<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 September 30, 1999
[ ] 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
------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 95-4547287
---------- ------------
(State of Incorporation) (IRS Employer
Identification No.)
4800 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90010
-------------------------------------------------------------
(Address of Principal Executive Offices)
(323) 634-1700
---------------
(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 29, 1999.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [x]
1
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I--FINANCIAL INFORMATION
<S> <C> <C> <C>
Item 1. Financial Statements (unaudited) Page
Consolidated Balance Sheets
as of September 30, 1999
and December 31, 3
Consolidated Statements of
Operations for the three months
and nine months ended September 30,
1999 and September 30, 1998 4
Consolidated Statements of
Cash Flows for the nine months
ended September 30, 1999
and September 30, 1998 5
Notes to Consolidated Financial
Statements 7
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 8
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
2
</TABLE>
<PAGE>
BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS:
Cash ........................................................................................ $ 3,702 $ 4,605
Federal funds sold........................................................................... -- 2,600
Investment securities held to maturity....................................................... 10,622 8,622
Mortgage-backed securities held to maturity.................................................. 13,868 12,096
Loans receivable, net........................................................................ 120,128 107,055
Loans receivable held for sale, at lower of cost or fair value............................... 8,190 2,495
Accrued interest receivable.................................................................. 986 888
Real estate acquired through foreclosure, net................................................ 635 222
Investments in capital stock of Federal Home Loan Bank, at cost.............................. 1,215 987
Office properties and equipment, net......................................................... 6,432 5,360
Other assets................................................................................. 1,472 721
------------- -------------
Total assets................................................................................. $167,250 $145,651
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits .................................................................................... $133,213 $125,998
Advance from Federal Home Loan Bank.......................................................... 18,000 4,500
Advance payments by borrowers for taxes and insurance........................................ 372 205
Other liabilities............................................................................ 1,852 1,395
------------- -------------
Total liabilities............................................................................ 153,437 132,098
Stockholders' Equity:
Preferred nonconvertible, non-cumulative, and non-voting stock, $.01 par
value, authorized 1,000,000 shares; issued and outstanding 55,199 and
55,199 shares at September 30, 1999 and December 31, 1998, respectively............. 1 1
Common stock, $.01 par value, authorized 3,000,000 shares; issued and
outstanding 932,494 and 932,494 shares at September 30, 1999 and
December 31, 1998, respectively...................................................... 10 10
Additional paid-in capital................................................................ 9,665 9,633
Retained earnings-substantially restricted................................................ 4,846 4,664
Treasury stock-29,241 shares at cost...................................................... (318) (318)
Unearned Employee Stock Ownership Plan shares............................................. (391) (437)
------------- -------------
Total stockholders' equity................................................................... 13,813 13,553
------------- -------------
Total liabilities and stockholders' equity.................................................. $167,250 $145,651
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ---------------------------
1999 1998 1999 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest on loans receivable................................. 2,569 $1,965 $7,173 $6,388
Interest on investment securities held-to-maturity........... 170 192 487 470
Interest on mortgage-backed securities held-to-maturity...... 222 81 660 188
Other interest income........................................ 13 14 42 44
------- -------- -------- --------
Total interest income........................................ 2,974 2,252 8,362 7,090
Interest on deposits......................................... 1,134 1,010 3,292 3,135
Interest on borrowings....................................... 205 78 384 91
------- -------- -------- --------
Total interest expense....................................... 1,339 1,088 3,676 3,226
------- -------- -------- --------
Net interest income before provision for loan losses......... 1,635 1,164 4,686 3,864
Provision for loan losses.................................... 75 225 225 375
------- -------- -------- --------
Net interest income after provision for loan losses.......... 1,560 939 4,461 3,489
Noninterest income:
Service charges......................................... 89 111 355 308
Gain (loss) on sale of loans receivable held for sale .. (49) -- (55) 14
Gain on casualty insurance reimbursement................ 680 -- 680 --
Other ................................................. 27 17 54 214
------- -------- -------- --------
Total noninterest income..................................... 747 128 1,034 536
------- -------- -------- --------
Noninterest expense:
Compensation and benefits............................... 841 596 2,267 1,937
Occupancy expense, net.................................. 262 309 859 891
Unrealized loss on loans receivable held for sale....... 60 -- 170 -
Advertising and promotional expense..................... 60 69 161 148
