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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
For transition period from__________ to___________
Commission file number 0-27464
BROADWAY FINANCIAL CORPORATION
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(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 95-4547287
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(State of Incorporation) (IRS Employer Identification No.)
4800 Wilshire Boulevard, Los Angeles, California 90010
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(Address of Principal Executive Offices)
(213) 634-1700
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [x] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 932,494 shares of the Company's
Common Stock, par value $.01 per share, were issued and outstanding as of
October 30, 1998.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No (x)
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INDEX
PART I-- FINANCIAL INFORMATION
Item 1. Financial Statements Page
Consolidated Balance Sheets
as of September 30, 1998 (unaudited)
and December 31, 1997 3
Consolidated Statements of
Operations (unaudited) for the
three months and nine months ended
September 30, 1998 and September
30, 1997 4
Consolidated Statements of
Cash Flows (unaudited) for the nine
months ended September 30, 1998
and September 30, 1997 5
Notes to Consolidated Financial
Statements 7
Item 2. Management's Discussion and
Analysis of Operations 9
PART II-OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults on Senior Securities 18
Item 4. Submission of Matters to a Vote
Of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
2
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BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
------------- ------------
<S> <C> <C>
ASSETS:
Cash and Federal funds sold ................................................. $ 8,815 $ 4,831
Investment securities, held to maturity ..................................... 16,651 9,207
Loans receivable, net ....................................................... 106,007 103,689
Loans receivable held for sale .............................................. -- 222
Accrued interest receivable ................................................. 891 834
Real estate acquired through foreclosure .................................... 589 1,144
Investments in capital stock of Federal Home Loan Bank, at cost ............. 973 931
Office properties and equipment, net ........................................ 5,047 3,995
Income tax receivable ....................................................... 156 --
Other assets ................................................................ 343 263
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Total Assets ........................................................... $ 139,472 $ 125,116
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LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits ............................................................ $ 119,831 $ 109,867
Advance from Federal Home Loan Bank ......................................... 4,500 --
Advance payments by borrowers for taxes and insurance ....................... 349 199
Deferred income taxes ....................................................... 408 463
Other liabilities ........................................................... 924 1,148
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Total Liabilities ...................................................... 126,012 111,677
Stockholders' Equity:
Preferred nonconvertible, non-cumulative, and non-voting stock, $.01 par
value, authorized 1,000,000 shares; issued and outstanding 55,199
shares at September 30, 1998 ....................................... 1 1
Common stock, $.01 par value, authorized 3,000,000 shares; issued and
outstanding 932,494 shares at September 30, 1998 .................. 10 9
Additional paid-in capital ............................................... 9,616 8,820
Retained earnings-substantially restricted ............................... 4,604 5,427
Treasury stock, at cost .................................................. (318) (318)
Unearned Employee Stock Ownership Plan shares ............................ (453) (500)
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Total Stockholders' Equity ............................................. 13,460 13,439
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Total Liabilities and Stockholders' Equity ......................... $ 139,472 $ 125,116
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</TABLE>
See Notes to Consolidated Financial Statements
3
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BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------
1998 1997 1998 1997
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest Income:
Interest on loans receivable ......................................... $ 1,965 $ 2,068 $ 6,388 $ 6,195
Interest on investment securities .................................... 192 142 470 459
Interest on mortgage backed securities ............................... 81 56 188 88
Other interest income ................................................ 14 15 44 44
--------- -------- -------- --------
Total interest income ............................................. 2,252 2,281 7,090 6,786
Interest expense:
Interest on savings deposits ......................................... 1,010 1,007 3,135 2,923
Interest on borrowings ............................................... 78 2 91 2
--------- -------- -------- --------
Total interest expense ............................................ 1,088 1,009 3,226 2,925
--------- -------- -------- --------
Net interest income before provision for loan losses .............. 1,164 1,272 3,864 3,861
Provision for loan losses ................................................. 225 75 375 152
--------- -------- -------- --------
Net interest income after provision for loan losses ............... 939 1,197 3,489 3,709
Noninterest income:
Service charges ...................................................... 111 101 308 302
Gain on sale of mortgage loans ....................................... -- -- 14 --
