<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 June 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 July 30, 1999.
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 June 30, 1999 (unaudited)
and December 31, 1998 3
Consolidated Statements of Operations for
the three months and six months ended June
30, 1999 and June 30, 1998 (unaudited) 4
Consolidated Statements of
Cash Flows for the six
months ended June 30, 1999
and June 30, 1998 (unaudited) 5
Notes to Consolidated Financial
Statements (unaudited) 7
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 8
PART II-OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults on Senior Securities 19
Item 4. Submission of Matters to a Vote
Of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
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BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ -------------
<S> <C> <C>
ASSETS:
Cash........................................................................... $ 4,974 $ 4,605
Federal funds sold............................................................. - 2,600
Investment securities held to maturity......................................... 10,622 8,622
Mortgage-backed securities held to maturity.................................... 14,733 12,096
Loans receivable, net.......................................................... 112,042 107,055
Loans receivable held for sale, at lower of cost or fair value................. 9,635 2,495
Accrued interest receivable.................................................... 992 888
Real estate acquired through foreclosure, net.................................. 730 222
Investments in capital stock of Federal Home Loan Bank, at cost................ 1,023 987
Office properties and equipment, net........................................... 6,038 5,360
Other assets................................................................... 961 721
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Total assets................................................................... $ 161,750 $ 145,651
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits....................................................................... $ 128,733 $ 125,998
Advance from Federal Home Loan Bank............................................ 18,000 4,500
Advance payments by borrowers for taxes and insurance.......................... 163 205
Other liabilities.............................................................. 1,333 1,395
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Total liabilities 148,229 132,098
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 June 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 June 30, 1999 and
December 31, 1998, respectively........................................ 10 10
Additional paid-in capital.................................................. 9,654 9,633
Retained earnings-substantially restricted.................................. 4,580 4,664
Treasury stock-29,241 shares at cost........................................ (318) (318)
Unearned Employee Stock Ownership Plan shares............................... (406) (437)
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Total stockholders' equity..................................................... 13,521 13,553
--------- ---------
Total liabilities and stockholders' equity $ 161,750 $ 145,651
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
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BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
1999 1998 1999 1998
------ ------- ------- -------
<S> <C> <C> <C> <C>
Interest on loans receivable................................. 2,349 $ 2,251 $ 4,604 $ 4,423
Interest on investment securities held-to-maturity........... 149 187 317 278
Interest on mortgage-backed securities held-to-maturity...... 234 58 438 107
Other interest income........................................ 14 15 29 30
----- ------ ------ ------
Total interest income........................................ 2,746 2,511 5,388 4,838
Interest on deposits......................................... 1,075 1,083 2,158 2,125
Interest on borrowings....................................... 122 10 179 13
----- ------ ----- -----
Total interest expense....................................... 1,197 1,093 2,337 2,138
----- ------ ----- -----
Net interest income before provision for loan losses......... 1,549 1,418 3,051 2,700
Provision for loan losses.................................... 75 75 150 150
----- ------ ----- -----
Net interest income after provision for loan losses.......... 1,474 1,343 2,901 2,550
Noninterest income:
Service charges......................................... 147 95 266 197
Gain (loss) on sale of loans receivable held for sale... (6) (5) (6) 14
Other................................................... 15 10 27 197
----- ------ ----- -----
Total noninterest income 156 100 287 408
----- ------ ----- -----
Noninterest expense:
Compensation and benefits............................... 649 648 1,426 1,341
Occupancy expense, net.................................. 340 302 597 582
Unrealized loss on loans receivable held for sale....... 110 - 110 -
Advertising and promotional expense..................... 55 42 101 79
Consulting service...................................... 31 12 50 34
Federal insurance premiums.............................. 28 25 55 50
Insurance bond premiums................................. 28 24 56 50
Real estate operations, net............................. 13 (1) 24 5
Contracted security services............................ 40 41 78 77
Litigation reserves..................................... 147 - 162 -