Consulting service...................................... 29 7 79 41
Federal insurance premiums.............................. 28 27 83 77
Insurance bond premiums................................. 21 28 77 78
Real estate operations, net............................. 4 34 28 39
Contracted security services............................ 41 39 119 116
Litigation reserves..................................... 70 -- 232 --
Telephone and postage................................... 53 30 128 77
Stationary, printing and supplies....................... 29 23 93 78
Other .................................................. 267 133 622 378
------- -------- -------- --------
Total noninterest expense.................................... 1,765 1,295 4,918 3,860
------- -------- -------- --------
Earnings (loss) before income taxes.......................... 542 (228) 577 165
Income taxes (tax benefit)................................... 222 (94) 235 70
------- -------- -------- --------
Net earnings (loss) ......................................... 320 $ (134) $ 342 $ 95
======= ======== ======== ========
Earnings (loss) per share-basic.............................. $ .34 $ (.16) $.34 $.08
Earnings (loss) per share-diluted............................ .33 (.16) .33 .08
Dividend declared per share-common stock.................... .05 .05 .15 .15
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 342 $ 95
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation 286 149
Amortization of premium on loans purchased 78 66
Amortization of net deferred loan origination fees 34 (41)
Amortization of discounts and premium on securities 88 9
Amortization of deferred compensation 78 47
Gain on sale of real estate acquired through foreclosure (8) (26)
Loss (gain) on sale of loans receivable held for sale 55 (14)
Gain on sale of office properties and equipment (2) (6)
Provision for loan losses 225 375
Provision for write-downs and losses on real estate acquired through foreclosure 10 40
Lower of cost or fair value on loans receivable held for sale 123 -
Loans originated for sale, net of refinances (13,855) (1,807)
Proceeds from sale of loans receivable held for sale 7,982 2,043
Changes in operating assets and liabilities:
Accrued interest receivable (98) (57)
Other assets (751) (236)
Deferred income taxes - (55)
Other liabilities 443 (257)
--------- -----------
Total adjustments (5,312) (230)
--------- -----------
Net cash provided by (used in) operating activities (4,970) 325
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated, net of refinances (30,201) (7,882)
Loans purchased -- (15,257)
Principal repayment on loans 16,304 20,108
Proceeds from sale of office properties and equipment 3 132
Purchases of investment securities held-to-maturity (4,500) (11,119)
Purchases of mortgage-backed securities held-to-maturity (4,595) (5,339)
Proceeds from maturities of investment securities held-to-
maturity 2,500 9,005
Proceeds from maturities of mortgage-backed securities held-
to-maturity 2,735 --
Purchase of Federal Home Loan stock (228) (42)
Capital expenditures for office properties and equipment (1,359) (1,327)
Proceeds from sale of real estate acquired through foreclosure 86 1,019
--------- -----------
Net cash used in investing activities (19,255) (10,702)
--------- -----------
</TABLE>
5
<PAGE>
BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 7,215 9,964
Increase in advance from Federal Home Loan Bank 13,500 4,500
Dividends paid (160) (121)
Increase in advances by borrowers
for taxes and insurance 167 150
---------------- ----------------
Net cash provided by financing activities 20,722 14,493
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (3,503) 4,116
Cash and cash equivalents at beginning of period 7,205 4,831
---------------- ----------------
Cash and cash equivalents at end of period $ 3,702 $ 8,947
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 3,592 $ 3,254
Cash paid for income taxes 315 312
================ ================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Additions to real estate acquired through foreclosure 500 561
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
BROADWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
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 adjustments necessary to
present fairly the consolidated financial position of the
Company at September 30, 1999 and the results of its
operations for the three months and nine months ended
September 30, 1999 and 1998, and its cash flows for the nine
months ended September 30, 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 and nine months ended September 30,
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." As amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of
Effective Date of FASB Statement No. 133.", 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. As
amended by SFAS No. 137, SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000. 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.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Broadway Financial Corporation (the "Company") is primarily engaged in providing
financial services through its wholly owned subsidiary, Broadway Federal Bank,
f.s.b. ("Broadway Federal") or (the "Bank"). 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 September 30, 1999, Broadway Federal operated five
retail banking offices in Southern California.
The Company's management considers its operations to be segregated into two
reportable segments - i)banking, through Broadway Federal and ii) retail
services, through its newly established subsidiary, Banksmart, Inc.
("Banksmart"). Through Banksmart, the Company is providing one stop, full
service, convenience to its customers. Banksmart includes a postal center,
copy center and in early 2000 ,a check cashing facility will be added.
Banksmart customers can rent mail boxes, order printing, perform desktop
publishing, purchase office supplies, wire money, send packages, etc. In
early August, Banksmart opened its first center inside Broadway Federal's
Exposition Park branch. As of September 30, 1999 the operations of Banksmart
are insignificant.
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. 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.