Gain on sale of office properties and equipment ...................... -- -- 6 --
Other noninterest income ............................................ 17 158 208 197
--------- -------- -------- --------
128 259 536 499
--------- -------- -------- --------
Noninterest expense:
Compensation and benefits ............................................ 596 605 1,937 1,804
Occupancy expense, net ............................................... 309 256 891 704
Advertising and promotional expense .................................. 69 52 148 121
Professional services ................................................ 7 8 41 44
Federal insurance premiums ........................................... 27 24 77 60
Insurance bond premiums .............................................. 28 29 78 85
Real estate operations, net .......................................... 34 43 39 98
Contracted security services ......................................... 39 35 116 93
Net operational losses ............................................... 13 53 37 205
Other noninterest expense ............................................ 173 175 496 458
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1,295 1,280 3,860 3,672
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Earnings (loss) before income taxes .................................. (228) 176 165 536
Income taxes (benefit) .................................................... (94) 74 70 226
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Net (loss) earnings .................................................. $ (134) $ 102 $ 95 $ 310
--------- -------- -------- --------
--------- -------- -------- --------
Per share information
Weighted average number of shares .................................... 891,216 833,248 872,805 858,426
Earnings (loss) per share ............................................ $ (.16) $ .11 $ .08 $ .32
Earnings (loss) per share -assuming dilution ......................... (.16) .11 .08 .32
</TABLE>
See Notes to Consolidated Financial Statements
4
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BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 95 $ 310
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation 149 120
Amortization of net deferred loan origination fees (41) (37)
Amortization of discounts and premium on securities 9 68
Federal Home Loan Bank stock dividends (42) (40)
Gain on sale of real estate owned (26) (21)
Gain on sale of loans receivable held for sale (14) --
Changes in operating assets and liabilities:
Provision for loan losses 375 152
Provision for write-downs and losses on real estate 40 41
Loans originated for sale, net of refinances (1,807) --
Proceeds from sale of loans receivable 2,043 1,083
Accrued interest receivable (57) (44)
Income tax receivable (156) 360
Other assets (80) (12)
Deferred income taxes (55) (43)
Other liabilities (257) 125
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Total adjustments 81 1,752
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Net cash provided by operating activities 176 2,062
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INVESTING ACTIVITIES
Loans originated, net of refinances (7,882) (8,877)
Loans purchased (15,257) (6,755)
Premium on loans purchased (66) --
Principal repayment on loans 20,108 7,369
Increase in loans receivable held for sale -- (1,350)
Proceeds from sale of office properties and equipment 132 --
Gain on sale of office properties and equipment (6) --
Purchases of investment securities held to maturity (16,458) (5,004)
Proceeds from maturities of investment securities held to
maturity 9,005 4,998
Capital expenditures for office properties and equipment (1,327) (2,141)
Proceeds from sale of real estate acquired through foreclosure 1,019 926
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Net cash used in investing activities (10,732) (10,834)
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</TABLE>
(Continued)
5
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BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C>
FINANCING ACTIVITIES
Net increase in savings deposits 9,964 5,328
Increase in advance from Federal Home Loan Bank 4,500 2,500
Common stock 1 --
Additional paid-in capital 796 33
Dividends declared (918) (162)
Unearned Employee Stock Ownership Plan 47 31
Treasury stock -- (672)
Increase in advances by borrowers
for taxes and insurance 150 155
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Net cash provided by financing activities 14,540 7,213
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Net increase (decrease) in cash and cash equivalents 3,984 (1,559)
Cash and cash equivalents at beginning of period 4,831 5,180
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Cash and cash equivalents at end of period $ 8,815 $ 3,621
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Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 3,254 $ 2,923
Cash paid for income taxes 312 1
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-------- -------
Supplemental disclosure of noncash investing and financing activities:
Additions to real estate acquired through foreclosure 561 1,192
Loans to facilitate the sale of real estate acquired through
foreclosure -- --
</TABLE>
See Notes to Consolidated Financial Statements
6
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BROADWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. In the opinion of management of Broadway Financial Corporation (the
"Company"), the preceding unaudited consolidated financial statements
contain all material adjustments (consisting solely of normal recurring
accruals and standard allowance for loan losses) necessary to present
fairly the consolidated financial position of the Company at September 30,
1998 and the results of its operations for the three months and nine months
ended September 30, 1998 and 1997, and its cash flows for the nine months
ended September 30, 1998 and 1997. These consolidated financial statements
do not include all disclosures associated with the Company's consolidated
annual financial statements included in its annual report on Form 10-KSB
for the year ended December 31, 1997 and, accordingly, should be read in
conjunction with such audited statements.
