasdaq corporate governance rules and complete the other steps required to amend its certificate of incorporation to authorize the issuance of a sufficient number of shares of Common Stock for such purposes; or (ii) file a certificate of designations with the Secretary of State of the State of Delaware to designate a new series of preferred stock out of Broadways authorized but unissued preferred stock, to be designated Series F Common Stock Equivalent (the Common Stock Equivalents), the terms of which will include that such preferred stock shall be mandatorily convertible into the number of shares of Common Stock that would, upon the affirmative vote of the stockholders of Broadway, be issued directly if the exchange were made for Common Stock and an escalating cumulative
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dividend requirement to provide an incentive to the stockholders of Broadway to provide such vote. The certificate of designations for such series of preferred stock shall be substantially in the form attached as Exhibit A to this Agreement. Broadway and the Treasury Department have further agreed in such event that the exchange to be conducted by Broadway for the outstanding shares of TARP Preferred Stock shall be for shares of the Common Stock Equivalents rather than shares of Common Stock. The number of shares of Common Stock Equivalents to be issued in such alternative transaction (excluding shares to be issues in respect of accrued cumulative dividends under the terms of the TARP Preferred Stock) shall be the number of shares of Common Stock Equivalents that has an aggregate liquidation preference equal to 50% of the liquidation preference of all of the TARP Preferred stock to be exchanged.
(b) AAA hereby agrees that if the exchange with the Treasury Department for TARP Preferred Stock is completed using Common Stock Equivalents, then AAA will exchange all of its shares of Series A Preferred Stock for shares of Common Stock Equivalents on the same basis, as adjusted to reflect the different per share liquidation preferences of the Series A Preferred Stock and the TARP Preferred Stock, that is, the number of shares of Common Stock Equivalents to be issued to AAA shall equal the number determined by dividing (A) 50% of the aggregate liquidation preference of all of the Shares exchanged by AAA by (B) $1,000, which is the per share liquidation preference of the Common Stock Equivalents.
(c) Broadway represents and warrants that the Common Stock Equivalents will have been duly and validly authorized by all necessary action, and, when issued and delivered pursuant to this Agreement, such Common Stock Equivalents will be duly and validly issued and fully paid and nonassessable, will not be issued in violation of any preemptive rights, will not subject the holder thereof to personal liability, and such shares will rank pari passu with or senior to all other series or classes of preferred stock, whether or not issued or outstanding.
12. NOTICE. Any notice required or permitted to be given to either party under this Agreement shall be deemed duly given and effective if such notice is either served personally or placed in the United States mail, postage prepaid, addressed as indicated below:
As to AAA:
Interinsurance Exchange of the Automobile Club
Automobile Club of Southern California
3333 Fairview Road
Costa Mesa, California 92626-1698
Attn: Senior Vice President and Chief Financial Officer
As to Broadway:
Broadway Financial Corporation
4800 Wilshire Boulevard
Los Angeles, CA 90010
Attn: Chief Financial Officer
13. FURTHER ASSURANCES. Each party hereto shall promptly execute and deliver such further agreements and instruments, and take such further actions, as either of the other parties may reasonably request in order to carry out the purpose and intent of this Agreement.
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14. ASSIGNABILITY AND PARTIES IN INTEREST. This Agreement shall not be assignable by any of the parties hereto without the prior written consent of all the other parties hereto. This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns.
15. GOVERNING LAW. This Agreement shall be governed by and construed and enforce in accordance with the internal substantive law, and not the law pertaining to conflicts or choice of law, of the State of California.
16. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument.
17. COMPLETE AGREEMENT. This Agreement is an integrated agreement containing the entire agreement between the parties hereto with respect to the subject matter hereof, and shall supersede all previous and all contemporaneous oral or written negotiations, commitments or understandings.
18. MODIFICATIONS. AMENDMENTS AND WAIVERS. This Agreement may be modified, amended, or otherwise supplemented only by a writing signed by the parties against whom it is sought to be enforced in such amended, modified or supplemented form. No waiver of any right or power hereunder shall be deemed effective unless and until a writing waiving such right or power is executed by the parties waiving such right or power.
19. NO THIRD PARTY BENEFICIARIES. There are no third party beneficiaries under this Agreement or intended by any party hereto.
20. CAPTIONS. The paragraph captions contained in this Agreement are for convenience only and do not constitute a part of the provisions.
[signature page follows]
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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the first date written above.
BROADWAY FINANCIAL CORPORATION | AUTOMOBILE CLUB OF SOUTHERN CALIFORNIA | |||||||
By: | By: | |||||||
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Name: | Wayne-Kent A. Bradshaw | Name: | David M. Mattingly | |||||
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Title: | Chief Executive Officer and President | Title: | Senior Vice President, Chief Financial Officer & Treasurer | |||||
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Date: | 3-15-12 | Date: | 3/19/12 | |||||
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INTERINSURANCE EXCHANGE OF THE AUTOMOBILE CLUB | ||||||||
By: | ACSC Management Services, Inc., Attorney-in Fact | |||||||
By: | ||||||||
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Name: | David M. Mattingly | |||||||
| ||||||||
Title: | Senior Vice President, Chief Financial Officer & Treasurer | |||||||
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Date: | 3/19/12 | |||||||
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Exhibit 10.21
Stock Purchase Agreement
This Stock Purchase Agreement (Agreement) is entered into and dated as of July 2, 2012, by Broadway Financial Corporation, a Delaware corporation (the Company), and Albert O. Maddox and Dorothy Deloise Maddox as Trustees U/D/T dated February 19, 1991 (the Purchaser).
A. The Purchaser is a director and/or senior executive officer of the Company and is thoroughly familiar with the business and affairs of the Company as a result of his service in such capacity.
B. The Company is currently seeking to effect a series of recapitalization transactions that would include, among other steps, exchanges of all outstanding shares of the Companys preferred stock for common stock of the Company and sales of common stock to investors for cash to raise funds that the Company needs to continue operations (the Recapitalization). There is currently no assurance that the Company will be able to complete the Recapitalization.
C. The purchase of the Shares provided for in this Agreement is not contingent upon completion of the Recapitalization by the Company. It is the Purchasers intention that his purchase of the Shares provided for herein shall be final and binding upon the Purchaser and Company whether or not the Recapitalization is completed in its currently contemplated form or in any other form. In addition, while it is expected that other directors and/or senior executive officers of the Company will purchase shares of common stock of the Company on the same terms as those set forth herein, the Purchasers purchase of Shares contemplated herein shall not be conditioned upon the completion of any other such purchase transactions.
SECTION 1. | PURCHASE OF SHARES. |
(a) Purchase and Sale. On the terms and conditions set forth in this Agreement, the Purchaser agrees to purchase from the Company, and the Company agrees to sell to Purchaser 19,231 shares of the common stock of the Company (each a Share and, collectively, the Shares). The purchase and sale of the Shares shall occur at the offices of the Company on the date of this Agreement set forth above or at such other place and time as the parties may agree.
(b) Purchase Price. The Purchaser agrees to pay $1.30 for each Share or, if greater, the amount per Share that equals the fair market value of a Share as defined in Nasdaq Listing Rule 5005(a)(22), which term means the consolidated closing bid price per Share as reported by Nasdaq immediately preceding the entry of the parties into this Agreement, it being acknowledged by the parties that this Agreement has been entered into after the close of the regular trading session of Nasdaq at 4 p.m. Eastern Time on the date of this Agreement set forth above. The aggregate price for the Shares is referred to herein as the Purchase Price. Payment of the Purchase Price shall be made on the date of purchase in cash or cash equivalents in an amount equal to the Purchase Price.
(c) Notwithstanding the preceding provisions of this Section 1, in the event that the Company sells Shares of its common stock to other purchasers in the Recapitalization within the period of three months following the date hereof at a price per share greater than the per share purchase price set forth in this Agreement, the Company and the Purchaser agree that the Purchase Price set forth herein shall be deemed retroactively adjusted to such higher purchase price and the number of Shares purchased by the Purchaser shall be correspondingly reduced to the nearest number of whole Shares at such adjusted Purchase Price. In such event, the Purchaser shall surrender to the Company the number of Shares initially purchased by the Purchaser necessary to achieve such reduction promptly upon receipt of the Companys request to do so. The Company shall thereupon pay cash to the Purchaser in such amount, if any, as shall be necessary to settle any fractional share amounts.
SECTION 2. | RESTRICTIONS ON TRANSFER. |
(a) Purchaser Representations and Warranties. In connection with the issuance and sale of the Shares contemplated by this Agreement, the Purchaser hereby represents and warrants to the Company as follows:
(i) The Purchaser is acquiring and will hold the Shares for investment for his account only and not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act.
(ii) The Purchaser understands that (A) the Shares have not been registered under the Securities Act in reliance by the Company on the availability of a specific exemption from the general registration requirements of the Securities Act, the availability of which exemption depends on the accuracy of the Purchasers representations and warranties set forth in this Section 2, and (B) the Shares must be held indefinitely, unless they are subsequently registered under the Securities Act or the Purchaser obtains an opinion of counsel, in form and substance satisfactory to the Company and its counsel, that such registration is not required. The Purchaser further acknowledges and understands that the Company is under no obligation to register the offer or sale of the Shares under the Securities Act.
(iii) The Purchaser is aware of Rule 144 by the Securities and Exchange Commission (the SEC) under the Securities Act, which permits limited public resales of securities acquired in a non-public offering, subject to the satisfaction of certain conditions, including (without limitation) the availability of certain current public information about the issuer, the resale occurring only after the holding period required by Rule 144 has been satisfied, the sale occurring through an unsolicited brokers transaction, and the amount of securities being sold during any three-month period not exceeding specified limitations. The Purchaser acknowledges and understands that the conditions for resale set forth in Rule 144 to be satisfied.
(iv) The Purchaser will not sell, transfer or otherwise dispose of the Shares in violation of the Securities Act, the Securities Exchange Act of 1934, or the rules promulgated thereunder, including Rule 144 under the Securities Act. The Purchaser agrees that he will not dispose of the Shares unless and until he has complied with all
2
requirements of this Agreement applicable to the disposition of Shares and he has provided the Company with written assurances, in substance and form satisfactory to the Company, that (A) the proposed disposition does not require registration of the Shares under the Securities Act or all appropriate action necessary for compliance with the registration requirements of the Securities Act or with any exemption from registration available under the Securities Act (including Rule 144) has been taken and (B) the proposed disposition will not result in the contravention of any transfer restrictions applicable to the Shares under the securities laws or regulations of any State.
(v) The Purchaser has been furnished with, and has had access to, such information as he considers necessary or appropriate for deciding whether to invest in the Shares, and the Purchaser has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the issuance of the Shares and any other matters the Purchaser considers relevant to his purchase of the Shares.