The improvement in earnings for the third quarter and nine months ended
September 30, 1999 compared to the prior year results from a number of
offsetting factors including: i) a higher net interest margin, ii) the
recognition of a $680,000 non-recurring pretax gain resulting from a casualty
insurance reimbursement and iii) a lower provision for loan losses, offset by
higher noninterest expenses.
8
<PAGE>
In August, the Company initiated a staff reduction and realignment plan, which
resulted in the termination of 5.0 full time equivalent employees ("FTEs") and
the resignation of 3.5 FTEs, which resulted in a net decrease of 8.5 FTEs. The
staff reduction represents 13.8% of the total staff employed by the Company at
June 30, 1999.
Also in August, the Company completed construction of a new branch office
facility at 4001 South Figueroa Street in Los Angeles, replacing the Bank's
temporary office at 4429 Broadway in Los Angeles. The new location houses a Bank
savings branch, a newly established copy/postal center, and a check cashing
facility that is projected to open in the first quarter of 2000.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
GENERAL
The Company recorded net earnings of $320,000, or $0.33 per diluted share, for
the three months ended September 30, 1999, as compared to a net loss of
$134,000, or $0.16 per diluted share, for the three months ended September 30,
1998. For the nine months ended September 30, 1999 the Company recorded net
earnings of $342,000, or $0.33 per diluted share, as compared to net earnings of
$95,000, or $0.08 per diluted share, for the same period ended September 30,
1998.
INTEREST INCOME
Interest income increased by $722,000 during the three months ended September
30, 1999 as compared to the same period in 1998. For the nine months ended
September 30, 1999 interest income increased by $1.3 million as compared to the
same period in 1998. These increases were primarily the result of increases in
average assets of $28.7 million and $23.9 million for the three months and nine
months ended September 30, 1999, respectively, as compared to the same periods
in 1998. The increase in assets during the three months and nine months ended
September 30, 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. The average interest rate on
earning assets decreased 29-basis points, from 7.91% for the nine months ended
September 30, 1998 to 7.62% for the nine months ended September 30, 1999.
INTEREST EXPENSE
Interest expense increased by $251,000 during the three months ended September
9
<PAGE>
30, 1999 as compared to the same period in 1998. For the nine months ended
September 30, 1999 interest expense increased by $450,000 as compared to the
same period in 1998. The increases were largely in interest on borrowings as
average borrowings increased by $13.5 million and $9.4 million for the three
months and nine months ended September 30, 1999 as compared to the same periods
in 1998. The average cost of deposits decreased 27-basis points, from 3.70% for
the nine months ended September 30, 1998 to 3.43% for the nine months ended
September 30, 1999.
PROVISION FOR LOAN LOSSES AND NON-PERFORMING ASSETS
The provision for loan losses decreased by $150,000 for the three months and
nine months ended September 30, 1999 as compared to the same periods in 1998.
The decrease was related to a significant decline in third quarter
charge-offs in 1999 as compared to charge-offs during the same period in 1998.
Total non-performing assets, consisting of non-accrual loans and real estate
acquired through foreclosure ("REO"), increased by $702,000, from $1.3
million at December 31, 1998 to $2.0 million at September 30, 1999. The
increase resulted from an increase in non-accrual loans of $289,000 and an
increase in REO of $413,000. As a percentage of total assets, non-performing
assets were 1.20% at September 30, 1999, compared to 0.90% at December 31,
1998. Non-accrual loans increased by $289,000 during the first nine months to
$1.4 million, and REO increased by $413,000, to $635,000. Non-accrual loans
at September 30, 1999 included six loans totaling $511,000 secured by one- to
four-unit properties, four loans totaling $848,000 secured by multi-family
properties and one unsecured loan for $20,000. REO at September 30, 1999
included three single family properties with book values totaling $423,000,
one commercial property with a book value of $93,000 and one parcel of land
with a book value of $265,000, offset by a $146,000 allowance for REO.
As of September 30, 1999 the Company's allowance for loan losses totaled $1.4
million, representing a $213,000 increase from the balance at December 31, 1998.
The allowance for loan losses represents 1.04% of total loans at September 30,
1999 compared to 1.03% at December 31, 1998. The allowance for loan losses was
98.92% of non-accrual loans at September 30, 1999 compared to 105.60% at
December 31, 1998. For the nine months ended September 30, 1999 loan charge-offs
totaled $12,000, as compared to $353,000 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.
Management believes that the allowance for loan losses is adequate to cover
inherent losses in its loan portfolio as of September 30, 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
10
<PAGE>
their examination process, periodically review the Company's allowance for loan
losses. These agencies may require the Company to increase the allowance in loan
losses based on their judgements of the information available at the time of the
examination.
