Note 2—Restructuring of the Company's Capital Structure and Regulatory Matters

During 2013 and 2014, the Company implemented a number of initiatives designed to enhance the Company's liquidity, simplify its capital structure and raise common equity. These matters, and the revision of the Orders which the Company and the Bank have been operating under, are described below.

Holding Company Liquidity

The Company's principal sources of funds have historically been dividends from the Bank and, to a lesser extent, additional capital from investors. Since 2010, however, the Bank has not been able to pay dividends to the Company because of its recent operating losses and because of limitations in a Consent Order that the Bank entered into with the Office of the Comptroller of the Currency ("OCC") on October 30, 2013. Management does not anticipate that the Bank will receive approval to pay dividends for at least the next several quarters. Accordingly, the Company had to raise new equity capital from investors to generate liquidity over the past three years. Initially, the Company sold $200,000 of common stock to certain directors and officers in 2012. Subsequently, the Company raised approximately $4.2 million of additional equity capital in August 2013 as part of the Recapitalization, and another $9.7 million of equity capital on October 16, 2014. These transactions improved the Company's liquidity, simplified its capital structure, reduced debt and associated servicing requirements, and enhanced the Bank's capital ratios, as more fully described below.

The Company increased its liquidity and strengthened its balance sheet by completing the Recapitalization in 2013, which included the following transactions:

(1)	The issuance of 8,776 shares of Series F Common Stock Equivalents in exchange for the five series of the Company's formerly outstanding preferred stock with an aggregate liquidation value or preference of $17.6 million, including the TARP Preferred Stock that was issued to the United States Department of the Treasury (the "U.S. Treasury") pursuant to the Capital Purchase Program component of the U.S. Treasury's Troubled Asset Relief Program, which the parties agreed to value at $8.8 million based on the price at which shares of the Common Stock were sold in the Subscription Offering referred to below;
(2)	The issuance of 2,646 shares of Series F Common Stock Equivalents in exchange for all of the accumulated dividends on the TARP Preferred Stock, totaling $2.6 million as of the date of the exchange;
(3)	The issuance of 2,575 shares of Series F Common Stock Equivalents in exchange for $2.6 million principal amount of the Company's bank debt (the "Debt Exchange");
(4)	The modification of the terms of the remaining $2.4 million principal amount of the senior debt to, among other matters, extend the maturity and eliminate the default rate. Under the modified terms, the Company was required to make quarterly payments of interest only for 18 months and then monthly equal payments of principal and accrued interest thereon over the ensuing 48 months. The Company was required to obtain approval from the Federal Reserve Bank of San Francisco (the "FRB") before making principal or interest payments on the remaining $2.4 million principal amount of the modified senior loan. The Company obtained approval from the FRB and paid the interest payments due in November 2013, February 2014, May 2014 and August 2014. In October 2014, the Company repaid the full amount of the outstanding senior debt and related accrued interest using the proceeds from the private placement described below;
(5)	The forgiveness of the $1.8 million of accrued interest on the entire amount of the Company's bank debt as of the date of the exchange;
(6)	The exchange of 698 shares of Series F Common Stock Equivalents issued in the Debt Exchange for 6,982 shares of Series G Non-Voting Preferred Stock ("Series G Preferred"); and
(7)	The issuance of 4,235,500 shares of Common Stock in private sales (the "Subscription Offering") at a price of $1.00 per share, yielding $4.2 million in gross proceeds. Of the $4.2 million in gross proceeds, $1.2 million was used to invest additional capital into the Bank and $1.0 million was used to repay all of the inter-company payables due to the Bank from the Company.

Subsequent to the closing of the Recapitalization, the Company's stockholders approved all of the proposals presented at the Annual Meeting on November 27, 2013, including the proposals to amend the Company's Certificate of Incorporation to increase the number of authorized shares of Common Stock to 50,000,000 shares and authorize the Company to issue up to 5,000,000 shares of a new class of non-voting Common Stock. As a result, on December 5, 2013 the Company's 13,299 outstanding shares of Common Stock Equivalents automatically converted into 13,299,000 shares of Common Stock, representing 65.8% of the Company's total equity at year-end, and its 6,982 shares of Series G Preferred automatically converted into 698,200 shares of non-voting Common Stock, representing 3.5% of the Company's total equity at year-end. Effective with these automatic conversions, the Company no longer has any outstanding series of preferred stock, and all of its equity capital consists of Common Stock or non-voting Common Stock.

After the Recapitalization, the Company had over $1.2 million of cash at December 31, 2013, which provided the Company with sufficient cash resources to pay normal operating expenses over the near term, including allocations of shared expenses from the Bank, on a timely basis, but not sufficient cash to service the Company's debt. In particular, the Company had insufficient cash resources to pay the interest and principal on the Company's Floating Rate Junior Subordinated Debentures (the "Debentures"), which had been in default as to interest payments since September 2010 and as to the full amount of principal due since they matured on March 17, 2014. Accordingly, the Company began implementing the next phase of its capital plan in late 2013 to raise additional equity capital.

In January 2014, the Company submitted a proposal to the trustee for the trust that holds the Debentures to extend the maturity of the Debentures to March 17, 2024 in return for paying all accrued interest on the Debentures and $900 thousand, or 15%, of the principal amount of the Debentures at face value, subject to satisfaction of certain conditions, including a requirement to raise at least $6 million of additional equity. The Company subsequently satisfied the conditions to implementation of this proposal and completed the modification of the Debentures and related transactions on October 16, 2014 as described below.

