<PAGE>
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 March 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
For transition period from to
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Commission file number 0-27464
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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)
(323) 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 April 30, 1999.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [x]
1
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INDEX
PART I-- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
<S> <C> <C>
Consolidated Balance Sheets (unaudited)
as of March 31, 1999
and December 31, 1998 3
Consolidated Statements of
Earnings (unaudited) for the
three months ended March 31,
1999 and March 31, 1998 4
Consolidated Statements of
Cash Flows (unaudited) for the three
months ended March 31, 1999
and March 31, 1998 5
Notes to Consolidated Financial
Statements 7
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 8
</TABLE>
2
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BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------------- -----------------
<S> <C> <C>
ASSETS:
Cash ........................................................................ $ 2,507 $ 4,605
Fed funds sold............................................................... - 2,600
Investment securities held to maturity....................................... 10,622 8,622
Mortgage-backed securities held to maturity.................................. 15,809 12,096
Loans receivable, net........................................................ 108,514 107,055
Loans receivable held for sale, at lower of cost or fair value............... 2,688 2,495
Accrued interest receivable.................................................. 939 888
Real estate acquired through foreclosure, net................................ 318 222
Investments in capital stock of Federal Home Loan Bank, at cost.............. 1,000 987
Office properties and equipment, net......................................... 5,710 5,360
Other assets................................................................. 686 721
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Total assets................................................................. $ 148,793 $ 145,651
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits .................................................................... $ 127,654 $ 125,998
Advance from Federal Home Loan Bank.......................................... 6,000 4,500
Advance payments by borrowers for taxes and insurance........................ 50 205
Other liabilities............................................................ 1,475 1,395
---------------- ----------------
Total liabilities............................................................ 135,179 132,098
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 March 31, 1999............................................ 1 1
Common stock, $.01 par value, authorized 3,000,000 shares; issued and
outstanding 932,494 shares at March 31, 1999........................ 10 10
Additional paid-in capital................................................ 9,644 9,633
Retained earnings-substantially restricted................................ 4,699 4,664
Treasury stock-29,241 shares at cost...................................... (318) (318)
Unearned Employee Stock Ownership Plan shares............................. (422) (437)
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Total stockholders' equity................................................... 13,614 13,553
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Total liabilities and stockholders' equity.................................. $ 148,793 $ 145,651
---------------- ----------------
---------------- ----------------
</TABLE>
See Notes to Consolidated Financial Statements
3
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BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
1999 1998
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<S> <C> <C>
Interest on loans receivable.................................... $ 2,255 $ 2,172
Interest on investment securities held-to-maturity.............. 168 91
Interest on mortgage-backed securities held-to-maturity......... 204 49
Other interest income........................................... 15 15
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Total interest income........................................... 2,642 2,327
Interest on deposits............................................ 1,083 1,042
Interest on borrowings.......................................... 57 3
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Total interest expense.......................................... 1,140 1,045
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Net interest income before provision for loan losses............ 1,502 1,282
Provision for loan losses....................................... 75 75
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Net interest income after provision for loan losses............. 1,427 1,207
Noninterest income:
Service charges............................................ 119 102
Gain on sale of loans receivable held for sale ............ - 19
Gain on sale of office properties and equipment............ - 6
Other .................................................... 12 181
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Total noninterest income 131 308
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Noninterest expense:
Compensation and benefits.................................. 777 693
Occupancy expense, net..................................... 257 280
Advertising and promotional expense........................ 46 37
Professional service....................................... 19 22
Federal insurance premiums................................. 27 25
Insurance bond premiums.................................... 28 26
Real estate operations, net................................ 11 6
Contracted security services............................... 38 36
Net branch losses.......................................... 29 10
Telephone and postage...................................... 39 24
Stationary, printing and supplies.......................... 30 26
Other ..................................................... 108 80
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Total noninterest expense 1,409 1,265
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Earnings before income taxes ................................... 148 250