Telephone and postage................................... 36 25 75 47
Stationary, printing and supplies....................... 34 31 64 55
Other................................................... 231 151 355 245
----- ------ ----- -----
Total noninterest expense 1,742 1,300 3,153 2,565
----- ------ ----- -----
Earnings before income taxes................................. (112) 143 35 393
Income taxes................................................. (47) 59 13 164
----- ------ ----- -----
Net earnings................................................. (65) $ 84 $ 22 $ 229
====== ====== ===== =====
Earnings per share-basic..................................... ($ .08) $ .08 $ .01 $ .23
Earnings per share-diluted................................... ($ .08) $ .08 $ .01 $ .23
Dividend declared per share-common stock.................... $ .05 $ .05 $ .10 $ .10
</TABLE>
See Notes to Consolidated Financial Statements
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BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 22 $ 229
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation 186 87
Amortization of premium on loans purchased 59 -
Amortization of net deferred loan origination fees (3) (43)
Amortization of discounts and premium on securities 56 3
Amortization of deferred compensation 53 56
Federal Home Loan Bank stock dividends (36) (27)
Gain on sale of real estate acquired through foreclosure - (25)
Loss (gain) on sale of loans receivable held for sale 6 (14)
Gain on sale of office properties and equipment (2) (6)
Provision for loan losses 150 150
Provision for write-downs and losses on real estate acquired through foreclosure 6 17
Lower of cost or fair value on loans receivable held for sale 110 -
Loans originated for sale, net of refinances (8,461) (3,171)
Proceeds from sale of loans receivable held for sale 1,205 1,705
Changes in operating assets and liabilities:
Accrued interest receivable (104) (162)
Other assets (240) (54)
Deferred income taxes - (35)
Other liabilities (76) (594)
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Total adjustments (7,091) (2,113)
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Net cash used in operating activities (7,069) (1,884)
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CASH FLOWS FROM INVESTING ACTIVITIES
Loans originated, net of refinances (16,858) (3,018)
Loans purchased - (14,687)
Premium on loans purchased - (253)
Principal repayment on loans 11,165 11,495
Proceeds from sale of office properties and equipment 3 132
Purchases of investment securities held-to-maturity (4,500) (10,065)
Purchases of mortgage-backed securities held-to-maturity (4,595) -
Proceeds from maturities of investment securities held-to-
maturity 2,500 3,991
Proceeds from maturities of mortgage-backed securities held-
to-maturity 1,902 -
Capital expenditures for office properties and equipment (865) (703)
Proceeds from sale of real estate acquired through foreclosure - 948
------- -------
Net cash used in investing activities (11,248) (12,160)
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</TABLE>
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BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 2,735 7,484
Increase in advance from Federal Home Loan Bank 13,500 5,500
Dividends paid (107) (101)
Decrease in advances by borrowers
for taxes and insurance (42) (46)
------- -------
Net cash provided by financing activities 16,086 12,837
------- -------
Net decrease in cash and cash equivalents (2,231) (1,207)
Cash and cash equivalents at beginning of period 7,205 4,831
------- -------
Cash and cash equivalents at end of period $ 4,974 $ 3,624
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 2,291 $ 2,144
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
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BROADWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
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 June 30, 1999 and the results of
its operations for the three months and six months ended June 30, 1999
and 1998, and its cash flows for the six months ended June 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 six months ended June 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.
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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 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 June 30, 1999, Broadway Federal operated
five retail banking offices in Southern California.
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 reduction in the Company's net earnings for the first six months of 1999
is primarily attributable to higher legal costs, an increase in litigation
reserves, and fair value adjustments on loans held for sale.
To improve profitability, management is focused on three Bank operational
areas: net interest margin, noninterest expenses, and noninterest income.
NET INTEREST MARGIN
The Company's net interest margin increased by $351,000, or 13%, for the six
months ended June 30, 1999, as compared to the prior year. The increase in
net interest margin results from higher interest income from loans and
investments and the Company's continued focus on controlling interest expense.
The increase in mortgage interest income was fueled by substantial growth in
loan originations coupled with a slow down in loan pay offs. The Company
originated $25.2 million in loans for the six months ended June 30, 1999,
compared to $6.1 million for
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the same period ended June 30, 1998, and compared to $22.1 million for the
twelve month period ended December 31, 1998.