2. The results of operations for the nine months ended September 30, 1998 are
not necessarily indicative of the results to be expected for the full year.
3. RECENT ACCOUNTING PRONOUNCEMENTS
EARNINGS PER SHARE - In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS
No. 128 establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock. SFAS
No. 128 simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15 and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS
with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the statement of operations for all
entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. SFAS No. 128 is effective
for financial statements issued for periods ending after December 15, 1997.
The Company adopted SFAS No. 128 effective December 31, 1997. Adoption had
no impact on the basic EPS computation. The EPS-assuming dilution
computation was impacted only by stock-based employee compensation. All EPS
amounts for all periods have been presented, and where appropriate,
restated, to conform to the SFAS No. 128 requirements.
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COMPREHENSIVE INCOME - In June 1997, the Financial Accounting Standards
Board issued Statement No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"). SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 requires companies to (a) display items
of other comprehensive income either below the total for net income in the
income statement, or in a statement of changes in equity, and (b) disclose
the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in-capital in the equity section of
the balance sheet. Other comprehensive income includes unrealized gains and
losses on available for-sale securities and foreign currency translation
adjustments. SFAS No. 130 is effective for the fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. Disclosure of total
comprehensive income is required in interim period financial statements.
The Company's adoption of SFAS No. 130 had no impact on its financial
condition or results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION
GENERAL
Broadway Financial Corporation (the "Company") was incorporated under
Delaware law on September 25, 1995 for the purpose of acquiring and holding
all of the outstanding capital stock of Broadway Federal Bank, f.s.b.
("Broadway Federal" or "Bank") as part of the Bank's conversion from a
federally chartered mutual savings association to a federally chartered stock
savings bank (the "Conversion"). The Conversion was completed, and the Bank
became a wholly owned subsidiary of the Company, on January 8, 1996.
The Company's principal business is serving as a holding company for Broadway
Federal. The Company's results of operations are dependent primarily on
Broadway Federal's net interest income, which is the difference between the
interest income earned on its interest-earning assets, such as loans and
investments, and the interest expense on its interest-bearing liabilities,
such as deposits and borrowings. Broadway Federal also generates recurring
non-interest income such as transactional fees on its loan and deposit
portfolios. The Company's operating results are also affected by the amount
of the Bank's general and administrative expenses, which consist principally
of employee compensation and benefits, occupancy expense, and federal deposit
insurance premiums, and by its periodic provisions for loan losses. More
generally, the results of operations of thrift and banking institutions are
also affected by prevailing economic conditions, competition, and the
monetary and fiscal policies of governmental agencies.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
GENERAL
The Company recognized a net loss of $134,000 for the three months ended
September 30, 1998, as compared to net earnings of $102,000 for the three
months ended September 30, 1997. For the nine months ended September 30,
1998 the Company recorded net earnings of $95,000 as compared to net earnings
of $310,000 for the same period a year ago. The quarter and year-to-date
results were significantly impacted by an additional provision for loan
losses of $150,000 caused by the charge-off of a loan secured by a
single-family property, and a $225,000 write-down of premiums on loans
purchased and excess servicing fees resulting from accelerated payoffs of
such loans. Excluding such adjustments the Company would have recorded third
quarter and year-to-date net income of $86,000 and $311,000 respectively.