(vi) The Purchaser is aware that his or her investment in the Company is a speculative investment that has limited liquidity and is subject to the risk of complete loss. The Purchaser is able, without impairing his financial condition, to hold the Shares for an indefinite period and to suffer a complete loss of his or her investment in the Shares.
(b) Securities Law Restrictions. Regardless of whether the offering and sale of Shares under this Agreement have been registered under the Securities Act or have been registered or qualified under the securities laws of any State, the Company at its discretion may impose restrictions upon the sale, pledge or other transfer of the Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law.
(c) Rights of the Company. The Company shall not be required to (i) transfer on its books any Shares that have been sold or transferred in contravention of this Agreement or (ii) treat as the owner of Purchased Shares, or otherwise to accord voting, dividend or liquidation rights to, any transferee to whom Purchased Shares have been transferred in contravention of this Agreement.
SECTION 3. | LEGENDS. |
All certificates evidencing Shares shall bear the following legends:
THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE REGISTERED HOLDER OF THE SHARES). THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE.
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THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
If required by the authorities of any State in connection with the issuance and sale of the Shares, the legend or legends required by such State authorities shall also be endorsed on all such certificates.
SECTION 4. | GENERAL TERMS. |
(a) Successors and Assigns. Except as otherwise expressly provided to the contrary, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and be binding upon the Purchaser and the Purchasers legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person has become a party to this Agreement or has agreed in writing to join herein and to be bound by the terms, conditions and restrictions hereof.
(b) Notice. Any notice required by the terms of this Agreement shall be given in writing. It shall be deemed effective upon (i) personal delivery, (ii) deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid or (iii) deposit with Federal Express Corporation or other nationally recognized courier delivery service, with shipping charges prepaid. Notice shall be addressed to the Company at its principal executive office and to the Purchaser at the address that he or she most recently provided to the Company in the manner provided in this Section 4(b).
(c) Entire Agreement. This Agreement constitutes the entire contract between the parties hereto with regard to the purchase of the Shares by the Purchaser. It supersedes any other agreements, representations or understandings (whether oral or written and whether express or implied) that relate to the subject matter hereof.
(d) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, as such laws are applied to contracts entered into and performed in such State.
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In witness whereof, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.
Purchaser: | Broadway Financial Corporation | |||||
/s/ Albert O. Maddox |
By: | /s/ Sam Sarpong | ||||
Name: | Sam Sarpong | |||||
Title: | CFO |
5
Stock Purchase Agreement
This Stock Purchase Agreement (Agreement) is entered into and dated as of July 2, 2012, by Broadway Financial Corporation, a Delaware corporation (the Company), and Daniel Medina and Laura Martin Family Trust (the Purchaser).
A. The Purchaser is a director and/or senior executive officer of the Company and is thoroughly familiar with the business and affairs of the Company as a result of his service in such capacity.
B. The Company is currently seeking to effect a series of recapitalization transactions that would include, among other steps, exchanges of all outstanding shares of the Companys preferred stock for common stock of the Company and sales of common stock to investors for cash to raise funds that the Company needs to continue operations (the Recapitalization). There is currently no assurance that the Company will be able to complete the Recapitalization.
C. The purchase of the Shares provided for in this Agreement is not contingent upon completion of the Recapitalization by the Company. It is the Purchasers intention that his purchase of the Shares provided for herein shall be final and binding upon the Purchaser and Company whether or not the Recapitalization is completed in its currently contemplated form or in any other form. In addition, while it is expected that other directors and/or senior executive officers of the Company will purchase shares of common stock of the Company on the same terms as those set forth herein, the Purchasers purchase of Shares contemplated herein shall not be conditioned upon the completion of any other such purchase transactions.
SECTION 1. | PURCHASE OF SHARES. |
(a) Purchase and Sale. On the terms and conditions set forth in this Agreement, the Purchaser agrees to purchase from the Company, and the Company agrees to sell to Purchaser 19,231 shares of the common stock of the Company (each a Share and, collectively, the Shares). The purchase and sale of the Shares shall occur at the offices of the Company on the date of this Agreement set forth above or at such other place and time as the parties may agree.
(b) Purchase Price. The Purchaser agrees to pay $1.30 for each Share or, if greater, the amount per Share that equals the fair market value of a Share as defined in Nasdaq Listing Rule 5005(a)(22), which term means the consolidated closing bid price per Share as reported by Nasdaq immediately preceding the entry of the parties into this Agreement, it being acknowledged by the parties that this Agreement has been entered into after the close of the regular trading session of Nasdaq at 4 p.m. Eastern Time on the date of this Agreement set forth above. The aggregate price for the Shares is referred to herein as the Purchase Price. Payment of the Purchase Price shall be made on the date of purchase in cash or cash equivalents in an amount equal to the Purchase Price.
(c) Notwithstanding the preceding provisions of this Section 1, in the event that the Company sells Shares of its common stock to other purchasers in the Recapitalization within the
period of three months following the date hereof at a price per share greater than the per share purchase price set forth in this Agreement, the Company and the Purchaser agree that the Purchase Price set forth herein shall be deemed retroactively adjusted to such higher purchase price and the number of Shares purchased by the Purchaser shall be correspondingly reduced to the nearest number of whole Shares at such adjusted Purchase Price. In such event, the Purchaser shall surrender to the Company the number of Shares initially purchased by the Purchaser necessary to achieve such reduction promptly upon receipt of the Companys request to do so. The Company shall thereupon pay cash to the Purchaser in such amount, if any, as shall be necessary to settle any fractional share amounts.
SECTION 2. | RESTRICTIONS ON TRANSFER. |
(a) Purchaser Representations and Warranties. In connection with the issuance and sale of the Shares contemplated by this Agreement, the Purchaser hereby represents and warrants to the Company as follows:
(i) The Purchaser is acquiring and will hold the Shares for investment for his account only and not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act.
(ii) The Purchaser understands that (A) the Shares have not been registered under the Securities Act in reliance by the Company on the availability of a specific exemption from the general registration requirements of the Securities Act, the availability of which exemption depends on the accuracy of the Purchasers representations and warranties set forth in this Section 2, and (B) the Shares must be held indefinitely, unless they are subsequently registered under the Securities Act or the Purchaser obtains an opinion of counsel, in form and substance satisfactory to the Company and its counsel, that such registration is not required. The Purchaser further acknowledges and understands that the Company is under no obligation to register the offer or sale of the Shares under the Securities Act.
(iii) The Purchaser is aware of Rule 144 by the Securities and Exchange Commission (the SEC) under the Securities Act, which permits limited public resales of securities acquired in a non-public offering, subject to the satisfaction of certain conditions, including (without limitation) the availability of certain current public information about the issuer, the resale occurring only after the holding period required by Rule 144 has been satisfied, the sale occurring through an unsolicited brokers transaction, and the amount of securities being sold during any three-month period not exceeding specified limitations. The Purchaser acknowledges and understands that the conditions for resale set forth in Rule 144 to be satisfied.
(iv) The Purchaser will not sell, transfer or otherwise dispose of the Shares in violation of the Securities Act, the Securities Exchange Act of 1934, or the rules promulgated thereunder, including Rule 144 under the Securities Act. The Purchaser agrees that he will not dispose of the Shares unless and until he has complied with all requirements of this Agreement applicable to the disposition of Shares and he has provided the Company with written assurances, in substance and form satisfactory to the
2
Company, that (A) the proposed disposition does not require registration of the Shares under the Securities Act or all appropriate action necessary for compliance with the registration requirements of the Securities Act or with any exemption from registration available under the Securities Act (including Rule 144) has been taken and (B) the proposed disposition will not result in the contravention of any transfer restrictions applicable to the Shares under the securities laws or regulations of any State.
(v) The Purchaser has been furnished with, and has had access to, such information as he considers necessary or appropriate for deciding whether to invest in the Shares, and the Purchaser has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the issuance of the Shares and any other matters the Purchaser considers relevant to his purchase of the Shares.
(vi) The Purchaser is aware that his or her investment in the Company is a speculative investment that has limited liquidity and is subject to the risk of complete loss. The Purchaser is able, without impairing his financial condition, to hold the Shares for an indefinite period and to suffer a complete loss of his or her investment in the Shares.
(b) Securities Law Restrictions. Regardless of whether the offering and sale of Shares under this Agreement have been registered under the Securities Act or have been registered or qualified under the securities laws of any State, the Company at its discretion may impose restrictions upon the sale, pledge or other transfer of the Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law.
(c) Rights of the Company. The Company shall not be required to (i) transfer on its books any Shares that have been sold or transferred in contravention of this Agreement or (ii) treat as the owner of Purchased Shares, or otherwise to accord voting, dividend or liquidation rights to, any transferee to whom Purchased Shares have been transferred in contravention of this Agreement.
SECTION 3. | LEGENDS. |
All certificates evidencing Shares shall bear the following legends:
THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE REGISTERED HOLDER OF THE SHARES). THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE.
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
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If required by the authorities of any State in connection with the issuance and sale of the Shares, the legend or legends required by such State authorities shall also be endorsed on all such certificates.
SECTION 4. | GENERAL TERMS. |
(a) Successors and Assigns. Except as otherwise expressly provided to the contrary, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and be binding upon the Purchaser and the Purchasers legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person has become a party to this Agreement or has agreed in writing to join herein and to be bound by the terms, conditions and restrictions hereof.
(b) Notice. Any notice required by the terms of this Agreement shall be given in writing. It shall be deemed effective upon (i) personal delivery, (ii) deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid or (iii) deposit with Federal Express Corporation or other nationally recognized courier delivery service, with shipping charges prepaid. Notice shall be addressed to the Company at its principal executive office and to the Purchaser at the address that he or she most recently provided to the Company in the manner provided in this Section 4(b).
(c) Entire Agreement. This Agreement constitutes the entire contract between the parties hereto with regard to the purchase of the Shares by the Purchaser. It supersedes any other agreements, representations or understandings (whether oral or written and whether express or implied) that relate to the subject matter hereof.
(d) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, as such laws are applied to contracts entered into and performed in such State.
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In witness whereof, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.
Purchaser: | Broadway Financial Corporation | |||||
/s/ Daniel A. Medina |
By: | /s/ Sam Sarpong | ||||
Daniel A Medina as TTF Martin Medina Family Trust UTD 6/30/94 |
Name: |
Sam Sarpong | ||||
Title: |
CFO |
5
Stock Purchase Agreement
This Stock Purchase Agreement (Agreement) is entered into and dated as of July 2, 2012, by Broadway Financial Corporation, a Delaware corporation (the Company), and Paul C. Hudson (the Purchaser).
A. The Purchaser is a director and/or senior executive officer of the Company and is thoroughly familiar with the business and affairs of the Company as a result of his service in such capacity.
B. The Company is currently seeking to effect a series of recapitalization transactions that would include, among other steps, exchanges of all outstanding shares of the Companys preferred stock for common stock of the Company and sales of common stock to investors for cash to raise funds that the Company needs to continue operations (the Recapitalization). There is currently no assurance that the Company will be able to complete the Recapitalization.