Interest income was also positively impacted by a 96% increase in investment
income, from $385,000 for the period ended June 30, 1998 to $755,000 for the
period ended June 30, 1999. Investment assets increased by 66% from $15.3
million as of June 30, 1998 to $25.4 million as of June 30, 1999, and have
increased by $4.6 million since December 31, 1998.
The Company funded its growth in investments and loans with a combination of
deposits and borrowings. Total deposits increased by $11.4 million, or 10%,
from $117.4 million as of June 30, 1998 to $128.7 million as of June 30,
l999. Advances from the Federal Home Loan Bank increased from $5.5 million as
of June 30, 1998 to $18.0 million as of June 30, 1999.
Management of the Company's net interest spread has involved investing in
higher yielding multifamily loans and reducing the rate paid on passbook
accounts. At June 30, 1999, passbook accounts totaled $29.4 million, or 22.8%
of total deposits.
NONINTEREST EXPENSE REDUCTION
Noninterest expense reduction efforts have included staff reductions and
closure of an in-store savings branch.
In early August, the Company initiated a staff reduction and realignment
plan, which resulted in the termination of five 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.
The Company has closed an in-store savings branch, located on Slauson Avenue
in Los Angeles, effective June 30, 1999. Branch deposits were transferred to
our Inglewood branch. The Company is also conducting an analysis of other
locations to determine the feasibility of additional branch closures.
NONINTEREST INCOME
The Company plans to improve noninterest income by selling new products and
services, fee increases and establishing new fees.
In early 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
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at 4429 Broadway in Los Angeles. The new location will house a Bank savings
branch, a newly established copy/postal center, and a check cashing store
that is projected to open in the first quarter of 2000.
The Company experienced a substantial increase in service charge revenues.
Service charges increased by 55% during the three-month period ended June 30,
1999, as compared to the same period in 1998. The Company has enhanced its
data systems and computer equipment to meet Year 2000 requirements; these
enhancements have resulted in the identification and implementation of new
fee income sources, such as charging ATM fees to non-Bank customers.
Management plans to explore areas for additional fee increases and for
implementation of new fees.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 1999 AND JUNE 30, 1998
GENERAL
The Company recorded a net loss of $65,000, or $0.08 per diluted share, for
the three months ended June 30, 1999, as compared to net earnings of $84,000,
or $0.08 per diluted share, for the three months ended June 30, 1998. For the
six months ended June 30, 1999 the Company recorded net earnings of $22,000,
or $0.01 per diluted share, as compared to net earnings of $229,000, or $0.23
per diluted share, for the same period ended June 30, 1998. The decrease in
net earnings for the first six months from 1998 to 1999 resulted primarily
from increased noninterest expense and lower noninterest income, offset by
higher net interest income.
INTEREST INCOME
Interest income increased by $235,000 during the three months ended June 30,
1999 as compared to the same period in 1998. For the six months ended June
30, 1999 interest income increased by$550,000 as compared to the same period
in 1998. These increases were primarily the result of increases in average
assets of $21.6 million and $21.2 million for the three months and six months
ended June 30, 1999, respectively, as compared to the same periods in 1998.
The increase in assets during the three months and six months ended June 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.
INTEREST EXPENSE
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Interest expense increased by $104,000 during the three months ended June 30,
1999 as compared to the same period in 1998. For the six months ended June
30, 1999 interest expense increased by $199,000 as compared to the same
period in 1998. The increases were largely in interest on borrowings as
average borrowings increased by $9.8 million and $7.5 million for the three
months and six months ended June 30, 1999 as compared to the same periods in
1998. The average cost of deposits decreased 26-basis points, from 3.70% for
the six months ended June 30, 1998 to 3.44% for the six months ended June 30,
1999.
PROVISION FOR LOAN LOSSES
The provision for loan losses totaled $75,000 and $150,000 for each of the
three months and six months ended June 30, 1999 and June 30, 1998,
respectively.