The third quarter results were also impacted by the net effect of other
offsetting
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factors, which included higher interest expense on savings deposits and
borrowings, lower noninterest income, higher noninterest expense and lower
income taxes. The year-to-date net earnings as of September 30, 1998 also
resulted from a number of other offsetting factors which included higher
interest income, higher interest expense on savings deposits and borrowings,
higher noninterest income, higher noninterest expense and lower income taxes.
INTEREST INCOME
Interest income decreased by $29,000 during the three months ended September
30, 1998 as compared to the same period a year ago. For the nine months
ended September 30, 1998 interest income increased by $304,000 as compared to
the same period in the prior year. The decrease in third quarter interest
income was attributed to the $225,000 write-down of premiums on loans purchased
and excess servicing fees resulting from accelerated payoffs on such loans.
For the three months and nine months ended September 30, 1998, loan payoffs
totaled $7.8 million and $14.8 million, respectively, which exceeded the loan
payoff levels experienced in the comparable 1997 periods. The higher loan
payoffs in 1998 were caused by the declining interest rate environment. The
increase in interest income for the nine months ended September 30, 1998 was
primarily the result of increases in average assets of $15.9 million and
$12.6 million for the three months and nine months ended September 30, 1998,
respectively, as compared to the same periods a year ago. The increases in
assets during the three months and nine months ended September 30, 1998 were
funded by increases in savings deposits and Federal Home Loan Bank advances.
The increases in average assets primarily resulted from the Company's
continued focus on increasing its loan portfolio, as well as a planned
increase in its investment securities.
INTEREST EXPENSE
Interest expense increased by $79,000 during the three months ended
September 30, 1998 as compared to the same period a year ago. For the nine
months ended September 30, 1998 interest on savings deposits and borrowings
increased by $301,000 as compared to the same period in the prior year.
These increases were primarily the result of increases in average deposits
and borrowings of $16.2 million and $12.7 million for the three months and
nine months ended September 30, 1998, respectively, as compared to the same
periods a year ago. The average cost of deposits increased 1 basis point,
from 3.69% for the nine months ended September 30, 1997 to 3.70% for the nine
months ended September 30, 1998.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased by $150,000, from $75,000 for the
three
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months ended September 30, 1997 to $225,000 for the three months ended
September 30, 1998. For the nine months ended September 30, 1998, the
provision for loan losses increased by $223,000 to $375,000, as compared to
$152,000 for the same period a year ago. The higher provision results from
management's ongoing analysis of the level of the Company's allowance for
loan losses, which in turn is impacted by the level of charge-offs during the
period. For the nine months ended September 30, 1998 loan charge-offs
totaled $353,000, as compared to $249,000 during the same period a year ago.
The charge-offs during the nine months ended September 30, 1998 primarily
consisted of two loans made to one borrower aggregating $229,000. The
property securing these loans was a single-family residence located in Los
Angeles, California that was sold through foreclosure. Other charge-offs
during the period, totaling $112,000, were on five properties transferred to
REO. As of September 30, 1998 three of the properties had been sold.
As of September 30, 1998 the Company's allowance for loan losses totaled $1.1
million, representing a $22,000 increase from the balance at December 31,
1997. The allowance for loan losses represents 1.00% of total loans at
September 30, 1998, unchanged since December 31, 1997. The allowance for loan
losses was 152.62% of non-accrual loans at September 30, 1998, compared to
114.44% at December 31, 1997. Net charge-offs through September 30, 1998 were
44.66% (annualized) of the beginning allowance for loan losses in 1998, as
compared to 32.28% for 1997. As of September 30, 1998 management believes
that, given the improved asset quality, the allowance for loan losses is
adequate to cover inherent losses in its loan portfolio. There can be no
assurance, however, that such losses will not exceed the estimated amounts.