C. The purchase of the Shares provided for in this Agreement is not contingent upon completion of the Recapitalization by the Company. It is the Purchasers intention that his purchase of the Shares provided for herein shall be final and binding upon the Purchaser and Company whether or not the Recapitalization is completed in its currently contemplated form or in any other form. In addition, while it is expected that other directors and/or senior executive officers of the Company will purchase shares of common stock of the Company on the same terms as those set forth herein, the Purchasers purchase of Shares contemplated herein shall not be conditioned upon the completion of any other such purchase transactions.
SECTION 1. | PURCHASE OF SHARES. |
(a) Purchase and Sale. On the terms and conditions set forth in this Agreement, the Purchaser agrees to purchase from the Company, and the Company agrees to sell to Purchaser 19,231 shares of the common stock of the Company (each a Share and, collectively, the Shares). The purchase and sale of the Shares shall occur at the offices of the Company on the date of this Agreement set forth above or at such other place and time as the parties may agree.
(b) Purchase Price. The Purchaser agrees to pay $1.30 for each Share or, if greater, the amount per Share that equals the fair market value of a Share as defined in Nasdaq Listing Rule 5005(a)(22), which term means the consolidated closing bid price per Share as reported by Nasdaq immediately preceding the entry of the parties into this Agreement, it being acknowledged by the parties that this Agreement has been entered into after the close of the regular trading session of Nasdaq at 4 p.m. Eastern Time on the date of this Agreement set forth above. The aggregate price for the Shares is referred to herein as the Purchase Price. Payment of the Purchase Price shall be made on the date of purchase in cash or cash equivalents in an amount equal to the Purchase Price.
(c) Notwithstanding the preceding provisions of this Section 1, in the event that the Company sells Shares of its common stock to other purchasers in the Recapitalization within the
period of three months following the date hereof at a price per share greater than the per share purchase price set forth in this Agreement, the Company and the Purchaser agree that the Purchase Price set forth herein shall be deemed retroactively adjusted to such higher purchase price and the number of Shares purchased by the Purchaser shall be correspondingly reduced to the nearest number of whole Shares at such adjusted Purchase Price. In such event, the Purchaser shall surrender to the Company the number of Shares initially purchased by the Purchaser necessary to achieve such reduction promptly upon receipt of the Companys request to do so. The Company shall thereupon pay cash to the Purchaser in such amount, if any, as shall be necessary to settle any fractional share amounts.
SECTION 2. | RESTRICTIONS ON TRANSFER. |
(a) Purchaser Representations and Warranties. In connection with the issuance and sale of the Shares contemplated by this Agreement, the Purchaser hereby represents and warrants to the Company as follows:
(i) The Purchaser is acquiring and will hold the Shares for investment for his account only and not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act.
(ii) The Purchaser understands that (A) the Shares have not been registered under the Securities Act in reliance by the Company on the availability of a specific exemption from the general registration requirements of the Securities Act, the availability of which exemption depends on the accuracy of the Purchasers representations and warranties set forth in this Section 2, and (B) the Shares must be held indefinitely, unless they are subsequently registered under the Securities Act or the Purchaser obtains an opinion of counsel, in form and substance satisfactory to the Company and its counsel, that such registration is not required. The Purchaser further acknowledges and understands that the Company is under no obligation to register the offer or sale of the Shares under the Securities Act.
(iii) The Purchaser is aware of Rule 144 by the Securities and Exchange Commission (the SEC) under the Securities Act, which permits limited public resales of securities acquired in a non-public offering, subject to the satisfaction of certain conditions, including (without limitation) the availability of certain current public information about the issuer, the resale occurring only after the holding period required by Rule 144 has been satisfied, the sale occurring through an unsolicited brokers transaction, and the amount of securities being sold during any three-month period not exceeding specified limitations. The Purchaser acknowledges and understands that the conditions for resale set forth in Rule 144 to be satisfied.
(iv) The Purchaser will not sell, transfer or otherwise dispose of the Shares in violation of the Securities Act, the Securities Exchange Act of 1934, or the rules promulgated thereunder, including Rule 144 under the Securities Act. The Purchaser agrees that he will not dispose of the Shares unless and until he has complied with all requirements of this Agreement applicable to the disposition of Shares and he has provided the Company with written assurances, in substance and form satisfactory to the
2
Company, that (A) the proposed disposition does not require registration of the Shares under the Securities Act or all appropriate action necessary for compliance with the registration requirements of the Securities Act or with any exemption from registration available under the Securities Act (including Rule 144) has been taken and (B) the proposed disposition will not result in the contravention of any transfer restrictions applicable to the Shares under the securities laws or regulations of any State.
(v) The Purchaser has been furnished with, and has had access to, such information as he considers necessary or appropriate for deciding whether to invest in the Shares, and the Purchaser has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the issuance of the Shares and any other matters the Purchaser considers relevant to his purchase of the Shares.
(vi) The Purchaser is aware that his or her investment in the Company is a speculative investment that has limited liquidity and is subject to the risk of complete loss. The Purchaser is able, without impairing his financial condition, to hold the Shares for an indefinite period and to suffer a complete loss of his or her investment in the Shares.
(b) Securities Law Restrictions. Regardless of whether the offering and sale of Shares under this Agreement have been registered under the Securities Act or have been registered or qualified under the securities laws of any State, the Company at its discretion may impose restrictions upon the sale, pledge or other transfer of the Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law.
(c) Rights of the Company. The Company shall not be required to (i) transfer on its books any Shares that have been sold or transferred in contravention of this Agreement or (ii) treat as the owner of Purchased Shares, or otherwise to accord voting, dividend or liquidation rights to, any transferee to whom Purchased Shares have been transferred in contravention of this Agreement.
SECTION 3. | LEGENDS. |
All certificates evidencing Shares shall bear the following legends:
THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE REGISTERED HOLDER OF THE SHARES). THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE.
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
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If required by the authorities of any State in connection with the issuance and sale of the Shares, the legend or legends required by such State authorities shall also be endorsed on all such certificates.
SECTION 4. | GENERAL TERMS. |
(a) Successors and Assigns. Except as otherwise expressly provided to the contrary, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and be binding upon the Purchaser and the Purchasers legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person has become a party to this Agreement or has agreed in writing to join herein and to be bound by the terms, conditions and restrictions hereof.
(b) Notice. Any notice required by the terms of this Agreement shall be given in writing. It shall be deemed effective upon (i) personal delivery, (ii) deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid or (iii) deposit with Federal Express Corporation or other nationally recognized courier delivery service, with shipping charges prepaid. Notice shall be addressed to the Company at its principal executive office and to the Purchaser at the address that he or she most recently provided to the Company in the manner provided in this Section 4(b).
(c) Entire Agreement. This Agreement constitutes the entire contract between the parties hereto with regard to the purchase of the Shares by the Purchaser. It supersedes any other agreements, representations or understandings (whether oral or written and whether express or implied) that relate to the subject matter hereof.
(d) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, as such laws are applied to contracts entered into and performed in such State.
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In witness whereof, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.
Purchaser: | Broadway Financial Corporation | |||||
/s/ Paul C. Hudson |
By: | /s/ Sam Sarpong | ||||
Name: | Sam Sarpong | |||||
Title: | CFO |
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Stock Purchase Agreement
This Stock Purchase Agreement (Agreement) is entered into and dated as of July 2, 2012, by Broadway Financial Corporation, a Delaware corporation (the Company), and The Robert and Alice Davidson Trust (the Purchaser).
A. The Purchaser is a director and/or senior executive officer of the Company and is thoroughly familiar with the business and affairs of the Company as a result of his service in such capacity.
B. The Company is currently seeking to effect a series of recapitalization transactions that would include, among other steps, exchanges of all outstanding shares of the Companys preferred stock for common stock of the Company and sales of common stock to investors for cash to raise funds that the Company needs to continue operations (the Recapitalization). There is currently no assurance that the Company will be able to complete the Recapitalization.
C. The purchase of the Shares provided for in this Agreement is not contingent upon completion of the Recapitalization by the Company. It is the Purchasers intention that his purchase of the Shares provided for herein shall be final and binding upon the Purchaser and Company whether or not the Recapitalization is completed in its currently contemplated form or in any other form. In addition, while it is expected that other directors and/or senior executive officers of the Company will purchase shares of common stock of the Company on the same terms as those set forth herein, the Purchasers purchase of Shares contemplated herein shall not be conditioned upon the completion of any other such purchase transactions.
SECTION 1. | PURCHASE OF SHARES. |
(a) Purchase and Sale. On the terms and conditions set forth in this Agreement, the Purchaser agrees to purchase from the Company, and the Company agrees to sell to Purchaser 19,231 shares of the common stock of the Company (each a Share and, collectively, the Shares). The purchase and sale of the Shares shall occur at the offices of the Company on the date of this Agreement set forth above or at such other place and time as the parties may agree.
(b) Purchase Price. The Purchaser agrees to pay $1.30 for each Share or, if greater, the amount per Share that equals the fair market value of a Share as defined in Nasdaq Listing Rule 5005(a)(22), which term means the consolidated closing bid price per Share as reported by Nasdaq immediately preceding the entry of the parties into this Agreement, it being acknowledged by the parties that this Agreement has been entered into after the close of the regular trading session of Nasdaq at 4 p.m. Eastern Time on the date of this Agreement set forth above. The aggregate price for the Shares is referred to herein as the Purchase Price. Payment of the Purchase Price shall be made on the date of purchase in cash or cash equivalents in an amount equal to the Purchase Price.
(c) Notwithstanding the preceding provisions of this Section 1, in the event that the Company sells Shares of its common stock to other purchasers in the Recapitalization within the
period of three months following the date hereof at a price per share greater than the per share purchase price set forth in this Agreement, the Company and the Purchaser agree that the Purchase Price set forth herein shall be deemed retroactively adjusted to such higher purchase price and the number of Shares purchased by the Purchaser shall be correspondingly reduced to the nearest number of whole Shares at such adjusted Purchase Price. In such event, the Purchaser shall surrender to the Company the number of Shares initially purchased by the Purchaser necessary to achieve such reduction promptly upon receipt of the Companys request to do so. The Company shall thereupon pay cash to the Purchaser in such amount, if any, as shall be necessary to settle any fractional share amounts.
SECTION 2. | RESTRICTIONS ON TRANSFER. |
(a) Purchaser Representations and Warranties. In connection with the issuance and sale of the Shares contemplated by this Agreement, the Purchaser hereby represents and warrants to the Company as follows:
(i) The Purchaser is acquiring and will hold the Shares for investment for his account only and not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act.