Total non-performing assets, consisting of non-accrual loans and real estate
acquired through foreclosure ("REO"), increased by $563,000, from $1.6
million at June 30, 1998 to $2.1 million at June 30, 1999. The increase
resulted from an increase in non-accrual loans of $515,000 and an increase in
REO of $48,000. As a percentage of total assets, non-performing assets were
1.33% at June 30, 1999, compared to 1.15% and 0.90% at June 30, 1998 and
December 31, 1998, respectively. Non-accrual loans increased by $327,000
during the first six months to $1.4 million, and REO increased by $508,000,
to $730,000. Non-accrual loans at June 30, 1999 included seven loans totaling
$669,000 secured by one- to four-unit properties and three loans totaling
$748,000 secured by multi-family properties. REO at June 30, 1999 included
four single family properties with book values totaling $514,000, 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 $142,000 allowance for REO.
As of June 30, 1999 the Company's allowance for loan losses totaled $1.3
million, representing a $150,000 increase from the balance at December 31,
1998. The allowance for loan losses represents 1.05% of total loans at June
30, 1999 compared to 1.03% at December 31, 1998. The allowance for loan
losses was 91.81% of non-accrual loans at June 30, 1999 compared to 105.60%
at December 31, 1998. There were no loan charge-offs or recoveries for the
six months ended June 30, 1999.
Management believes that the allowance for loan losses is adequate to cover
inherent losses in its loan portfolio as of June 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 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.
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NONINTEREST INCOME
Noninterest income increased by $56,000 for the three- month period ended
June 30, 1999 as compared to the same period during 1998. For the six-month
period ended June 30, 1999 noninterest income decreased by $121,000. Service
charges increased by $52,000 and $69,000 during the three-month and six-month
periods ended June 30, 1999 as compared to the same periods in 1998. The
increase resulted primarily from increased fees charged on various savings
products and from a greater number of checking accounts at June 30, 1999 as
compared to June 30, 1998. The Company reported a $6,000 loss on sale of
mortgage loans for the three-month and six-month periods ended June 30, 1999
as compared to a $5,000 loss and a $14,000 gain on sale of mortgage loans for
the same periods in 1998. Finally, other noninterest income increased by
$5,000, from $10,000 for the three months ended June 30, 1998 to $15,000 for
the same period in 1999. For the six months ended June 30, 1999 other
noninterest income decreased by $170,000, from $197,000 for the six months
ended June 30, 1998 to $27,000 for the same period during 1999. The decrease
resulted from the reversal in the 1998 period of a $170,000 accrual that had
been set up for interest and penalties on funds escheated to the State of
California in 1992.
NONINTEREST EXPENSE
Noninterest expense increased by $442,000 and $588,000, respectively, during
the three-month and six-month periods ended June 30, 1999 as compared to the
same periods in 1998. The increase in noninterest expense was due primarily
to increases in compensation and benefits, an unrealized loss on loans
receivable held for sale, and accruals for litigation and other expenses.
Compensation and benefits increased by $1,000 and $85,000, respectively, for
the three-month and six-month periods ended June 30, 1999 as compared to the
same periods in 1998. The increases resulted from the accrual of vested stock
grants and an increase in the number of employees, offset by a reversal of
accrued bonuses during the second quarter of 1999. The increase in unrealized
loss on loans receivable held for sale was caused by changes in market
conditions at June 30, 1999. The accrual for litigation increased by $147,000
and $162,000, respectively, during the three-month and six-month periods
ended June 30, 1999 as compared to the same periods in 1998. The increases
were due to the accrual of estimated legal settlement loss. Other noninterest
expense increased by $80,000 and $110,000, respectively, for the three-month
and six-month periods ended June 30, 1999 as compared to the same periods
during 1998. The increases were primarily caused by an increase in legal fees
incurred during the period.
INCOME TAXES
Income tax expense decreased by $106,000 and $151,000, respectively, for the
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three-month and six-month periods ended June 30, 1999 as compared to the same
periods in 1998. The decreases in income taxes were the result of lower
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 JUNE 30, 1999 AND DECEMBER 31, 1998
Total assets at June 30, 1999 were $161.7 million compared to $145.7 million
at December 31, 1998, representing an increase of $16.0 million. Net loans
receivable increased from $107.0 million at December 31, 1998 to $112.0
million at June 30, 1999 as a result of $25.2 million in new loan
originations, offset by $11.2 million in principal repayments, $500,000 in
loans transferred to foreclosure and $8.5 million in loans originated and
classified as held for sale. Loans held for sale at June 30, 1999 totaled
$9.6 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 six months ended June 30, 1999, loans sold totaled $1.2 million.