Total non-performing assets, consisting of non-accrual loans and real estate
acquired through foreclosure ("REO"), decreased by $733,000 , from $2.0
million at September 30, 1997 to $1.3 million at September 30, 1998. The
$733,000 decrease resulted from a decrease in non-accrual loans of $274,000
and a decrease in REO of $459,000. As a percentage of total assets,
non-performing assets were 0.93% at September 30, 1998, compared to 1.63% and
1.65% at September 30, 1997 and December 31, 1997, respectively. Since
December 1997, non-accrual loans have decreased by $216,000, to $705,000, and
REO has decreased by $555,000, to $589,000. Non-accrual loans at September
30, 1998 included five loans, totaling $440,000, secured by one- to four-unit
properties and two loans, totaling $265,000, secured by multi-family
properties. REO at September 30, 1998 included one single-family property
($106,000), one multi-family property ($279,000), one commercial property
($93,000) and one parcel of land ($265,000).
NONINTEREST INCOME
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Noninterest income decreased by $131,000, from $259,000 for the three months
ended September 30, 1997 to $128,000 for the same period during 1998. For
the nine months ended September 30, 1988, noninterest income increased by
$37,000, from $499,000 during 1997 to $536,000 for the same period in 1998.
Service charges increased by $10,000 and $6,000 during the three-month and
nine-month periods ended September 30, 1998 as compared to the same periods a
year ago. The increase resulted primarily from increased fees charged on
various savings products and from a greater number of checking accounts at
September 30, 1998 as compared to September 30, 1997, offset by lower
appraisal fees. There were no sales of mortgage loans for the three months
ended September 30, 1998. For the nine months ended September 30, 1998, the
Company reported a net gain on sale of mortgage loans of $14,000. There were
no loans held for sale at September 30, 1998 as compared to $1.3 million at
September 30, 1997.
The Company realized a gain on sale of office properties and equipment of $6,000
for the nine months ended September 30, 1998 which was attributable to the sale
of property located in Inglewood, California. Other noninterest income
decreased by $141,000, from $158,000 for the three months ended September 30,
1997 to $17,000 for the same period in 1998. The decrease primarily resulted
from the following income items recognized in 1997 for which there were no
comparable 1998 items: 1) recognition of $85,000 in income from insurance
proceeds received in settlement of a burglary that occurred at one of the
Bank's branches in early 1997; 2) the recognition of income from the sale
of mortgage loans totaling $29,000 and 3) the recognition of income resulting
from a severance benefit accrual adjustment of $27,000. For the nine months
ended September 30, 1998, other noninterest income increased by $11,000, from
$197,000 during 1997 to $208,000 for the same period in 1998. The increase was
primarily generated from the income recognized in1998 as a result of reversal
of a $170,000 accrual that had been set up for interest and penalties on funds
escheated to the State of California in 1992 offset by income recognized in
1997: 1) recognition of $85,000 in income from insurance proceeds;
2) recognition of $29,000 in gain on sale of mortgage loans; 3) recognition
of $27,000 in income from severance benefit adjustment and 4) recognition
of $10,000 in gain on sale of real estate.
NONINTEREST EXPENSE
Noninterest expense increased by $15,000 and $188,000, respectively, during
the three-month and nine-month periods ended September 30, 1998 as compared
to the same periods in 1997. The year-to-date increase in noninterest
expense was due primarily to increases in compensation and benefits,
occupancy expense, advertising expense, federal insurance premiums,
contracted security services and other noninterest expense, offset by
decreases in professional services, insurance bond premiums, real estate
operations and operational losses. Compensation and benefits decreased by
$9,000 for the three-month period ended September 30, 1998 as compared to
the same period a year ago. The decrease was primarily due to the
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reversal of the bonus accrual after determining that bonuses have not been
earned. Compensation and benefits increased by $133,000 for the nine-month
period ended September 30, 1998 as compared to the same period in 1997. The
increases resulted from general salary increases during the year and an
increase in the number of staff. Occupancy expense, including depreciation
and repair and maintenance costs on office properties and equipment,
increased by $53,000 and $187,000, respectively, for the three-month and
nine-month periods ended September 30, 1998, as compared to the same periods
during 1997. The increases were primarily due to increases in computer
expenses, rent and utilities, maintenance and repair and depreciation on
office buildings. Advertising and promotional expense increased by $17,000
and $27,000, respectively, for the three-month and nine-month periods ended
September 30, 1998 as compared to the same periods a year ago. The increases
were primarily attributable to the grand opening of the Wilshire office.