(ii) The Purchaser understands that (A) the Shares have not been registered under the Securities Act in reliance by the Company on the availability of a specific exemption from the general registration requirements of the Securities Act, the availability of which exemption depends on the accuracy of the Purchasers representations and warranties set forth in this Section 2, and (B) the Shares must be held indefinitely, unless they are subsequently registered under the Securities Act or the Purchaser obtains an opinion of counsel, in form and substance satisfactory to the Company and its counsel, that such registration is not required. The Purchaser further acknowledges and understands that the Company is under no obligation to register the offer or sale of the Shares under the Securities Act.
(iii) The Purchaser is aware of Rule 144 by the Securities and Exchange Commission (the SEC) under the Securities Act, which permits limited public resales of securities acquired in a non-public offering, subject to the satisfaction of certain conditions, including (without limitation) the availability of certain current public information about the issuer, the resale occurring only after the holding period required by Rule 144 has been satisfied, the sale occurring through an unsolicited brokers transaction, and the amount of securities being sold during any three-month period not exceeding specified limitations. The Purchaser acknowledges and understands that the conditions for resale set forth in Rule 144 to be satisfied.
(iv) The Purchaser will not sell, transfer or otherwise dispose of the Shares in violation of the Securities Act, the Securities Exchange Act of 1934, or the rules promulgated thereunder, including Rule 144 under the Securities Act. The Purchaser agrees that he will not dispose of the Shares unless and until he has complied with all requirements of this Agreement applicable to the disposition of Shares and he has provided the Company with written assurances, in substance and form satisfactory to the
2
Company, that (A) the proposed disposition does not require registration of the Shares under the Securities Act or all appropriate action necessary for compliance with the registration requirements of the Securities Act or with any exemption from registration available under the Securities Act (including Rule 144) has been taken and (B) the proposed disposition will not result in the contravention of any transfer restrictions applicable to the Shares under the securities laws or regulations of any State.
(v) The Purchaser has been furnished with, and has had access to, such information as he considers necessary or appropriate for deciding whether to invest in the Shares, and the Purchaser has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the issuance of the Shares and any other matters the Purchaser considers relevant to his purchase of the Shares.
(vi) The Purchaser is aware that his or her investment in the Company is a speculative investment that has limited liquidity and is subject to the risk of complete loss. The Purchaser is able, without impairing his financial condition, to hold the Shares for an indefinite period and to suffer a complete loss of his or her investment in the Shares.
(b) Securities Law Restrictions. Regardless of whether the offering and sale of Shares under this Agreement have been registered under the Securities Act or have been registered or qualified under the securities laws of any State, the Company at its discretion may impose restrictions upon the sale, pledge or other transfer of the Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law.
(c) Rights of the Company. The Company shall not be required to (i) transfer on its books any Shares that have been sold or transferred in contravention of this Agreement or (ii) treat as the owner of Purchased Shares, or otherwise to accord voting, dividend or liquidation rights to, any transferee to whom Purchased Shares have been transferred in contravention of this Agreement.
SECTION 3. | LEGENDS. |
All certificates evidencing Shares shall bear the following legends:
THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE REGISTERED HOLDER OF THE SHARES). THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE.
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
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If required by the authorities of any State in connection with the issuance and sale of the Shares, the legend or legends required by such State authorities shall also be endorsed on all such certificates.
SECTION 4. | GENERAL TERMS. |
(a) Successors and Assigns. Except as otherwise expressly provided to the contrary, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and be binding upon the Purchaser and the Purchasers legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person has become a party to this Agreement or has agreed in writing to join herein and to be bound by the terms, conditions and restrictions hereof.
(b) Notice. Any notice required by the terms of this Agreement shall be given in writing. It shall be deemed effective upon (i) personal delivery, (ii) deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid or (iii) deposit with Federal Express Corporation or other nationally recognized courier delivery service, with shipping charges prepaid. Notice shall be addressed to the Company at its principal executive office and to the Purchaser at the address that he or she most recently provided to the Company in the manner provided in this Section 4(b).
(c) Entire Agreement. This Agreement constitutes the entire contract between the parties hereto with regard to the purchase of the Shares by the Purchaser. It supersedes any other agreements, representations or understandings (whether oral or written and whether express or implied) that relate to the subject matter hereof.
(d) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, as such laws are applied to contracts entered into and performed in such State.
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In witness whereof, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.
Purchaser: | Broadway Financial Corporation | |||||
/s/ Robert C. Davidson Jr. |
By: | /s/ Sam Sarpong | ||||
Trustee |
Name: |
Sam Sarpong | ||||
Title: | CFO |
5
Stock Purchase Agreement
This Stock Purchase Agreement (Agreement) is entered into and dated as of July 2, 2012, by Broadway Financial Corporation, a Delaware corporation (the Company), and IRA for the benefit of Virgil Roberts (the Purchaser).
A. The Purchaser is a director and/or senior executive officer of the Company and is thoroughly familiar with the business and affairs of the Company as a result of his service in such capacity.
B. The Company is currently seeking to effect a series of recapitalization transactions that would include, among other steps, exchanges of all outstanding shares of the Companys preferred stock for common stock of the Company and sales of common stock to investors for cash to raise funds that the Company needs to continue operations (the Recapitalization). There is currently no assurance that the Company will be able to complete the Recapitalization.
C. The purchase of the Shares provided for in this Agreement is not contingent upon completion of the Recapitalization by the Company. It is the Purchasers intention that his purchase of the Shares provided for herein shall be final and binding upon the Purchaser and Company whether or not the Recapitalization is completed in its currently contemplated form or in any other form. In addition, while it is expected that other directors and/or senior executive officers of the Company will purchase shares of common stock of the Company on the same terms as those set forth herein, the Purchasers purchase of Shares contemplated herein shall not be conditioned upon the completion of any other such purchase transactions.
SECTION 1. | PURCHASE OF SHARES. |
(a) Purchase and Sale. On the terms and conditions set forth in this Agreement, the Purchaser agrees to purchase from the Company, and the Company agrees to sell to Purchaser 3,846 shares of the common stock of the Company (each a Share and, collectively, the Shares). The purchase and sale of the Shares shall occur at the offices of the Company on the date of this Agreement set forth above or at such other place and time as the parties may agree.
(b) Purchase Price. The Purchaser agrees to pay $1.30 for each Share or, if greater, the amount per Share that equals the fair market value of a Share as defined in Nasdaq Listing Rule 5005(a)(22), which term means the consolidated closing bid price per Share as reported by Nasdaq immediately preceding the entry of the parties into this Agreement, it being acknowledged by the parties that this Agreement has been entered into after the close of the regular trading session of Nasdaq at 4 p.m. Eastern Time on the date of this Agreement set forth above. The aggregate price for the Shares is referred to herein as the Purchase Price. Payment of the Purchase Price shall be made on the date of purchase in cash or cash equivalents in an amount equal to the Purchase Price.
(c) Notwithstanding the preceding provisions of this Section 1, in the event that the Company sells Shares of its common stock to other purchasers in the Recapitalization within the
period of three months following the date hereof at a price per share greater than the per share purchase price set forth in this Agreement, the Company and the Purchaser agree that the Purchase Price set forth herein shall be deemed retroactively adjusted to such higher purchase price and the number of Shares purchased by the Purchaser shall be correspondingly reduced to the nearest number of whole Shares at such adjusted Purchase Price. In such event, the Purchaser shall surrender to the Company the number of Shares initially purchased by the Purchaser necessary to achieve such reduction promptly upon receipt of the Companys request to do so. The Company shall thereupon pay cash to the Purchaser in such amount, if any, as shall be necessary to settle any fractional share amounts.
SECTION 2. | RESTRICTIONS ON TRANSFER. |
(a) Purchaser Representations and Warranties. In connection with the issuance and sale of the Shares contemplated by this Agreement, the Purchaser hereby represents and warrants to the Company as follows:
(i) The Purchaser is acquiring and will hold the Shares for investment for his account only and not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act.
(ii) The Purchaser understands that (A) the Shares have not been registered under the Securities Act in reliance by the Company on the availability of a specific exemption from the general registration requirements of the Securities Act, the availability of which exemption depends on the accuracy of the Purchasers representations and warranties set forth in this Section 2, and (B) the Shares must be held indefinitely, unless they are subsequently registered under the Securities Act or the Purchaser obtains an opinion of counsel, in form and substance satisfactory to the Company and its counsel, that such registration is not required. The Purchaser further acknowledges and understands that the Company is under no obligation to register the offer or sale of the Shares under the Securities Act.
(iii) The Purchaser is aware of Rule 144 by the Securities and Exchange Commission (the SEC) under the Securities Act, which permits limited public resales of securities acquired in a non-public offering, subject to the satisfaction of certain conditions, including (without limitation) the availability of certain current public information about the issuer, the resale occurring only after the holding period required by Rule 144 has been satisfied, the sale occurring through an unsolicited brokers transaction, and the amount of securities being sold during any three-month period not exceeding specified limitations. The Purchaser acknowledges and understands that the conditions for resale set forth in Rule 144 to be satisfied.
(iv) The Purchaser will not sell, transfer or otherwise dispose of the Shares in violation of the Securities Act, the Securities Exchange Act of 1934, or the rules promulgated thereunder, including Rule 144 under the Securities Act. The Purchaser agrees that he will not dispose of the Shares unless and until he has complied with all requirements of this Agreement applicable to the disposition of Shares and he has provided the Company with written assurances, in substance and form satisfactory to the
2
Company, that (A) the proposed disposition does not require registration of the Shares under the Securities Act or all appropriate action necessary for compliance with the registration requirements of the Securities Act or with any exemption from registration available under the Securities Act (including Rule 144) has been taken and (B) the proposed disposition will not result in the contravention of any transfer restrictions applicable to the Shares under the securities laws or regulations of any State.
(v) The Purchaser has been furnished with, and has had access to, such information as he considers necessary or appropriate for deciding whether to invest in the Shares, and the Purchaser has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the issuance of the Shares and any other matters the Purchaser considers relevant to his purchase of the Shares.
(vi) The Purchaser is aware that his or her investment in the Company is a speculative investment that has limited liquidity and is subject to the risk of complete loss. The Purchaser is able, without impairing his financial condition, to hold the Shares for an indefinite period and to suffer a complete loss of his or her investment in the Shares.
(b) Securities Law Restrictions. Regardless of whether the offering and sale of Shares under this Agreement have been registered under the Securities Act or have been registered or qualified under the securities laws of any State, the Company at its discretion may impose restrictions upon the sale, pledge or other transfer of the Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law.
(c) Rights of the Company. The Company shall not be required to (i) transfer on its books any Shares that have been sold or transferred in contravention of this Agreement or (ii) treat as the owner of Purchased Shares, or otherwise to accord voting, dividend or liquidation rights to, any transferee to whom Purchased Shares have been transferred in contravention of this Agreement.
SECTION 3. | LEGENDS. |
All certificates evidencing Shares shall bear the following legends:
THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE REGISTERED HOLDER OF THE SHARES). THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE.
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
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If required by the authorities of any State in connection with the issuance and sale of the Shares, the legend or legends required by such State authorities shall also be endorsed on all such certificates.