Income taxes ................................................... 61 105
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Net earnings ................................................... $ 87 $ 145
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Earnings per share-basic........................................ $.09 $.15
Earnings per share-diluted...................................... .09 .15
</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>
Three Months Ended
March 31,
1999 1998
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $87 $145
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation 81 31
Amortization of premium on loans purchased 37 -
Amortization of net deferred loan origination fees (17) (92)
Amortization of discounts and premium on securities 25 1
Federal Home Loan Bank stock dividends (13) (14)
Gain on sale of real estate owned - (25)
Gain on sale of loans receivable held for sale - (25)
Gain on sale of office properties and equipment - (6)
Provision for loan losses 75 75
Provision for write-downs and losses on real estate 6 17
Loans originated for sale, net of refinances (1,394) (1,713)
Proceeds from sale of loans receivable held for sale 1,195 1,144
Discount on sale of loans receivable held for sale 6 -
Changes in operating assets and liabilities:
Accrued interest receivable (51) 68
Other assets 35 (281)
Other liabilities 80 (425)
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Total adjustments 65 (1,126)
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Net cash provided by (used in) operating activities 152 (981)
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CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated, net of refinances (9,176) (1,808)
Loans purchased - (4,780)
Principal repayment on loans 7,520 4,736
Proceeds from sale of office properties and equipment - 132
Purchases of investment securities held-to-maturity (3,500) (3,125)
Purchases of mortgage-backed securities held-to-maturity (4,595) -
Proceeds from maturities of investment securities held-to-
maturity 1,500 3,502
Proceeds from maturities of mortgage-backed securities held-
to-maturity 857 191
Capital expenditures for office properties and equipment (431) (452)
Proceeds from sale of real estate acquired through foreclosure - 836
---------------- ---------------
Net cash used in investing activities (7,825) (768)
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</TABLE>
5
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BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 1,656 3,687
Increase in advance from Federal Home Loan Bank 1,500 -
Additional paid-in capital 11 12
Dividends paid (53) (50)
Unearned Employee Stock Ownership Plan 16 16
Increase in advances by borrowers
for taxes and insurance (155) (182)
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Net cash provided by financing activities 2,975 3,483
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Net increase (decrease) in cash and cash equivalents (4,698) 1,734
Cash and cash equivalents at beginning of period 7,205 4,831
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Cash and cash equivalents at end of period $2,507 $6,565
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $1,100 $1,049
Cash paid for income taxes 10 -
------------------- -------------------
------------------- -------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Additions to real estate acquired through foreclosure 102 245
</TABLE>
See Notes to Consolidated Financial Statements
6
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BROADWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. In the opinion of management of Broadway Financial Corporation (the
"Company"), the preceding unaudited consolidated financial statements
contain all material adjustments, necessary to present fairly the
consolidated financial position of the Company at March 31, 1999 and the
results of its operations for the three months ended March 31, 1999 and
1998, and its cash flows for the three months ended March 31, 1999 and
1998. 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, 1998 and, accordingly, should be read in conjunction with such
audited statements. The results of operations for the three months ended
March 31, 1999 are not necessarily indicative of the results to be
expected for the full year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 established
accounting and reporting standards for derivative instruments and hedging
activities. SFAS No. 133 required recognition of all derivative
instruments in the statement of financial position as either assets or
liabilities and the measurement of derivative instruments at fair value.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
The adoption of SFAS No. 133 is not expected to have a material effect on
the Company's consolidated results of operations or financial condition.
MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE
LOANS HELD FOR SALE - In October 1998, the Financial Accounting Standards
Board issued SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans held for Sale by a
Mortgage Banking Enterprise." SFAS No. 134 is an amendment of SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities." SFAS No. 134
requires mortgage banking enterprises to classify loans held for sale that
they have securitized, based on their intent to sell or hold those
investments. SFAS No. 134 was adopted on January 1, 1999. The adoption of
SFAS No. 134 did not have a material impact on the Company's consolidated
results of operations or financial condition, as currently there are no
mortgage loans that have been securitized by the Company.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Broadway Financial Corporation (the "Company") is a Delaware corporation,
primarily engaged in the savings and loan business through its wholly owned
subsidiary, Broadway Federal Bank, f.s.b. (Broadway Federal). Broadway
Federal's business is that of a financial intermediary and consists primarily
of attracting deposits from the general public and using such deposits,
together with borrowings and other funds, to make mortgage loans secured by
residential real estate located in Southern California. At March 31, 1999,
Broadway Federal operated five retail banking offices and a loan center, in
Southern California. Broadway Federal is subject to significant competition
from other financial institutions, and is also subject to regulation by
certain federal agencies and undergoes periodic examinations by those
regulatory agencies.