Contracted security services increased by $4,000 and $23,000, respectively,
for the three-month and nine-month periods ended September 30, 1998 as
compared to the same periods during 1997. The increases were due to security
services provided to the new branch office at 4800 Wilshire Boulevard.
Real estate operations decreased by $9,000 and $59,000, respectively, for the
three-month and nine-month periods ended September 30, 1998 as compared to
the same periods a year ago. The decreases were mainly attributable to an
increase in gain on sale of REO and a decrease in carrying costs offset by an
increase in REO loss provisions. Net operational losses decreased by $40,000
and $168,000 for the three-month and nine-month periods ended September 30,
1998 as compared to the same periods during 1997. The decreases were
principally due to lower savings losses and no losses resulting from
burglaries for the nine months ended September 30, 1988 as compared to the
same periods in 1997. Other noninterest expense decreased by $2,000 for
the three-month period ended September 30, 1998 as compared to the same
period a year ago. For the nine months ended September 30, 1998, other
noninterest expense increased by $38,000 as compared to the same period a
year ago. The increase was primarily caused by an increase in legal fees,
loan expense and other operating expense. Federal deposit insurance
premiums increased by $3,000 and $17,000, respectively, for the three-month
and nine-month periods ended September 30, 1998 as compared to the same
periods a year ago, due to an increase in savings deposits.
INCOME TAXES
Income tax expense decreased by $168,000 for the three-month period ended
September 30, 1998, as compared to the same period in 1997. The decrease in
income taxes was due to the loss before income taxes during the third quarter
of 1998 as compared to earnings before income taxes for the same period
during 1997. For the nine-month period ended September 30, 1998, income tax
expense decreased by $156,000 as compared to the same period a year ago. The
decrease
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in income taxes was due to lower earnings before income taxes during the nine
months ended September 30,1998 as compared to the same period in 1997.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
Total assets at September 30, 1998 were $139.5 million compared to $125.1
million at December 31, 1997, representing an increase of $14.4 million.
Net loans receivable increased from $103.7 million at December 31, 1997 to
$106.0 million at September 30, 1998 as a result of $9.7 million in new loan
originations and $15.3 million in loan purchases, including premiums, offset
by $20.1 million in principal repayments, $400,000 in loans transferred to
foreclosure, $1.8 million in loans transferred to held for sale and a
$400,000 increase in the allowance for loan losses. There were no loans held
for sale at September 30, 1998 as compared to $222,000 of such loans at
December 31, 1997. Office properties and equipment increased from $4.0 million
at December 31, 1997 to $5.0 million at September 30, 1998, primarily as a
result of renovation costs incurred for the Bank's branch and administrative
office located in the City of Los Angeles and the costs incurred for new
computer system. The new Wilshire Boulevard facility was acquired to replace
the Bank's administrative office lost by fire in 1992 during the civil
disturbance in Los Angeles. Since that time Bank administrative operations
have been operated from Broadway Federal's branch office sites.
Total liabilities at September 30, 1998 were $126.0 million compared to
$111.7 million at December 31, 1997. The $14.3 million increase is primarily
attributable to the increase in savings deposits, Federal Home Loan Bank
advances and advance payments by borrowers, offset by a decrease in deferred
income taxes and other liabilities.