On October 16, 2014, the Company concurrently consummated private placements of 8,829,549 shares of common stock, including 6,973,320 shares of non-voting common stock, for gross proceeds of $9.7 million. These proceeds were used in part to concurrently make payments on the Debentures of $900 thousand of principal and approximately $805 thousand of interest, representing all of the accrued interest on all of the Debentures. Also, the Company and the trustee for the Debentures concurrently executed a Supplemental Indenture for the Debentures that extended the maturity of the Debentures to March 17, 2024 and modified the payment terms of the remaining $5.1 million principal amount thereof. As a result of modification of the terms of the Debentures through the execution of a Supplemental Indenture and the corresponding payments of principal and all accrued interest, the Debentures are now current and not in default.

In addition, the Company used a portion of the proceeds from the private placements to invest $2.5 million as common equity in the Bank and repay the outstanding defaulted senior debt of $2.4 million, together with all accrued interest thereon. As a result, the Company's only remaining debt outstanding is the $5.1 million of Debentures, all of which are current and no longer in default.

The balance of the net proceeds from the private placements, approximately $2.2 million, have been retained by the Company to enhance its liquidity.

Regulatory Matters

As a result of significant deficiencies in the Company's and the Bank's operations noted in a regulatory examination in early 2010, the Company and the Bank were declared to be in "troubled condition" and agreed to the issuance of the cease and desist orders (the "Orders") by the regulatory predecessor of the OCC for the Bank and the FRB for the Company effective September 9, 2010, requiring, among other things, that the Company and the Bank take remedial actions to improve the Bank's loan underwriting and internal asset review procedures, to reduce the amount of its non-performing assets and to improve other aspects of the Bank's business, as well as the Company's management of its business and the oversight of the Company's business by the Board of Directors. Effective October 30, 2013, the Order for the Bank was superseded by a Consent Order entered into by the Bank with the OCC. As part of the Consent Order, the Bank is required to attain, and thereafter maintain, a Tier 1 (Core) Capital to Adjusted Total Assets ratio of at least 9% and a Total Risk-Based Capital to Risk-Weighted Assets ratio of at least 13%, both of which ratios are greater than the respective 4% and 8% levels for such ratios that are generally required under OCC regulations. The Bank's regulatory capital exceeded both of these higher capital ratios at December 31, 2014 and 2013 (see Note 15).

The Consent Order imposed new requirements on the Bank, including the following, among others:

•	The Bank was required to create a Compliance Committee consisting of at least three independent directors to monitor compliance with the Consent Order.
•	The Board of the Bank was required to prepare and submit a strategic plan, and a capital plan that is consistent with the strategic plan, for approval by the OCC. The capital plan requirement includes requirements regarding targeted capital ratios and prior approval requirements for the payment of dividends.
•	The Bank must implement an enhanced set of lending, other business and corporate governance procedures, and must develop and adhere to a written commercial real estate loan concentration risk management program and a written program to reduce the level of assets considered doubtful, substandard or special mention. This latter program includes requirements to monitor the levels of such assets on an on-going basis and to prepare and implement corrective actions as deemed necessary.
•	The Bank must also implement an independent on-going loan review system and adopt new policies with respect to maintaining an adequate allowance for loan and lease losses.

In November 2013, management submitted updated policies and procedures to the OCC with respect to determining and maintaining an appropriate level of ALLL. In December 2013, the Board of Directors established a Consent Order Compliance Committee to oversee the operating changes implemented by the Bank to comply with the Consent Order. In January 2014, the Bank submitted its strategic plan and capital plan to the OCC for approval and in August 2014 submitted revised forms of the plans. In November 2014, the Bank received a written statement of non-objection from the OCC with respect to the capital plan, but not with respect to the strategic plan requirements.

Management believes that the Bank is in compliance with all aspects of the Consent Order, other than the Consent Order's strategic plan and loan concentration risk management plan requirements.

The Company is amending the strategic plan to incorporate the provisions of a revised loan concentration risk management plan that is intended to reduce the Bank's concentration limit established for multi-family loans.

Based on the Bank's current capital levels, management anticipates that the Bank will find it necessary to sell more multi-family loans than previously planned in order to comply with the reduced concentration limit for multi-family loans set by the OCC. During the fourth quarter of 2014, in order to comply with regulatory loan concentration limits, $22.8 million of loans receivable held for investment, primarily multi-family loans, were transferred to held for sale. See Note 4 for more information regarding loans receivable held for sale.

The Consent Order does not include certain restrictions on the Bank that had been imposed by the Order, such as the specific limitation on the Bank's ability to increase its assets during any quarter or certain limitations on employment agreements and compensation arrangements.

Management believes that the Order issued to the Company, which has been administered by the FRB since July 2012, remains in effect. This Order imposes limitations and restrictions on several aspects of the Company's business, including the following:

•	The Company may not declare or pay any dividends or make any other capital distributions without the prior written approval of the FRB.
•	The Company may not make any changes in its directors or senior executive officers without prior notice to and receipt of notice of non-objection from the FRB.
•	The Company is 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.

See Note 11 for more information regarding the Debentures and the senior loan and Note 17 for information regarding the separate condensed financial information of Broadway Financial Corporation.