All of the Company's operations are considered by management to be aggregated
in one reportable operating segment-banking.
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 ENDED MARCH 31, 1999 AND
MARCH 31, 1998
GENERAL
The Company recorded net earnings of $87,000, or $0.09 per diluted share for
the three months ended March 31, 1999, as compared to net earnings of
$145,000, or $0.15 per diluted share for the three months ended March 31,
1998. The decrease in first quarter net earnings from 1998 to 1999
resulted primarily from the following: 1) higher net interest income, 2)
lower noninterest income, and 3) higher noninterest expense.
8
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INTEREST INCOME
Interest income increased by $315,000 during the three months ended March 31,
1999 as compared to the same period in 1998. This increase was primarily
the result of an increase in average assets of $20.5 million, to $147.5
million for the three months ended March 31, 1999 from $127.0 million for
the same period in 1998. The increase in assets during the three months
ended March 31, 1999 was funded by an increase in savings deposits and
advances from the Federal Home Loan Bank. The increase in average assets
primarily resulted from the Company's continued focus on increasing its loan
portfolio and its investment in mortgage-backed securities.
INTEREST EXPENSE
Interest on deposits and borrowings increased by $95,000 during the three
months ended March 31, 1999 as compared to the same period in 1998. The
increase in interest on deposits was due to an increase in average deposits
of $15.7 million, to $127.5 million for the three months ended March 31, 1999
from $111.8 million during the same period in 1998. Average borrowings also
increased by $4.9 million for the three months ended March 31, 1999 as
compared to the same period in 1998. The impact of the increase in interest
on deposits was mitigated by the current interest rate environment as the
average cost of deposits decreased 26-basis points, from 3.73% for the three
months ended March 31, 1998 to 3.46% for the three months ended March 31,
1999.
PROVISION FOR LOAN LOSSES
The provision for loan losses remained at $75,000 for the three months ended
March 31, 1999 and March 31, 1998.
Total non-performing assets, consisting of non-accrual loans and real estate
acquired through foreclosure ("REO"), increased by $130,000, from $1.5
million at March 31, 1998 to $1.7 million at March 31, 1999. The increase
resulted from an increase in non-accrual loans of $326,000 and a decrease in
REO of $197,000. As a percentage of total assets, non-performing assets were
1.14% at March 31, 1999, compared to 1.22% and 0.90% at March 31, 1998 and
December 31, 1998, respectively. Since December 1998, Non-accrual loans
increased by $286,000 during the 1999 first quarter, to $1.4 million, and REO
has decreased by $96,000, to $318,000. Non-accrual loans at March 31, 1999
included eleven loans totaling $1.1 million secured by one- to four-unit
properties and two loans totaling $264,000 secured by multi-family
properties. REO at March 31, 1999 included one single family property for
$102,000, one commercial property for $93,000 and one parcel of land for
$265,000
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offset by allowance for REO of $142,000.
As of March 31, 1999 the Company's allowance for loan losses totaled $1.2
million, representing a $75,000 increase from the balance at December 31,
1998. The allowance for loan losses represents 1.08% of total loans at March
31, 1999 compared to 1.03% at December 31, 1998. The allowance for loan
losses was 89.10% of non-accrual loans at March 31, 1999, compared to 105.60%
at December 31, 1998. There were no loan charge-offs or recoveries for the
three months ended March 31, 1999. Management believes that the allowance
for loan losses is adequate to cover inherent losses in its loan portfolio as
of March 31, 1999, but there can be no assurance that such losses will not
exceed the estimated amounts.
In addition, the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation as an integral part of their examination process,
periodically review the Company's allowance for loan losses. These agencies
may require the Company to increase the allowance for loan losses based on
their judgements of the information available at the time of the examination.
NONINTEREST INCOME
Noninterest income decreased by $177,000, from $308,000 for the three months
ended March 31, 1998 to $131,000 for the same period during 1999. Service
charges increased by $17,000 during the three-month period ended March 31,
1999 as compared to the same period in 1998. The increase resulted primarily
from increased fees charged on various savings products and from a greater
number of checking accounts at March 31, 1999 as compared to March 31, 1998.