At September 30, 1998, total capital was $13.5 million, an increase of $21,000
over the balance at December 31, 1997. The $21,000 increase results from:
1) net earnings of $95,000 for the nine months ended September 30, 1998; 2) the
combined effect of an 8% stock dividend and cash dividends which served to
increase common stock by $1,000, decrease retained earnings by $918,000 and
increase additional paid-in-capital by $796,000, (additional paid-in-capital
was also impacted by interest earned on the employee stock ownership plan
("ESOP")); and 3) a decrease of $47,000 in the unearned ESOP account resulting
from principal payments received on the loan to the ESOP.
YEAR 2000 ISSUES
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may
14
<PAGE>
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
deposit and loan transactions, or to engage in similar normal business
activities.
During 1997, the Company initiated an organization-wide Year 2000 project to
address the issue. Utilizing both internal and external resources, the
Company is in the process of becoming Year 2000 compliant. The Company's Year
2000 project is comprised of two components: business applications and
equipment. The business applications component consists of the Company's
business computer systems, as well as the computer systems of third-party
suppliers or customers whose Year 2000 problems could potentially impact the
Company. Equipment exposures consist of the micro-processors with the power
of small computers that are embedded within operating equipment such as
pumps, compressors, elevators and furnaces.
The Company's plan to resolve the Year 2000 Issue involves the following five
phases: awareness, assessment, renovation, validation and implementation. In
the awareness phase, knowledge of the Year 2000 problem was built, and a sense
of urgency was created toward resolving the problem. In the assessment phase,
an inventory of affected systems was performed, the problem sized, risks were
measured, and an action plan formalized. The Company's Year 2000 Action Plan
was finalized and approved by the Board of Directors in July 1998. The Company
is now engaged in the renovation phase of the plan, in which changes are to be
made and vendors are to be managed according to the action plan. In the
validation phase, testing will be done and results analyzed to confirm that the
changes made bring the affected system into compliance with the Year 2000, and
that no new problems have surfaced as a result of the changes. Finally, in the
implementation phase, actual rollout of the product will occur. A review will
be conducted to assure that the system works as desired. As shown in the
chart below, to date, the Company has fully completed its awareness, assessment
and renovation phases for its critical hardware, products and third party
vendors. Validation and implementation for the Company's hardware is complete
and the Company is in process of validating and implementing its Year 2000
changes for its products and third party vendors.
The Company's computer hardware consists of end-user personal computers and
servers. These were replaced with new Year 2000 compliant hardware during the
first nine months of 1998. The Company's products include loan and deposit
services, billings and accounting data. These items were made Year 2000
compliant as part of the conversion to the new service bureau on October 16,
1998. Third party vendors include significant suppliers, subcontractors and
vendors who could have a critical impact on the Company's operations if they
are not Year 2000 compliant. As part of the Company's Year 2000 project,
information about the Year 2000 compliance status of its significant
suppliers, subcontractors and vendors is being gathered and monitored.
15
<PAGE>
The Company is approximately 35% complete in the validation and implementation
phases for its products and services. The validation of the Company's
products and services is more difficult given the varied nature of the
Company's business. Such areas as testing of interest accruals on loans and
savings accounts are currently being planned.
The Company is approximately 65% complete in the validation and implementation
phases of its significant third party suppliers, subcontractors and vendors.
The Company's accounts payable system was utilized to identify significant
third party suppliers, subcontractors and vendors. Several of the significant
third party suppliers, subcontractors and vendors interface directly with the
Company through systems and software, the largest of which is the Company's
new service bureau, the Federal Reserve, the Company's item processor, ATM
servicer, payroll service bureau and security monitoring service. The
Company is in the process of working with its significant third party
suppliers, subcontractors and vendors to ensure that the Company's systems
that interface directly are Year 2000 compliant by December 31, 1999.
The Company has queried its other significant third party suppliers,
subcontractors and vendors that do not directly interface with the Company
through systems and software (external agents). To date, the Company is not
aware of any external agent with a Year 2000 issue that would materially
impact the Company's results of operations, liquidity or capital resources.