SECTION 4. | GENERAL TERMS. |
(a) Successors and Assigns. Except as otherwise expressly provided to the contrary, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and be binding upon the Purchaser and the Purchasers legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person has become a party to this Agreement or has agreed in writing to join herein and to be bound by the terms, conditions and restrictions hereof.
(b) Notice. Any notice required by the terms of this Agreement shall be given in writing. It shall be deemed effective upon (i) personal delivery, (ii) deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid or (iii) deposit with Federal Express Corporation or other nationally recognized courier delivery service, with shipping charges prepaid. Notice shall be addressed to the Company at its principal executive office and to the Purchaser at the address that he or she most recently provided to the Company in the manner provided in this Section 4(b).
(c) Entire Agreement. This Agreement constitutes the entire contract between the parties hereto with regard to the purchase of the Shares by the Purchaser. It supersedes any other agreements, representations or understandings (whether oral or written and whether express or implied) that relate to the subject matter hereof.
(d) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, as such laws are applied to contracts entered into and performed in such State.
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In witness whereof, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.
Purchaser: | Broadway Financial Corporation | |||||
/s/ Virgil Roberts |
By: | /s/ Sam Sarpong | ||||
Name: | Sam Sarpong | |||||
Title: | CFO |
5
Stock Purchase Agreement
This Stock Purchase Agreement (Agreement) is entered into and dated as of July 2, 2012, by Broadway Financial Corporation, a Delaware corporation (the Company), and Virgil and Brenda Roberts Defined Benefit Pension Plan (the Purchaser).
A. The Purchaser is a director and/or senior executive officer of the Company and is thoroughly familiar with the business and affairs of the Company as a result of his service in such capacity.
B. The Company is currently seeking to effect a series of recapitalization transactions that would include, among other steps, exchanges of all outstanding shares of the Companys preferred stock for common stock of the Company and sales of common stock to investors for cash to raise funds that the Company needs to continue operations (the Recapitalization). There is currently no assurance that the Company will be able to complete the Recapitalization.
C. The purchase of the Shares provided for in this Agreement is not contingent upon completion of the Recapitalization by the Company. It is the Purchasers intention that his purchase of the Shares provided for herein shall be final and binding upon the Purchaser and Company whether or not the Recapitalization is completed in its currently contemplated form or in any other form. In addition, while it is expected that other directors and/or senior executive officers of the Company will purchase shares of common stock of the Company on the same terms as those set forth herein, the Purchasers purchase of Shares contemplated herein shall not be conditioned upon the completion of any other such purchase transactions.
SECTION 1. | PURCHASE OF SHARES. |
(a) Purchase and Sale. On the terms and conditions set forth in this Agreement, the Purchaser agrees to purchase from the Company, and the Company agrees to sell to Purchaser 15,385 shares of the common stock of the Company (each a Share and, collectively, the Shares). The purchase and sale of the Shares shall occur at the offices of the Company on the date of this Agreement set forth above or at such other place and time as the parties may agree.
(b) Purchase Price. The Purchaser agrees to pay $1.30 for each Share or, if greater, the amount per Share that equals the fair market value of a Share as defined in Nasdaq Listing Rule 5005(a)(22), which term means the consolidated closing bid price per Share as reported by Nasdaq immediately preceding the entry of the parties into this Agreement, it being acknowledged by the parties that this Agreement has been entered into after the close of the regular trading session of Nasdaq at 4 p.m. Eastern Time on the date of this Agreement set forth above. The aggregate price for the Shares is referred to herein as the Purchase Price. Payment of the Purchase Price shall be made on the date of purchase in cash or cash equivalents in an amount equal to the Purchase Price.
(c) Notwithstanding the preceding provisions of this Section 1, in the event that the Company sells Shares of its common stock to other purchasers in the Recapitalization within the
period of three months following the date hereof at a price per share greater than the per share purchase price set forth in this Agreement, the Company and the Purchaser agree that the Purchase Price set forth herein shall be deemed retroactively adjusted to such higher purchase price and the number of Shares purchased by the Purchaser shall be correspondingly reduced to the nearest number of whole Shares at such adjusted Purchase Price. In such event, the Purchaser shall surrender to the Company the number of Shares initially purchased by the Purchaser necessary to achieve such reduction promptly upon receipt of the Companys request to do so. The Company shall thereupon pay cash to the Purchaser in such amount, if any, as shall be necessary to settle any fractional share amounts.
SECTION 2. | RESTRICTIONS ON TRANSFER. |
(a) Purchaser Representations and Warranties. In connection with the issuance and sale of the Shares contemplated by this Agreement, the Purchaser hereby represents and warrants to the Company as follows:
(i) The Purchaser is acquiring and will hold the Shares for investment for his account only and not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act.
(ii) The Purchaser understands that (A) the Shares have not been registered under the Securities Act in reliance by the Company on the availability of a specific exemption from the general registration requirements of the Securities Act, the availability of which exemption depends on the accuracy of the Purchasers representations and warranties set forth in this Section 2, and (B) the Shares must be held indefinitely, unless they are subsequently registered under the Securities Act or the Purchaser obtains an opinion of counsel, in form and substance satisfactory to the Company and its counsel, that such registration is not required. The Purchaser further acknowledges and understands that the Company is under no obligation to register the offer or sale of the Shares under the Securities Act.
(iii) The Purchaser is aware of Rule 144 by the Securities and Exchange Commission (the SEC) under the Securities Act, which permits limited public resales of securities acquired in a non-public offering, subject to the satisfaction of certain conditions, including (without limitation) the availability of certain current public information about the issuer, the resale occurring only after the holding period required by Rule 144 has been satisfied, the sale occurring through an unsolicited brokers transaction, and the amount of securities being sold during any three-month period not exceeding specified limitations. The Purchaser acknowledges and understands that the conditions for resale set forth in Rule 144 to be satisfied.
(iv) The Purchaser will not sell, transfer or otherwise dispose of the Shares in violation of the Securities Act, the Securities Exchange Act of 1934, or the rules promulgated thereunder, including Rule 144 under the Securities Act. The Purchaser agrees that he will not dispose of the Shares unless and until he has complied with all requirements of this Agreement applicable to the disposition of Shares and he has provided the Company with written assurances, in substance and form satisfactory to the
2
Company, that (A) the proposed disposition does not require registration of the Shares under the Securities Act or all appropriate action necessary for compliance with the registration requirements of the Securities Act or with any exemption from registration available under the Securities Act (including Rule 144) has been taken and (B) the proposed disposition will not result in the contravention of any transfer restrictions applicable to the Shares under the securities laws or regulations of any State.
(v) The Purchaser has been furnished with, and has had access to, such information as he considers necessary or appropriate for deciding whether to invest in the Shares, and the Purchaser has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the issuance of the Shares and any other matters the Purchaser considers relevant to his purchase of the Shares.
(vi) The Purchaser is aware that his or her investment in the Company is a speculative investment that has limited liquidity and is subject to the risk of complete loss. The Purchaser is able, without impairing his financial condition, to hold the Shares for an indefinite period and to suffer a complete loss of his or her investment in the Shares.
(b) Securities Law Restrictions. Regardless of whether the offering and sale of Shares under this Agreement have been registered under the Securities Act or have been registered or qualified under the securities laws of any State, the Company at its discretion may impose restrictions upon the sale, pledge or other transfer of the Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law.
(c) Rights of the Company. The Company shall not be required to (i) transfer on its books any Shares that have been sold or transferred in contravention of this Agreement or (ii) treat as the owner of Purchased Shares, or otherwise to accord voting, dividend or liquidation rights to, any transferee to whom Purchased Shares have been transferred in contravention of this Agreement.
SECTION 3. | LEGENDS. |
All certificates evidencing Shares shall bear the following legends:
THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE REGISTERED HOLDER OF THE SHARES). THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE.
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
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If required by the authorities of any State in connection with the issuance and sale of the Shares, the legend or legends required by such State authorities shall also be endorsed on all such certificates.
SECTION 4. | GENERAL TERMS. |
(a) Successors and Assigns. Except as otherwise expressly provided to the contrary, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and be binding upon the Purchaser and the Purchasers legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person has become a party to this Agreement or has agreed in writing to join herein and to be bound by the terms, conditions and restrictions hereof.
(b) Notice. Any notice required by the terms of this Agreement shall be given in writing. It shall be deemed effective upon (i) personal delivery, (ii) deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid or (iii) deposit with Federal Express Corporation or other nationally recognized courier delivery service, with shipping charges prepaid. Notice shall be addressed to the Company at its principal executive office and to the Purchaser at the address that he or she most recently provided to the Company in the manner provided in this Section 4(b).
(c) Entire Agreement. This Agreement constitutes the entire contract between the parties hereto with regard to the purchase of the Shares by the Purchaser. It supersedes any other agreements, representations or understandings (whether oral or written and whether express or implied) that relate to the subject matter hereof.
(d) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, as such laws are applied to contracts entered into and performed in such State.
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In witness whereof, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.
Purchaser: | Broadway Financial Corporation | |||||
/s/ Virgil Roberts |
By: | /s/ Sam Sarpong | ||||
Name: | Sam Sarpong | |||||
Title: | CFO |
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Stock Purchase Agreement
This Stock Purchase Agreement (Agreement) is entered into and dated as of July 2, 2012, by Broadway Financial Corporation, a Delaware corporation (the Company), and Wayne-Kent A. Bradshaw (the Purchaser).
A. The Purchaser is a director and/or senior executive officer of the Company and is thoroughly familiar with the business and affairs of the Company as a result of his service in such capacity.
B. The Company is currently seeking to effect a series of recapitalization transactions that would include, among other steps, exchanges of all outstanding shares of the Companys preferred stock for common stock of the Company and sales of common stock to investors for cash to raise funds that the Company needs to continue operations (the Recapitalization). There is currently no assurance that the Company will be able to complete the Recapitalization.
C. The purchase of the Shares provided for in this Agreement is not contingent upon completion of the Recapitalization by the Company. It is the Purchasers intention that his purchase of the Shares provided for herein shall be final and binding upon the Purchaser and Company whether or not the Recapitalization is completed in its currently contemplated form or in any other form. In addition, while it is expected that other directors and/or senior executive officers of the Company will purchase shares of common stock of the Company on the same terms as those set forth herein, the Purchasers purchase of Shares contemplated herein shall not be conditioned upon the completion of any other such purchase transactions.
SECTION 1. | PURCHASE OF SHARES. |
(a) Purchase and Sale. On the terms and conditions set forth in this Agreement, the Purchaser agrees to purchase from the Company, and the Company agrees to sell to Purchaser 19,231 shares of the common stock of the Company (each a Share and, collectively, the Shares). The purchase and sale of the Shares shall occur at the offices of the Company on the date of this Agreement set forth above or at such other place and time as the parties may agree.