The Company reported no gain on sale of mortgage loans for the three months
ended March 31, 1999 as compared to a $19,000 of gain on sale for the same
period a year ago. The Company realized no gain on sale of office properties
and equipment for the three months ended March 31, 1999 as compared to the
gain on sale of $6,000 for the three months ended March 31, 1998 which was
attributable to the sale of property located at 8467 South Van Ness Avenue,
Inglewood, California. Finally, other noninterest income decreased by
$169,000, from $181,000 for the three months ended March 31, 1998 to $12,000
for the same period in 1999. The decrease primarily resulted from the
reversal of a $170,000 accrual during the first quarter of 1998 that had been
set up for interest and penalties on funds escheated to the State of
California in 1992. Upon review by management, it was determined that the
interest and penalties were not due.
NONINTEREST EXPENSE
Noninterest expense increased by $144,000 during the three-month period ended
March 31, 1999 as compared to the same period in 1998. The increase in
noninterest
10
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expense was due primarily to increases in compensation and benefits and
other expense, offset by decreases in occupancy expense. Compensation and
benefits increased by $84,000 for the three-month period ended March 31, 1999
as compared to the same period in 1998. The increases resulted from the
accrual of vested stock grants and an increase in the number of staff.
Other noninterest expense increased by $28,000 for the three-month period
ended March 31, 1999 as compared to the same period during 1998. The
increase was primarily caused by an increase in legal fees. Offsetting these
increases is a $23,000 decrease in occupancy expense for the three months
ended March 31, 1999 as compared to the same period in 1998. The decrease
was primarily due to decreases in computer expenses, repair and maintenance
and furniture, fixture, equipment expense offset by increases in depreciation
expense, rent and utilities expense.
INCOME TAXES
Income tax expense decreased by $44,000 for the three-month period ended
March 31, 1999, as compared to the same period in 1998. The decrease in
income taxes was the result of lower earnings before income taxes during the
first quarter of 1999 as compared to the same period during 1998. Broadway
Federal computed income taxes by applying the statutory federal income tax
rate of 34% and California income tax rate of 11.01% to earnings before
income taxes.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1999 AND DECEMBER 31, 1998
Total assets at March 31, 1999 were $148.8 million compared to $145.7 million
at December 31, 1998, representing an increase of $3.1 million. Net loans
receivable increased from $107.0 million at December 31, 1998 to $108.5
million at March 31, 1999 as a result of $10.5 million in new loan
originations, offset by $7.5 million in principal repayments, $102,000 in
loans transferred to foreclosure and $1.4 million in loans originated and
classified as held for sale. Loans held for sale at March 31, 1999 totaled
$2.7 million as compared to $2.5 million at December 31, 1998. During the
period loans originated that were classified as held-for-sale totaled $1.4
million and loans sold totaled $1.2 million. Office properties and equipment
increased from $5.4 million at December 31, 1998 to $5.7 million at March 31,
1999, primarily as a result of construction costs incurred for the Bank's
branch office located at Figueroa and Martin Luther King in the City of Los
Angeles.
Total liabilities at March 31, 1999 were $135.2 million compared to $132.1
million at December 31, 1998. The $3.1 million increase is primarily
attributable to the increase in deposits, advances from Federal Home Loan
Bank and other liabilities, offset by the decrease in advance payments by
borrowers and deferred income taxes.
Total capital at March 31, 1999 remained unchanged as compared to total
capital at
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March 31, 1998 at $13.6 million.
LIQUIDITY AND CAPITAL RESOURCES
Sources of liquidity and capital for the Company on a stand-alone basis
include distributions from the Bank and borrowings such as securities sold
under agreements to repurchase. Dividends and other capital distributions
from the Bank are subject to regulatory restrictions.
The Bank's primary sources of funds are Bank deposits, principal and interest
payments on loans and, to a lesser extent, proceeds from the sale of loans
and advances from the FHLB. While maturities and scheduled amortization of
Bank loans are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions, and competition. Broadway Federal's average liquidity ratios were
18.62% and 13.35% for the period ended March 31, 1999 and 1998, respectively.
The relatively high liquidity ratio results from the fact that Conversion
proceeds, which the Company has not yet invested into Bank loans, are held as
investments in treasury securities and federal agency obligations, which are
included in the liquidity ratio under OTS regulations. Management is
currently attempting to reduce the liquidity ratio to a range of 10% to 12%
as part of the Company's strategy to invest excess liquidity in Bank loans or
other higher yielding interest-earnings assets.