NON-INTEREST INCOME
Non-interest income increased by $619,000 for the three-month period ended
September 30, 1999 as compared to the same period during 1998. For the
nine-month period ended September 30, 1999 non-interest income increased by
$498,000. The increase in non-interest income for both the three-month and
nine-month periods ended September 30, 1999 compared to the corresponding 1998
periods are due primarily to a $680,000 gain recognized on the reimbursement of
a casualty insurance claim during the third quarter of 1999. This reimbursement
related to the 1992 destruction of Broadway Federal's corporate headquarters
office. At September 30, 1999, the Company has no further insurance claims
outstanding relative to this casualty loss. These increases were offset by
losses on sales of loans recognized during the periods in question.
Additionally, other income for the nine months ended September 30, 1999 is
comparatively lower relative to that recognized in 1998 due to the reversal of a
$170,000 accrual in 1998 for possible penalties on funds escheated to the State
of California. The accrual was reversed after management determined the Company
was no longer subject to the penalties.
NON-INTEREST EXPENSE
Non-interest expense increased by $470,000 and $1.1 million, respectively,
during the three-month and nine-month periods ended September 30, 1999 as
compared to the same periods in 1998. The increases were due primarily to
increases in i) compensation and benefits, ii) unrealized loss on loans
receivable held for sale, iii) litigation reserves, and iv) other expenses.
Compensation and Benefits
Compensation and benefits increased by $245,000 and $330,000, respectively,
during the three-month and nine-month periods ended September 30, 1999 relative
to the same periods in 1998. The increase resulted primarily from the accrual of
vested stock awards, the payment of severance benefits related to the
aforementioned staff reduction, and accrued bonuses.
Unrealized Losses on Loans Receivable Held for Sale
The increases in this category relate directly to changes in secondary market
factors for the periods reported. Unrealized losses are recognized to the extent
that the fair
11
<PAGE>
value of loans receivable held for sale is less than the historical cost of such
loans. The majority of loans receivable held for sale at September 30, 1999 are
currently at fixed rates. Recent increases in interest rates have led to a
diminution in the fair value of such loans. During 1998, market conditions and
prices on loans were such that no unrealized losses were recognized.
Litigation Reserves
Litigation reserves increased by $70,000 and $232,000, respectively, during the
three-month and nine-month periods ended September 30, 1999 relative to the same
periods in 1998. The increase in reserves relates to two unrelated proceedings
pending against Broadway Federal that arose out of alleged fraudulent
endorsements by Broadway Federal's customers. One proceeding involves a
complaint for fraud, conversion, declaratory relief and injunctive relief. The
second proceeding involves a complaint for breach of transfer and presentment
warranties. The Company has accrued a total of $205,000 at September 30, 1999
for the litigation risk relative to these cases.
Other Expenses
Other expenses increased by $134,000 and $244,000, respectively, for the
three-month and nine-month ended September 30, 1999 relative to the same periods
in 1998. The increases were primarily a result of increases in branch operating
losses and legal fees during the periods noted.
INCOME TAXES
Income tax expense increased by $316,000 and $165,000, respectively, for the
three-month and nine-month periods ended September 30, 1999 as compared to the
same periods in 1998. The increases in income taxes were the result of higher
earnings before income taxes. Broadway Federal computed income taxes by applying
the statutory federal income tax rate of 34% and a California income tax rate of
10.84% to earnings before income taxes.
FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
Total assets at September 30, 1999 were $167.3 million compared to $145.7
million at December 31, 1998, representing an increase of $21.6 million. Net
loans receivable increased from $107.0 million at December 31, 1998 to $120.1
million at September 30, 1999 as a result of $44.0 million in new loan
originations, offset by $16.3 million in principal repayments, $500,000 in loans
transferred to foreclosure, $13.9 million in loans originated and classified as
held for sale, and $225,000 provision for loan losses. Loans held for sale at
September 30, 1999 totaled $8.2
12
<PAGE>
million as compared to $2.5 million at December 31, 1998. The increase resulted
from an increase in multi-family loans designated as held for sale. During the
nine months ended September 30, 1999, loans sold totaled $8.0 million. Office
properties and equipment increased from $5.4 million at December 31, 1998 to
$6.4 million at September 30, 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 September 30, 1999 were $153.4 million compared to $132.1
million at December 31, 1998. The $21.3 million increase is primarily
attributable to the increase in deposits, Federal Home Loan Bank advances,
advance payments by borrowers and other liabilities.