(b) Purchase Price. The Purchaser agrees to pay $1.30 for each Share or, if greater, the amount per Share that equals the fair market value of a Share as defined in Nasdaq Listing Rule 5005(a)(22), which term means the consolidated closing bid price per Share as reported by Nasdaq immediately preceding the entry of the parties into this Agreement, it being acknowledged by the parties that this Agreement has been entered into after the close of the regular trading session of Nasdaq at 4 p.m. Eastern Time on the date of this Agreement set forth above. The aggregate price for the Shares is referred to herein as the Purchase Price. Payment of the Purchase Price shall be made on the date of purchase in cash or cash equivalents in an amount equal to the Purchase Price.
(c) Notwithstanding the preceding provisions of this Section 1, in the event that the Company sells Shares of its common stock to other purchasers in the Recapitalization within the
period of three months following the date hereof at a price per share greater than the per share purchase price set forth in this Agreement, the Company and the Purchaser agree that the Purchase Price set forth herein shall be deemed retroactively adjusted to such higher purchase price and the number of Shares purchased by the Purchaser shall be correspondingly reduced to the nearest number of whole Shares at such adjusted Purchase Price. In such event, the Purchaser shall surrender to the Company the number of Shares initially purchased by the Purchaser necessary to achieve such reduction promptly upon receipt of the Companys request to do so. The Company shall thereupon pay cash to the Purchaser in such amount, if any, as shall be necessary to settle any fractional share amounts.
SECTION 2. | RESTRICTIONS ON TRANSFER. |
(a) Purchaser Representations and Warranties. In connection with the issuance and sale of the Shares contemplated by this Agreement, the Purchaser hereby represents and warrants to the Company as follows:
(i) The Purchaser is acquiring and will hold the Shares for investment for his account only and not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act.
(ii) The Purchaser understands that (A) the Shares have not been registered under the Securities Act in reliance by the Company on the availability of a specific exemption from the general registration requirements of the Securities Act, the availability of which exemption depends on the accuracy of the Purchasers representations and warranties set forth in this Section 2, and (B) the Shares must be held indefinitely, unless they are subsequently registered under the Securities Act or the Purchaser obtains an opinion of counsel, in form and substance satisfactory to the Company and its counsel, that such registration is not required. The Purchaser further acknowledges and understands that the Company is under no obligation to register the offer or sale of the Shares under the Securities Act.
(iii) The Purchaser is aware of Rule 144 by the Securities and Exchange Commission (the SEC) under the Securities Act, which permits limited public resales of securities acquired in a non-public offering, subject to the satisfaction of certain conditions, including (without limitation) the availability of certain current public information about the issuer, the resale occurring only after the holding period required by Rule 144 has been satisfied, the sale occurring through an unsolicited brokers transaction, and the amount of securities being sold during any three-month period not exceeding specified limitations. The Purchaser acknowledges and understands that the conditions for resale set forth in Rule 144 to be satisfied.
(iv) The Purchaser will not sell, transfer or otherwise dispose of the Shares in violation of the Securities Act, the Securities Exchange Act of 1934, or the rules promulgated thereunder, including Rule 144 under the Securities Act. The Purchaser agrees that he will not dispose of the Shares unless and until he has complied with all requirements of this Agreement applicable to the disposition of Shares and he has provided the Company with written assurances, in substance and form satisfactory to the
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Company, that (A) the proposed disposition does not require registration of the Shares under the Securities Act or all appropriate action necessary for compliance with the registration requirements of the Securities Act or with any exemption from registration available under the Securities Act (including Rule 144) has been taken and (B) the proposed disposition will not result in the contravention of any transfer restrictions applicable to the Shares under the securities laws or regulations of any State.
(v) The Purchaser has been furnished with, and has had access to, such information as he considers necessary or appropriate for deciding whether to invest in the Shares, and the Purchaser has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the issuance of the Shares and any other matters the Purchaser considers relevant to his purchase of the Shares.
(vi) The Purchaser is aware that his or her investment in the Company is a speculative investment that has limited liquidity and is subject to the risk of complete loss. The Purchaser is able, without impairing his financial condition, to hold the Shares for an indefinite period and to suffer a complete loss of his or her investment in the Shares.
(b) Securities Law Restrictions. Regardless of whether the offering and sale of Shares under this Agreement have been registered under the Securities Act or have been registered or qualified under the securities laws of any State, the Company at its discretion may impose restrictions upon the sale, pledge or other transfer of the Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law.
(c) Rights of the Company. The Company shall not be required to (i) transfer on its books any Shares that have been sold or transferred in contravention of this Agreement or (ii) treat as the owner of Purchased Shares, or otherwise to accord voting, dividend or liquidation rights to, any transferee to whom Purchased Shares have been transferred in contravention of this Agreement.
SECTION 3. | LEGENDS. |
All certificates evidencing Shares shall bear the following legends:
THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE REGISTERED HOLDER OF THE SHARES). THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE.
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
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If required by the authorities of any State in connection with the issuance and sale of the Shares, the legend or legends required by such State authorities shall also be endorsed on all such certificates.
SECTION 4. | GENERAL TERMS. |
(a) Successors and Assigns. Except as otherwise expressly provided to the contrary, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and be binding upon the Purchaser and the Purchasers legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person has become a party to this Agreement or has agreed in writing to join herein and to be bound by the terms, conditions and restrictions hereof.
(b) Notice. Any notice required by the terms of this Agreement shall be given in writing. It shall be deemed effective upon (i) personal delivery, (ii) deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid or (iii) deposit with Federal Express Corporation or other nationally recognized courier delivery service, with shipping charges prepaid. Notice shall be addressed to the Company at its principal executive office and to the Purchaser at the address that he or she most recently provided to the Company in the manner provided in this Section 4(b).
(c) Entire Agreement. This Agreement constitutes the entire contract between the parties hereto with regard to the purchase of the Shares by the Purchaser. It supersedes any other agreements, representations or understandings (whether oral or written and whether express or implied) that relate to the subject matter hereof.
(d) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, as such laws are applied to contracts entered into and performed in such State.
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In witness whereof, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.
Purchaser: | Broadway Financial Corporation | |||||
/s/ Wayne-Kent A. Bradshaw |
By: | /s/ Sam Sarpong | ||||
Name: | Sam Sarpong | |||||
Title: | CFO |
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Stock Purchase Agreement
This Stock Purchase Agreement (Agreement) is entered into and dated as of November 26, 2012, by Broadway Financial Corporation, a Delaware corporation (the Company), and NORMAN E. BELLEFEUILLE, JR. and CATHERINE G. BELLEFEUILLE, as Trustees of THE BELLEFEUILLE FAMILY TRUST UTD April 14, 2005 (the Purchaser).
A. The Purchaser is a director and/or senior executive officer of the Company and is thoroughly familiar with the business and affairs of the Company as a result of his service in such capacity.
B. The Company is currently seeking to effect a series of recapitalization transactions that would include, among other steps, exchanges of all outstanding shares of the Companys preferred stock for common stock of the Company and sales of common stock to investors for cash to raise funds that the Company needs to continue operations (the Recapitalization). There is currently no assurance that the Company will be able to complete the Recapitalization.
C. The purchase of the Shares provided for in this Agreement is not contingent upon completion of the Recapitalization by the Company. It is the Purchasers intention that his purchase of the Shares provided for herein shall be final and binding upon the Purchaser and Company whether or not the Recapitalization is completed in its currently contemplated form or in any other form. In addition, while it is expected that other directors and/or senior executive officers of the Company will purchase shares of common stock of the Company on the same terms as those set forth herein, the Purchasers purchase of Shares contemplated herein shall not be conditioned upon the completion of any other such purchase transactions.
SECTION 1. PURCHASE OF SHARES.
(a) Purchase and Sale. On the terms and conditions set forth in this Agreement, the Purchaser agrees to purchase from the Company, and the Company agrees to sell to Purchaser 57,471 shares of the common stock of the Company (each a Share and, collectively, the Shares). The purchase and sale of the Shares shall occur at the offices of the Company on the date of this Agreement set forth above or at such other place and time as the parties may agree.
(b) Purchase Price. The Purchaser agrees to pay $.87 for each Share or, if greater, the amount per Share that equals the fair market value of a Share as defined in Nasdaq Listing Rule 5005(a)(22), which term means the consolidated closing bid price per Share as reported by Nasdaq immediately preceding the entry of the parties into this Agreement, it being acknowledged by the parties that this Agreement has been entered into after the close of the regular trading session of Nasdaq at 4 p.m. Eastern Time on the date of this Agreement set forth above. The aggregate price for the Shares is referred to herein as the Purchase Price. Payment of the Purchase Price shall be made on the date of purchase in cash or cash equivalents in an amount equal to the Purchase Price.
(c) Notwithstanding the preceding provisions of this Section 1, in the event that the Company sells Shares of its common stock to other purchasers in the Recapitalization within the period of three months following the date hereof at a price per share greater than the per share purchase price set forth in this Agreement, the Company and the Purchaser agree that the Purchase Price set forth herein shall be deemed retroactively adjusted to such higher purchase price and the number of Shares purchased by the Purchaser shall be correspondingly reduced to the nearest number of whole Shares at such adjusted Purchase Price. In such event, the Purchaser shall surrender to the Company the number of Shares initially purchased by the Purchaser necessary to achieve such reduction promptly upon receipt of the Companys request to do so. The Company shall thereupon pay cash to the Purchaser in such amount, if any, as shall be necessary to settle any fractional share amounts.
SECTION 2. RESTRICTIONS ON TRANSFER.
(a) Purchaser Representations and Warranties. In connection with the issuance and sale of the Shares contemplated by this Agreement, the Purchaser hereby represents and warrants to the Company as follows:
(i) The Purchaser is acquiring and will hold the Shares for investment for his account only and not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act.
(ii) The Purchaser understands that (A) the Shares have not been registered under the Securities Act in reliance by the Company on the availability of a specific exemption from the general registration requirements of the Securities Act, the availability of which exemption depends on the accuracy of the Purchasers representations and warranties set forth in this Section 2, and (B) the Shares must be held indefinitely, unless they are subsequently registered under the Securities Act or the Purchaser obtains an opinion of counsel, in form and substance satisfactory to the Company and its counsel, that such registration is not required. The Purchaser further acknowledges and understands that the Company is under no obligation to register the offer or sale of the Shares under the Securities Act.
(iii) The Purchaser is aware of Rule 144 by the Securities and Exchange Commission (the SEC) under the Securities Act, which permits limited public resales of securities acquired in a non-public offering, subject to the satisfaction of certain conditions, including (without limitation) the availability of certain current public information about the issuer, the resale occurring only after the holding period required by Rule 144 has been satisfied, the sale occurring through an unsolicited brokers transaction, and the amount of securities being sold during any three-month period not exceeding specified limitations. The Purchaser acknowledges and understands that the conditions for resale set forth in Rule 144 to be satisfied.