The Bank has other sources of liquidity in the event that a need for
additional funds arises, including FHLB advances to the Bank. At March 31,
1999 and 1998 FHLB advances totaled $6.0 million and zero, respectively.
Broadway Federal had borrowed from the FHLB to meet its short-term loan
funding needs. Other sources of liquidity include investment securities
maturing within one year.
REGULATORY CAPITAL
The OTS capital regulations include three separate minimum capital
requirements for savings institutions subject to OTS supervision. First, the
tangible capital requirement mandates that the Association's stockholder's
equity less intangible assets be at least 1.50% of adjusted total assets as
defined in the capital regulations. Second, the core capital requirement
currently mandates core capital (tangible capital plus qualifying supervisory
goodwill) be at least 3.00% of adjusted total assets as defined in the
capital regulations. Third, the risk-based capital requirement presently
mandates that core capital plus supplemental capital as defined by the OTS be
at least 8.00% of risk-weighted assets as prescribed in the capital
regulations. The capital regulations assign specific risk weightings to all
assets and off-balance sheet items.
Broadway Federal was in compliance with all capital requirements in effect at
March 31, 1999, and meets all standards necessary to be considered
"well-capitalized" under the prompt corrective action regulations adopted by
the OTS pursuant to the Federal Deposit Insurance Corporation Improvement Act
of 1991 (FDICIA). The following table reflects the required and actual
regulatory capital ratios of Broadway Feral at the date indicated:
<TABLE>
<CAPTION>
FIRREA FDICIA Actual
Regulatory Capital Ratios Minimum "Well-capitalized" At March 31,
for Broadway Federal Requirement Requirement 1999
- ------------------------------ ------------ ------------------ ------------
<S> <C> <C> <C>
Tangible capital 1.50% N/A 7.67%
Core Capital 3.00% 5.00% 7.67%
Risk-based capital 8.00% 10.00% 14.20%
Tier 1 Risk-based capital N/A 6.00% 13.08%
</TABLE>
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year in the
date field with the assumption that the first two digits are always 19.
Systems that calculate, compare or sort data using the incorrect date may
cause erroneous results, ranging from system malfunctions to incorrect or
incomplete processing. If not remedied, potential risks include: business
disruption or temporary shutdown and financial loss. Pursuant to its
information technology strategy, the Company principally utilizes third-party
computer service providers and third-party software for
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its information technology needs. As a result, the Year 2000 compliance of
the Company's information technology assets ("IT assets"), such as computer
hardware, software and systems, is primarily dependent upon the Year 2000
compliance efforts and results of its third-party vendors. The Year 2000
compliance of the Company's non-IT assets, which include automated teller
machines (ATMs), copiers, fax machines, coin/currency counters, and emergency
communications radios, is also primarily dependent upon the Year 2000
compliance efforts and results of third parties.
State of Readiness
In June 1998, the Company developed a plan to address Year 2000 issues and
appointed a Year 2000 Committee comprised of representatives from all
divisions of the Company. The Year 2000 Committee has developed and is
currently implementing a comprehensive initiative to make the Company's IT
assets and non-IT assets Year 2000 compliant. A Year 2000 compliance review
and test of the computer hardware and software used by the Company was
conducted in the first quarter of 1998. As a result, the Company replaced
approximately 95% of its existing personal computers and monitors, as well as
its data processing service bureau.
The Company's non-IT assets were also assessed for Year 2000 compliance.
Manufacturers, installers, and/or servicers of each have been contacted for
certification of Year 2000 readiness.
The Year 2000 Committee's initiative to make the Company's IT assets and
non-IT assets Year 2000 compliant is comprised of the following phases:
1. Awareness-Educational initiative on Year 2000 issues and concerns. This
phase has been completed.
2. Assessment-Inventory of IT assets and non-IT assets as well as
identification of third-party vendors and service providers with which the
Company has material relationships. This phase has been completed.
3. Renovation-Review of vendor and service providers' responses to the
Company's Year 2000 inquiries and development of a follow-up plan and
time-line. This phase has been completed.
4. Validation-The Year 2000 Committee's readiness initiative is currently in
this phase. This phase consists of testing of IT assets and non-IT assets
as well as testing of third-party vendors and service providers of Year
2000 issues. The testing of IT assets and non-IT assets is substantially
complete. The testing of third-party vendors and service providers has
begun and will continue through June 30, 1999. Testing of all
mission-critical systems is scheduled to be
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completed by June 30, 1999.