Office properties and equipment increased from $5.4 million at December 31,
1998 to $6.0 million at June 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 June 30, 1999 were $148.2 million compared to $132.1
million at December 31, 1998. The $16.1 million increase is primarily
attributable to the increase in deposits and Federal Home Loan Bank advances,
offset by a decrease in advance payments by borrowers and other liabilities.
As compared to total capital at December 31, 1998, total capital at June 30,
1999 decreased $32,000, to $13.5 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
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conditions, and competition. Broadway Federal's average liquidity ratios were
20.05% and 13.43% for the period ended June 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 June 30, 1999 and 1998 FHLB advances totaled $18.0 million and $5.5
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, that is, the risk
that the interest rates it receives on loans and securities investments may
change at different times or in different degrees than the interest rates it
pays on its customer deposits and on its borrowings. The composition of the
Company's financial instruments that subject it to market risk has not
changed significantly since December 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 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 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
June 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 June 30,
for Broadway Federal Requirement Requirement 1999
- ------------------------- ------------- ------------------ -----------
<S> <C> <C> <C>
Tangible capital 1.50% N/A 7.07%
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Core capital 3.00% 5.00% 7.07%
Risk-based capital 8.00% 10.00% 13.96%
Tier 1 Risk-based capital N/A 6.00% 13.00%
</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 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 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
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<PAGE>
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-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 is complete. The testing of third-party vendors and service
providers is 99% complete. Testing of all mission-critical 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 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 $478,000, of which $46,000
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
-16-
<PAGE>
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 principal 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 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 are currently in the testing phase. Testing is expected to be
completed by September 1, 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
-17-
<PAGE>
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.
-18-
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company was held on June 16, 1999
for the following purposes:
(a) To elect three directors to serve until the Annual Meeting to
be held in the year 2002 or until their successors are
elected and have been qualified:
The stockholders reelected Messrs. A Odell Maddox, Lyle
Marshall and Daniel A. Medina to serve as directors for terms
of three years each. The number of votes FOR and those
WITHHELD for each of the directors is detailed below:
Mr. A. ODELL MADDOX
For 477,863
Withheld 2,900
Mr. LYLE MARSHALL
For 478,572
Withheld 2,191
Mr. DANIEL A. MEDINA
For 479,445
Withheld 1,318
(b) To ratify the appointment of KPMG LLP as the Company's
-19-
<PAGE>
independent auditing firm for 1999 and 2000.
The stockholders ratified the appointment of independent
auditors based upon total votes FOR of 480,427, 216 AGAINST
and total ABSTENTIONS of 120 .
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1-Financial Data Schedule
(b) Reports on Form 8-K
None
-20-
<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: August 11, 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
-21-
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,888
<INT-BEARING-DEPOSITS> 86
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 25,355
<INVESTMENTS-MARKET> 25,019
<LOANS> 122,978
<ALLOWANCE> (1,301)
<TOTAL-ASSETS> 161,750
<DEPOSITS> 128,733
<SHORT-TERM> 18,000
<LIABILITIES-OTHER> 1,496
<LONG-TERM> 0
0
552
<COMMON> 9,113
<OTHER-SE> (724)
<TOTAL-LIABILITIES-AND-EQUITY> 161,750
<INTEREST-LOAN> 4,604
<INTEREST-INVEST> 755
<INTEREST-OTHER> 29
<INTEREST-TOTAL> 5,388
<INTEREST-DEPOSIT> 2,158
<INTEREST-EXPENSE> 2,337
<INTEREST-INCOME-NET> 3,051
<LOAN-LOSSES> 150
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 0
<INCOME-PRETAX> 35
<INCOME-PRE-EXTRAORDINARY> 35
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
<YIELD-ACTUAL> 0.073
<LOANS-NON> 1,417
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (1,151)
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> (1,301)
<ALLOWANCE-DOMESTIC> (1,301)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 210
</TABLE>