(iv) The Purchaser will not sell, transfer or otherwise dispose of the Shares in violation of the Securities Act, the Securities Exchange Act of 1934, or the rules promulgated thereunder, including Rule 144 under the Securities Act. The Purchaser agrees that he will not dispose of the Shares unless and until he has complied with all
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requirements of this Agreement applicable to the disposition of Shares and he has provided the Company with written assurances, in substance and form satisfactory to the Company, that (A) the proposed disposition does not require registration of the Shares under the Securities Act or all appropriate action necessary for compliance with the registration requirements of the Securities Act or with any exemption from registration available under the Securities Act (including Rule 144) has been taken and (B) the proposed disposition will not result in the contravention of any transfer restrictions applicable to the Shares under the securities laws or regulations of any State.
(v) The Purchaser has been furnished with, and has had access to, such information as he considers necessary or appropriate for deciding whether to invest in the Shares, and the Purchaser has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the issuance of the Shares and any other matters the Purchaser considers relevant to his purchase of the Shares.
(vi) The Purchaser is aware that his or her investment in the Company is a speculative investment that has limited liquidity and is subject to the risk of complete loss. The Purchaser is able, without impairing his financial condition, to hold the Shares for an indefinite period and to suffer a complete loss of his or her investment in the Shares.
(b) Securities Law Restrictions. Regardless of whether the offering and sale of Shares under this Agreement have been registered under the Securities Act or have been registered or qualified under the securities laws of any State, the Company at its discretion may impose restrictions upon the sale, pledge or other transfer of the Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law.
(c) Rights of the Company. The Company shall not be required to (i) transfer on its books any Shares that have been sold or transferred in contravention of this Agreement or (ii) treat as the owner of Purchased Shares, or otherwise to accord voting, dividend or liquidation rights to, any transferee to whom Purchased Shares have been transferred in contravention of this Agreement.
SECTION 3. LEGENDS.
All certificates evidencing Shares shall bear the following legends:
THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE REGISTERED HOLDER OF THE SHARES). THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE.
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THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
If required by the authorities of any State in connection with the issuance and sale of the Shares, the legend or legends required by such State authorities shall also be endorsed on all such certificates.
SECTION 4. GENERAL TERMS.
(a) Successors and Assigns. Except as otherwise expressly provided to the contrary, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and be binding upon the Purchaser and the Purchasers legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person has become a party to this Agreement or has agreed in writing to join herein and to be bound by the terms, conditions and restrictions hereof.
(b) Notice. Any notice required by the terms of this Agreement shall be given in writing. It shall be deemed effective upon (i) personal delivery, (ii) deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid or (iii) deposit with Federal Express Corporation or other nationally recognized courier delivery service, with shipping charges prepaid. Notice shall be addressed to the Company at its principal executive office and to the Purchaser at the address that he or she most recently provided to the Company in the manner provided in this Section 4(b).
(c) Entire Agreement. This Agreement constitutes the entire contract between the parties hereto with regard to the purchase of the Shares by the Purchaser. It supersedes any other agreements, representations or understandings (whether oral or written and whether express or implied) that relate to the subject matter hereof.
(d) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, as such laws are applied to contracts entered into and performed in such State.
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In witness whereof, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.
Purchaser: | Broadway Financial Corporation | |||||||
/s/ Norman E. Bellefeuille, Jr. | By: | /s/ Daniele Johnson | ||||||
Name: | Daniele Johnson | |||||||
Title: | Corporate Secretary |
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Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-17331 on Form S-8 pertaining to the Broadway Financial Corporation Stock Option Plan for Outside Directors and the Broadway Financial Corporation Long Term Incentive Plan, Registration Statement No. 333-102138 on Form S-8 pertaining to the Broadway Financial Corporation Long Term Incentive Plan, and Registration Statement No. 333-163150 on Form S-8 pertaining to the Broadway Financial Corporation 2008 Long-Term Incentive Plan of our report dated April 1, 2013 relating to the consolidated financial statements appearing in this Annual Report on Form 10-K.
/s/ Crowe Horwath LLP |
Sacramento, California |
April 1, 2013 |
Exhibit 31.1
SECTION 302 CERTIFICATION
I, Wayne-Kent A. Bradshaw, certify that:
1. | I have reviewed this annual report on Form 10-K of Broadway Financial Corporation; |
2. | Based on my knowledge, this 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 report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this 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 report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: | April 1, 2013 | |
/s/ Wayne-Kent A. Bradshaw | ||
Wayne-Kent A. Bradshaw | ||
Chief Executive Officer | ||
Broadway Financial Corporation |
Exhibit 31.2
SECTION 302 CERTIFICATION
I, Brenda Battey, certify that:
1. | I have reviewed this annual report on Form 10-K of Broadway Financial Corporation; |
2. | Based on my knowledge, this 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 report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this 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 report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: | April 1, 2013 | |
/s/ Brenda Battey | ||
Brenda Battey | ||
Interim Chief Financial Officer | ||
Broadway Financial Corporation |
Exhibit 32.1
SECTION 906 CERTIFICATION
The following statement is provided by the undersigned to accompany the foregoing Report on Form 10-K 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 Securities Exchange Act of 1934 or any other securities law.
The undersigned certifies that the foregoing Report on Form 10-K 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-K 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, 2012.
Date: April 1, 2013 | By: | /s/ Wayne-Kent A. Bradshaw | ||
Wayne-Kent A. Bradshaw | ||||
Chief Executive Officer | ||||
Broadway Financial Corporation |
Exhibit 32.2
SECTION 906 CERTIFICATION
The following statement is provided by the undersigned to accompany the foregoing Report on Form 10-K 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 Securities Exchange Act of 1934 or any other securities law.
The undersigned certifies that the foregoing Report on Form 10-K 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-K 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, 2012.
Date: April 1, 2013 | By: | /s/ Brenda Battey | ||
Brenda Battey | ||||
Interim Chief Financial Officer | ||||
Broadway Financial Corporation |
Exhibit 99.3
TARP CERTIFICATION FOR YEAR 2012
I, Wayne-Kent A. Bradshaw, certify, based on my knowledge, that:
(i) | The compensation committee of Broadway Financial Corporation has discussed, reviewed, and evaluated with senior risk officers at least every six months during any part of the most recently completed fiscal year that was a TARP period, senior executive officer (SEO) compensation plans and employee compensation plans and the risks these plans pose to Broadway Financial Corporation; |
(ii) | The compensation committee of Broadway Financial Corporation has identified and limited during any part of the most recently completed fiscal year that was a TARP period any features in the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Broadway Financial Corporation and identified any features in the employee compensation plans that pose risks to Broadway Financial Corporation and limited those features to ensure that Broadway Financial Corporation is not unnecessarily exposed to risks; |
(iii) | The compensation committee has reviewed, at least every six months during any part of the most recently completed fiscal year that was a TARP period, the terms of each employee compensation plan and identified the features in the plan that could encourage the manipulation of reported earnings of Broadway Financial Corporation to enhance the compensation of an employee, and has limited these features that would encourage the manipulation of reported earnings of Broadway Financial Corporation; |
(iv) | The compensation committee of Broadway Financial Corporation will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above; |
(v) | The compensation committee of Broadway Financial Corporation will provide a narrative description of how it limited during any part of the most recently completed fiscal year that was a TARP period the features in: |
a) | SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Broadway Financial Corporation; |
b) | Employee compensation plans that unnecessarily expose Broadway Financial Corporation to risks; and |
c) | Employee compensation plans that could encourage the manipulation of reported earnings of Broadway Financial Corporation to enhance the compensation of an employee; |
(vi) | Broadway Financial Corporation has required that bonus payments to SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), be subject to a recovery or clawback provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria; |
(vii) | Broadway Financial Corporation has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to a SEO or any of the next five most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period; |
(viii) | Broadway Financial Corporation has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during any part of the most recently completed fiscal year that was a TARP period; |
(ix) | Broadway Financial Corporation and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, during any part of the most recently completed fiscal year that was a TARP period, and that any expenses requiring approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved; |
(x) | Broadway Financial Corporation will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during any part of the most recently completed fiscal year that was a TARP period; |
(xi) | Broadway Financial Corporation will disclose the amount, nature, and justification for the offering, during any part of the most recently completed fiscal year that was a TARP period, of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for each employee subject to the bonus payment limitations identified in paragraph (viii); |
(xii) | Broadway Financial Corporation will disclose whether Broadway Financial Corporation, the board of directors of Broadway Financial Corporation, or the compensation committee of Broadway Financial Corporation has engaged during any part of the most recently completed fiscal year that was a TARP period a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period; |
(xiii) | Broadway Financial Corporation has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period; |
(xiv) | Broadway Financial Corporation has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Broadway Financial Corporation and Treasury, including any amendments; |
(xv) | Broadway Financial Corporation has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee identified; and |
(xvi) | I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both. |
Date: | April 1, 2013 | |
/s/ Wayne-Kent A. Bradshaw | ||
Wayne-Kent A. Bradshaw | ||
Chief Executive Officer | ||
Broadway Financial Corporation |
Exhibit 99.4
TARP CERTIFICATION FOR YEAR 2012
I, Brenda Battey, certify, based on my knowledge, that:
(i) | The compensation committee of Broadway Financial Corporation has discussed, reviewed, and evaluated with senior risk officers at least every six months during any part of the most recently completed fiscal year that was a TARP period, senior executive officer (SEO) compensation plans and employee compensation plans and the risks these plans pose to Broadway Financial Corporation; |
(ii) | The compensation committee of Broadway Financial Corporation has identified and limited during any part of the most recently completed fiscal year that was a TARP period any features in the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Broadway Financial Corporation and identified any features in the employee compensation plans that pose risks to Broadway Financial Corporation and limited those features to ensure that Broadway Financial Corporation is not unnecessarily exposed to risks; |
(iii) | The compensation committee has reviewed, at least every six months during any part of the most recently completed fiscal year that was a TARP period, the terms of each employee compensation plan and identified the features in the plan that could encourage the manipulation of reported earnings of Broadway Financial Corporation to enhance the compensation of an employee, and has limited these features that would encourage the manipulation of reported earnings of Broadway Financial Corporation; |
(iv) | The compensation committee of Broadway Financial Corporation will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above; |
(v) | The compensation committee of Broadway Financial Corporation will provide a narrative description of how it limited during any part of the most recently completed fiscal year that was a TARP period the features in: |
a) | SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Broadway Financial Corporation; |
b) | Employee compensation plans that unnecessarily expose Broadway Financial Corporation to risks; and |
c) | Employee compensation plans that could encourage the manipulation of reported earnings of Broadway Financial Corporation to enhance the compensation of an employee; |
(vi) | Broadway Financial Corporation has required that bonus payments to SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), be subject to a recovery or clawback provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria; |
(vii) | Broadway Financial Corporation has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to a SEO or any of the next five most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period; |
(viii) | Broadway Financial Corporation has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during any part of the most recently completed fiscal year that was a TARP period; |
(ix) | Broadway Financial Corporation and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, during any part of the most recently completed fiscal year that was a TARP period, and that any expenses requiring approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved; |
(x) | Broadway Financial Corporation will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during any part of the most recently completed fiscal year that was a TARP period; |
(xi) | Broadway Financial Corporation will disclose the amount, nature, and justification for the offering, during any part of the most recently completed fiscal year that was a TARP period, of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for each employee subject to the bonus payment limitations identified in paragraph (viii); |
(xii) | Broadway Financial Corporation will disclose whether Broadway Financial Corporation, the board of directors of Broadway Financial Corporation, or the compensation committee of Broadway Financial Corporation has engaged during any part of the most recently completed fiscal year that was a TARP period a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period; |
(xiii) | Broadway Financial Corporation has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period; |
(xiv) | Broadway Financial Corporation has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Broadway Financial Corporation and Treasury, including any amendments; |
(xv) | Broadway Financial Corporation has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee identified; and |
(xvi) | I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both. |
Date: | April 1, 2013 | |
/s/ Brenda Battey | ||
Brenda Battey | ||
Interim Chief Financial Officer | ||
Broadway Financial Corporation |
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Regulatory Capital Matters and Capital Purchase Program (Tables)
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Dec. 31, 2012
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Regulatory Capital Requirements | Actual and normally required capital amounts and ratios at December 31, 2012 and December 31, 2011, together with the higher capital requirements that the Bank is required to meet under the cease and desist order applicable to it, are presented below.