As compared to total capital at December 31, 1998, total capital at September
30, 1999 increased $260,000, to $13.8 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 customer deposits, principal and
interest payments on loans and other sources of liquidity include investment
securities maturing within one year, to a lesser extent, proceeds from the sale
of loans and advances from the Federal Home Loan Bank " FHLB". While maturities
and scheduled amortization of Bank loans are relatively 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 19.11% and 13.80% for the period ended September 30, 1999
and 1998, respectively. 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 loans or other higher yielding interest-earning
assets.
At September 30, 1999 and 1998 FHLB advances totaled $18.0 million and $4.5
million, respectively. Broadway Federal increased its borrowings from the FHLB
in the period after June 30, 1998 to meet its short-term loan funding needs.
Other sources of liquidity include investment securities maturing within one
year.
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Company's market risk arises primarily from interest rate
risk inherent in its lending and deposit taking activities. The composition of
the Company's financial instruments that subject it to market risk has not
changed significantly since December
13
<PAGE>
31, 1998.
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 Bank'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
4.00% 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 risk-based capital
provisions of 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
September 30, 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 Federal at the date indicated:
<TABLE>
<CAPTION>
FIRREA FDICIA Actual
Regulatory Capital Ratios Minimum "Well-capitalized" At September 30,
for Broadway Federal Requirement Requirement 1999
- ------------------------------ ------------------ ---------------------- ------------------
<S> <C> <C> <C>
Tangible capital 1.50% 5.00 7.01%
Core capital 4.00% 6.00% 7.01%
Risk-based capital 8.00% 10.00% 12.55%
Tier 1 Risk-based capital N/A 6.00% 11.64%
</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.
Beginning with the year 2000, systems that calculate, compare or sort data in
this manner may cause erroneous results, ranging from system malfunctions to
incorrect or incomplete processing. If not remedied, potential risks include:
business disruption or temporary
14
<PAGE>
shutdown and financial loss. The Company principally utilizes third-party
computer service providers and third-party software for 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 implemented 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
timeline. This phase has been completed.
4. Validation-This phase consists of testing of IT assets and non-IT
assets, as well as testing of third-party vendors and service providers
with respect to Year 2000 issues. The testing of IT assets and non-IT
assets as well as third-party vendors and service providers is
complete. Testing of all mission-critical
15
<PAGE>
systems has been completed.
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 Company is awaiting certification
from a small number of vendors in order to complete vendor testing and
verification.
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 was acquired and is being 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 Year 2000
compliance costs were funded primarily through operating cash flow and did
not 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
$483,000, of which $51,000 was 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 has been
performed with satisfactory results.
If the Company's principal third-party providers with which the Company has
material
16
<PAGE>
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 has developed contingency plans to minimize disruption of operations
due to Year 2000 issues. These included 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 are also
included. The contingency plans were completed in June of 1999, and tested in
October, 1999 with satisfactory results.
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.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, which can be identified by the
use of forward-looking terminology, including "may," "will," "should," "expect,"
"anticipate," "estimate" or "continue" or the negatives thereof or other
comparable terminology. The Company's actual results could differ materially
from those anticipated in such forward-looking statements as a result of various
factors, including those set forth in the documents filed by the Company with
the Securities and Exchange Commission.
17
<PAGE>
PART II- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1--Financial Data Schedule
(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 12, 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
19
<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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,635
<INT-BEARING-DEPOSITS> 67
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 24,490
<INVESTMENTS-MARKET> 23,946
<LOANS> 129,682
<ALLOWANCE> (1,364)
<TOTAL-ASSETS> 167,250
<DEPOSITS> 133,213
<SHORT-TERM> 18,000
<LIABILITIES-OTHER> 2,224
<LONG-TERM> 0
0
552
<COMMON> 9,123
<OTHER-SE> (709)
<TOTAL-LIABILITIES-AND-EQUITY> 167,250
<INTEREST-LOAN> 7,173
<INTEREST-INVEST> 1,147
<INTEREST-OTHER> 42
<INTEREST-TOTAL> 8,362
<INTEREST-DEPOSIT> 3,292
<INTEREST-EXPENSE> 3,676
<INTEREST-INCOME-NET> 4,686
<LOAN-LOSSES> 225
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 0
<INCOME-PRETAX> 577
<INCOME-PRE-EXTRAORDINARY> 577
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 342
<EPS-BASIC> 0.34
<EPS-DILUTED> 0.33
<YIELD-ACTUAL> 0.073
<LOANS-NON> 1,379
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (1,151)
<CHARGE-OFFS> 12
<RECOVERIES> 0
<ALLOWANCE-CLOSE> (1,364)
<ALLOWANCE-DOMESTIC> (1,364)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 321
</TABLE>