However, the Company has no means of ensuring that external agents will be
Year 2000 ready. The inability of external agents to complete their Year
2000 resolution process in a timely fashion could have a material impact on the
Company. The effect of non-compliance by external agents is not determinable.
The Company has utilized both internal and external resources to assess,
remediate, test and implement the software and operating equipment for Year
2000 modifications. As of November 16, 1998 the Company had incurred $379,000
for hardware, software and information systems consultants. In addition,
because of the conversion to a new service bureau, the Company anticipates
adding an in-house information systems specialist. Applicable costs incurred
in converting to the new service bureau were capitalized by the Company, all
other costs are being expensed as incurred.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company
has not yet completed all necessary phases of the Year 2000 project. The
Company has ascertained that failure to alleviate the Year 2000 problem with
its significant systems could result in possible system failure or
miscalculations causing disruptions of operations, including among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. These
16
<PAGE>
problems could be substantially alleviated with manual processing. However,
this would cause delays, possible lost production days, reduced customer
service and increased expense. In addition, disruptions in the economy
generally resulting from Year 2000 issues could also materially adversely
affect the Company. The Company could be subject to litigation for computer
systems product failure, for example, equipment shutdown or failure to
properly date business records. The amount of potential liability and lost
revenue cannot be reasonably estimated at this time.
The Company currently has no contingency plans in place in the event it does
not complete all phases of the Year 2000 program. The Company is in the
process of completing such plans and will evaluate the status of completion
in March 1999.
YEAR 2000 DISCLOSURE CHART
<TABLE>
<CAPTION>
Awareness Assessment Renovation Validation Implementation
<S> <C> <C> <C> <C> <C>
End-User Personal 100% 100% 100% 100% 100%
Computers and Complete Complete Complete Complete Complete
Servers
Products 100% 100% 100% 35% 35%
Complete Complete Complete Complete Complete
Third Parties 100% 100% 100% 65% 65%
Complete Complete Complete Complete Complete
</TABLE>
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
The Company issued an 8% common stock dividend to
shareholders of record as of August 7, 1998. The
distribution date was August 25, 1998. As a result of this
stock dividend, the Company's outstanding common stock
increased from 863,447 shares to 932,494 shares.
Item 3. DEFAULTS ON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements 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
Date: November 6, 1998 By: /s/ PAUL C. HUDSON
-------------------------------------
Paul C. Hudson
President and Chief Executive Officer
By: /s/ BOB ADKINS
-------------------------------------
Bob Adkins
Secretary and Chief Financial Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,105
<INT-BEARING-DEPOSITS> 10
<FED-FUNDS-SOLD> 5,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 16,651
<INVESTMENTS-MARKET> 16,727
<LOANS> 107,083
<ALLOWANCE> (1,076)
<TOTAL-ASSETS> 139,472
<DEPOSITS> 119,831
<SHORT-TERM> 4,500
<LIABILITIES-OTHER> 1,681
<LONG-TERM> 0
0
552
<COMMON> 9,075
<OTHER-SE> (771)
<TOTAL-LIABILITIES-AND-EQUITY> 139,472
<INTEREST-LOAN> 6,388
<INTEREST-INVEST> 658
<INTEREST-OTHER> 44
<INTEREST-TOTAL> 7,090
<INTEREST-DEPOSIT> 3,135
<INTEREST-EXPENSE> 3,226
<INTEREST-INCOME-NET> 3,864
<LOAN-LOSSES> 375
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 0
<INCOME-PRETAX> 165
<INCOME-PRE-EXTRAORDINARY> 165
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
<YIELD-ACTUAL> 0.077
<LOANS-NON> 705
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (1,054)
<CHARGE-OFFS> 353
<RECOVERIES> 0
<ALLOWANCE-CLOSE> (1,076)
<ALLOWANCE-DOMESTIC> (1,076)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 242
</TABLE>