5. Implementation-As mentioned above, the Company replaced 95% of its computer
hardware and software, and converted to a data processing service bureau
that is considered to be Year 2000 compliant. The Company has conducted
sufficient testing to satisfy itself of such compliance. The Company has
also tested its new hardware and software and ascertained their compliance.
The major focus of the Company's efforts is currently to ensure that its
vendors are compliant. This process is expected to be completed by the end
of the second quarter of 1999.
Costs to Address the Year 2000 Issue
The total cost of carrying out the Company's plan to address the Year 2000
issue is currently estimated to be approximately $500,000, including
estimates of personnel costs, and is comprised primarily of costs for
equipment and software that will be acquired and depreciated over its useful
life in accordance with Company policy. Any personnel and additional costs
have been and will continue to be expensed as incurred. These currently
contemplated Year 2000 compliance costs are expected to be funded primarily
through operating cash flow and are not expected to have a material adverse
effect on the Company's business, financial condition or results of
operations. To date, the costs incurred related to Year 2000, excluding
estimates of personnel costs, are approximately $469,000, of which $37,000
were expensed. The major part of the costs incurred to date relate to the
replacement of hardware and software which have been capitalized in
accordance with Company policies.
Risks Presented by the year 2000 Issue
Because the Company is substantially dependent upon the proper functioning of
its computer systems and the computer systems and services of third parties,
a failure of those computer systems and services to be Year 2000 compliant
could have a material adverse effect on the Company's business, financial
condition or results of operations. The Company relies heavily on
third-party vendors and service providers for its information technology
needs. The Company's primary third-party computer service provider is a
computer service bureau that provides data processing for virtually all of
the Company's savings and checking accounts, real estate lending and real
estate loan servicing, general ledger, fixed assets and accounts payable.
This third-party's data processing services are mission-critical services for
the Company and a failure of this provider's services to be Year 2000
compliant could cause substantial disruption of the Company's business and
could have a material adverse financial impact on the Company. Testing of
this third-party data processing service bureau was performed with
satisfactory results.
14
<PAGE>
If this third-party service provider or other third-party providers with
which the Company has material relationships are not Year 2000 compliant, the
following problems could result: (i) in the case of vendors, important
services upon which the Company depends, such as telecommunications and
electrical power, could be interrupted, (ii) in the case of third-party
service providers, the Company could receive inaccurate or outdated
information, which could impair the Company's ability to perform critical
data functions, such as the processing of deposit accounts, loan servicing
and internal accounting, and (iii) in the case of governmental agencies, such
as the FHLB, and correspondent banks, such agencies and financial
institutions could fail to provide funds to the Company, which could
materially impair the Company's liquidity and affect the Company's ability to
fund loans and deposit withdrawals. In addition, whether or not the Company
is Year 2000 compliant, the Company may experience an outflow of deposits if
customers are concerned about the integrity of financial institutions'
records regarding customers' accounts.
Contingency Plans
The Company is currently in the process of completing testing of its vendors
and service providers. Where this is not possible, the Company will rely
upon certifications of Year 2000 compliance from vendors and service
providers. The Company is currently developing a contingency plan to
minimize disruption of operations due to Year 2000 issues. Included are
plans to recover critical business operations and alternatives to mitigate
potential effects of critical third-party vendors and service providers whose
own failure to properly address Year 2000 issues may adversely impact the
ability to perform certain functions. Alternative strategies and contingency
plans for liquidity and cash will also be included as part of the plan. The
contingency plan is expected to be substantially completed for critical
business operations by June 30, 1999.
There can be no assurance that the Company's Year 2000 initiative will
effectively address the Year 2000 issues, that the Company's estimates of the
timing and costs of completing the initiative will ultimately be accurate or
that the impact of any failure of the Company or its third-party vendors and
service providers to be Year 2000 compliant will not have a material adverse
effect on the Company's business, financial condition or results of
operations.
15
<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: MAY 7, 1999 By: /s/ PAUL C. HUDSON
------------------- ---------------------------------
Paul C. Hudson
President and Chief Executive Officer
By: /s/ BOB ADKINS
---------------------------------
Bob Adkins
Secretary and Chief Financial Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PRECEDING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
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0
552
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