|
Loans Receivable Held-For-Sale (Parenthetical) (Detail) (USD $)
In Thousands, unless otherwise specified |
Dec. 31, 2012
|
Dec. 31, 2011
|
---|---|---|
Accounts, Notes, Loans and Financing Receivable [Line Items] | ||
Charge-offs, Non-performing loans | $ 2,500 | $ 953 |
Summary of Deposits (Detail) (USD $)
In Thousands, unless otherwise specified |
Dec. 31, 2012
|
Dec. 31, 2011
|
---|---|---|
Deposit Liabilities [Line Items] | ||
Deposits | $ 257,071 | $ 294,686 |
NOW account and other demand deposits
|
||
Deposit Liabilities [Line Items] | ||
Deposits | 11,706 | 15,143 |
Non-interest bearing demand deposits
|
||
Deposit Liabilities [Line Items] | ||
Deposits | 21,513 | 24,072 |
Money market deposits
|
||
Deposit Liabilities [Line Items] | ||
Deposits | 16,829 | 21,872 |
Passbook
|
||
Deposit Liabilities [Line Items] | ||
Deposits | 37,055 | 37,084 |
Certificates of deposit
|
||
Deposit Liabilities [Line Items] | ||
Deposits | $ 169,968 | $ 196,515 |
Loans Receivable - Additional Information (Detail) (USD $)
|
12 Months Ended | |
---|---|---|
Dec. 31, 2012
|
Dec. 31, 2011
|
|
Loans Receivable [Line Items] | ||
Interest income on impaired loans | $ 4,000,000 | $ 5,100,000 |
Troubled debt restructurings, allowance | 2,500,000 | 2,600,000 |
Loans classified as a Troubled Debt Restructurings | 41,100,000 | 37,100,000 |
Non-accrual loans | 22,800,000 | 19,400,000 |
Accrual loans status | 18,300,000 | 17,700,000 |
Minimum period to reduce interest rate as a modification in term of loan | 10 months | |
Maximum period to reduce interest rate as a modification in term of loan | 7 years | |
Financing receivable modification extension period minimum | 10 months | |
Financing receivable modification extension period maximum | 5 years | |
Troubled debt restructurings, specific reserves | 778,000 | 2,500,000 |
Troubled debt restructurings, charge-offs | 279,000 | 928,000 |
Payment default classification period | 90 days | |
Loans modified | $ 791,000 | $ 7,200,000 |
Securities - Additional Information (Detail) (USD $)
|
12 Months Ended | |
---|---|---|
Dec. 31, 2012
|
Dec. 31, 2011
|
|
Schedule of Available-for-sale Securities [Line Items] | ||
Securities pledged | $ 1,500,000 | $ 1,500,000 |
Sale of securities | 1,050,000 | 0 |
Residential mortgage backed securities
|
||
Schedule of Available-for-sale Securities [Line Items] | ||
Estimated remaining term | 4 years 8 months 12 days | |
U.S. Government and federal agency
|
||
Schedule of Available-for-sale Securities [Line Items] | ||
Sale of securities | 1,000,000 | |
Gain on sale of securities | $ 50,000 | |
Holding of securities greater than 10% of shareholders' equity | 0 | 0 |
Office Properties and Equipment, net (Tables)
|
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2012
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Properties and Equipment | Year-end office properties and equipment were as follows:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Minimum Rental Payments Due under Operating Leases | Rent commitments, before considering renewal options that generally are present, were as follows:
|
Advances from Federal Home Loan Bank (Detail) (USD $)
In Thousands, unless otherwise specified |
Dec. 31, 2012
|
Dec. 31, 2011
|
---|---|---|
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items] | ||
Federal Home Loan Bank advances | $ 79,500 | $ 83,000 |
Outstanding Loan Related Commitments (Detail) (USD $)
In Thousands, unless otherwise specified |
Dec. 31, 2012
|
Dec. 31, 2011
|
---|---|---|
Commitments To Extend Credit [Line Items] | ||
Commitments to make loans - variable rates | $ 141 | $ 300 |
Unused lines of credit - variable rates | $ 399 | $ 4,783 |
Contractual Maturities of Federal Home Loan Bank Advances (Detail) (USD $)
In Thousands, unless otherwise specified |
Dec. 31, 2012
|
---|---|
Scheduled Principal Payments For Borrowings [Line Items] | |
2013 | $ 0 |
2014 | 30,500 |
2015 | 5,500 |
2016 | 7,000 |
2017 | 36,500 |
Thereafter | 0 |
Federal Home Loan Bank, Advances, Total | $ 79,500 |
Difference Between Federal Statutory Rate and Effective Tax Rates (Detail) (USD $)
In Thousands, unless otherwise specified |
12 Months Ended | |
---|---|---|
Dec. 31, 2012
|
Dec. 31, 2011
|
|
Reconciliation of Provision of Income Taxes [Line Items] | ||
Federal statutory rate times financial statement income (loss) | $ 482 | $ (4,221) |
State taxes, net of federal benefit | 104 | (885) |
Enterprise zone net interest deduction | (356) | (428) |
Earnings from bank owned life insurance | (32) | (36) |
Low income housing credits | (167) | (388) |
Change in valuation allowance | 701 | 7,721 |
Other, net | 97 | 79 |
Total | $ 829 | $ 1,842 |
Junior Subordinated Debentures and Other Borrowings - Additional Information (Detail) (USD $)
|
12 Months Ended | 1 Months Ended | 12 Months Ended | ||
---|---|---|---|---|---|
Dec. 31, 2012
|
Feb. 28, 2010
|
Mar. 17, 2004
|
Feb. 28, 2010
Line of Credit
|
Dec. 31, 2012
Line of Credit
|
|
Debt Instrument [Line Items] | |||||
Issue of floating rate junior subordinated debentures | $ 6,000,000 | ||||
Issuance date of junior subordinated debentures | Mar. 17, 2004 | ||||
Maturity of debentures | 10 years | ||||
Interest rate on debenture | 2.54% | ||||
Frequency of interest payment | Quarterly | ||||
Debt instrument interest rate description | 3-month LIBOR plus 2.54% | ||||
Effective interest rate | 2.85% | ||||
Accrued interest on debenture | 454,000 | ||||
Line of credit | 5,000,000 | ||||
Line of credit borrowing capacity | 5,000,000 | ||||
Minimum interest rate on line of credit | 6.00% | ||||
Increase in interest rate | 0.05 | ||||
Payment date for line of credit | Mar. 17, 2014 | Jul. 31, 2010 | |||
Accrued interest on the line of credit | $ 1,400,000 |
Deposits - Additional Information (Detail) (USD $)
|
Dec. 31, 2012
|
Dec. 31, 2011
|
---|---|---|
Deposit Liabilities [Line Items] | ||
Deposits | $ 257,071,000 | $ 294,686,000 |
Certificates of deposit
|
||
Deposit Liabilities [Line Items] | ||
Deposits | 169,968,000 | 196,515,000 |
Amount of time deposits in denominations of 100,000 or more | 121,200,000 | 128,100,000 |
Brokered Deposits
|
||
Deposit Liabilities [Line Items] | ||
Deposits | $ 2,900,000 | $ 9,200,000 |
Parent Company Only Condensed Financial Information
|
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2012
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Parent Company Only Condensed Financial Information | Note 18 – Parent Company Only Condensed Financial Information Condensed financial information of Broadway Financial Corporation follows: Condensed Balance Sheet December 31,
Condensed Statements of Operations Years ended December 31,
Condensed Statements of Cash Flows Years ended December 31,
|
Loss Per Common Share (Tables)
|
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2012
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earning (Loss) Per Common Share Computation | The factors used in the loss per common share computation follow:
|
Federal Home Loan Bank Advances - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified |
Dec. 31, 2012
|
Dec. 31, 2011
|
---|---|---|
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items] | ||
Federal Home Loan Bank advances, collateralized | $ 185.0 | $ 205.8 |
Federal Home Loan Bank advances, general borrowing limit | 100.0 | |
Maximum
|
||
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items] | ||
Federal Home Loan Bank advances, additional borrowing amount | $ 8.8 |
Related Party Transactions (Tables)
|
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2012
|
|||||||||||||||||||||||||||||||||||||||||
Loans to Principal Officers, Directors and their Affiliates | Loans to principal officers, directors, and their affiliates during 2012 were as follows:
|
Year-End Office Properties and Equipment (Detail) (USD $)
In Thousands, unless otherwise specified |
Dec. 31, 2012
|
Dec. 31, 2011
|
---|---|---|
Property, Plant and Equipment [Line Items] | ||
Land | $ 572 | $ 1,723 |
Office buildings and improvements | 3,949 | 5,051 |
Furniture, fixtures and equipment | 2,091 | 2,120 |
Office properties and equipment | 6,612 | 8,894 |
Less accumulated depreciation | (3,995) | (4,268) |
Office properties and equipment, net | $ 2,617 | $ 4,626 |
Activity in Valuation Allowance (Detail) (USD $)
In Thousands, unless otherwise specified |
12 Months Ended | |
---|---|---|
Dec. 31, 2012
|
Dec. 31, 2011
|
|
Real Estate [Line Items] | ||
Beginning valuation allowance | $ 347 | $ 54 |
Additions charged to expense | 1,218 | 2,654 |
Direct write-downs | (1,019) | (2,361) |
Ending valuation allowance | $ 546 | $ 347 |
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