UNITED STATES
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, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
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 or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
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: 1,831,161 shares of the Company's
Common Stock, par value $0.01 per share, were issued and outstanding as of
October 31, 2003.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [x]
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
As of September 30, 2003 and December 31, 2002 3
Consolidated Statements of Operations and
Comprehensive Earnings (unaudited) for the three
and nine months ended September 30, 2003 and 2002 4
Consolidated Statements of Cash Flows
(unaudited) for the nine months ended
September 30, 2003 and 2002 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Disclosure Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
2
BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
(Unaudited)
September 30, December 31,
2003 2002
Assets:
Cash $ 4,264 $ 3,859
Federal funds sold 6,900 1,500
Interest bearing deposits - 1,028
Investment securities held to maturity 2,996 2,000
Investment securities available for sale - 5,007
Mortgage-backed securities held to maturity 7,327 10,843
Mortgage-backed securities available for sale 20,843 27,697
Loans receivable, net 160,585 140,085
Loans receivable held for sale, at lower of cost or fair value 1,852 3,770
Accrued interest receivable 932 995
Investment in capital stock of the Federal Home Loan Bank, at cost 1,771 1,561
Office properties and equipment, net 5,664 5,811
Other assets 8,579 750
Total assets $ 221,713 $ 204,906
Liabilities and stockholders' equity
Deposits $ 167,285 $ 156,148
Advances from the Federal Home Loan Bank 31,071 28,724
Advance payments by borrowers for taxes and insurance 533 311
Deferred income taxes 906 931
Other liabilities 4,004 1,871
Total liabilities 203,799 187,985
Stockholders' Equity:
Preferred non-convertible, non-cumulative, and non-voting stock, $.01 par
value, authorized 1,000,000 shares; issued and outstanding 155,199
shares at September 30, 2003 and December 31, 2002 2 2
Common stock, $.01 par value, authorized 3,000,000 shares; issued and
outstanding 1,831,485 shares at September 30, 2003 and 1,815,294
shares at December 31, 2002 10 10
Additional paid-in capital 10,501 10,512
Accumulated other comprehensive gain, net of taxes 26 57
Retained earnings-substantially restricted 7,844 7,005
Treasury stock-at cost, 37,457 shares at September 30, 2003 and 53,648
shares at December 31, 2002 (363) (520)
Unearned Employee Stock Ownership Plan shares (106) (145)
Total stockholders' equity 17,914 16,921
Total liabilities and stockholders' equity $ 221,713 $ 204,906
See Notes to Unaudited Consolidated Financial Statements.
3
BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Interest on loans receivable $ 2,556 $ 2,644 $ 7,669 $ 8,220
Interest on investment securities held to maturity 26 40 84 129
Interest on investment securities available for sale 7 92 52 182
Interest on mortgage-backed securities 345 208 1,153 612
Other interest income 27 36 102 131
Total interest income 2,961 3,020 9,060 9,274
Interest on deposits 730 887 2,315 2,900
Interest on borrowings 194 135 556 386
Total interest expense 924 1,022 2,871 3,286
Net interest income before provision for loan losses 2,037 1,998 6,189 5,988
Provision for loan losses - - - -
Net interest income after provision for loan losses 2,037 1,998 6,189 5,988
Noninterest income:
Service charges 255 186 773 574
Gain on loans receivable held for sale - - 18 -
Other 102 38 112 62
Total noninterest income 357 224 903 636
Noninterest expense:
Compensation and benefits 1,038 898 2,986 2,717
Occupancy expense, net 152 108 795 765
Information services 267 282 434 472
Professional services 104 123 372 322
Office services and supplies 103 100 315 295
Other 129 82 411 337
Total noninterest expense 1,793 1,593 5,313 4,908
Earnings before income taxes 601 629 1,779 1,716
Income taxes 222 189 680 628
Net earnings $ 379 $ 440 $ 1,099 $ 1,088
Other comprehensive income (loss):
Unrealized income (loss) on securities available for sale $ (545) $ (43) $ (141)$ (11)
Less: reclassification of realized net gains included
in net earnings 85 19 85 24
Income tax benefit (expense) 179 10 25 (5)
Other comprehensive income (loss) (281) (14) (31) 8
Comprehensive earnings $ 98 $ 426 $ 1,068 $ 1,096
Net earnings 379 440 1,099 1,088
Dividends paid on preferred stock (19) (7) (58) (21)
Earnings available to common shareholders $ 360 $ 433 $ 1,041 $ $ 1,067
Earnings per share-basic $ 0.20 $ 0.24 $ 0.58 $ 0.60
Earnings per share-diluted $ 0.19 $ 0.24 $ 0.55 $ 0.59
Dividend declared per share-common stock $ 0.04 $ 0.03 $ 0.11 $ 0.08
Basic weighted average shares outstanding 1,802,204 1,776,008 1,794,726 1,779,612
Diluted weighted average shares outstanding 1,908,887 1,813,192 1,894,614 1,805,718
See Notes to Unaudited Consolidated Financial Statements.
4
BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine months ended September 30,
2003 2002
Cash flows from operating activities
Net earnings $ 1,099 $ 1,088
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation 273 304
Amortization of premiums and (accretion) of discounts on
loans purchased 89 (145)
Amortization of net deferred loan origination fees (69) (221)
Amortization of discounts and premiums on investment securities
and mortgage-backed securities 312 132
Amortization of deferred compensation 97 64
Gain on sale of securities available for sale (85) (24)
Gain on sale of loans receivable held for sale (18) -
(Gain) Loss on disposal of fixed assets (1) 53
Loans originated for sale (2,732) (679)
Proceeds from sale of loans receivable held for sale 1,481 795
Changes in operating assets and liabilities:
Accrued interest receivable 63 8
Other assets (7,829) (251)
Other liabilities 2,133 752
Net cash provided by (used in) operating activities (5,187) 1,876
Cash flows from investing activities
Loans originated, net of refinances (35,362) (18,855)
Principal repayment on loans 36,038 21,754
Purchase of loans (18,009) (820)
Purchases of investment securities held to maturity (996) (2,000)
Purchases of investment securities availablefor sale (23,000) (27,128)
Purchases of mortgage-backed securities held to maturity - (2,093)
Purchases of mortgage-backed securities available for sale (17,373) -
Proceeds from maturities of interest bearing deposits 1,028 4,000
Proceeds from maturities of mortgage-backed securities held
to maturity 3,389 3,471
Proceeds from sale of securities available for sale 27,990 10,544
Proceeds from sale of mortgage-backed securities available for sale 14,467 -
Principal repayments on mortgage-backed securities
available for sale 9,621 -
Purchase of Federal Home Loan Bank stock (210) (60)
Proceeds from sale of fixed assets 35 10
Capital expenditures for office properties and equipment (160) (221)
Net cash used in investing activities (2,542) (11,398)
See accompanying notes to unaudited consolidated financial statements.
5
BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
(Unaudited)
Nine months ended September 30,
2003 2002
Cash flows from financing activities
Net increase in deposits 11,137 5,059
Increase in advances from Federal Home Loan Bank 2,347 4,750
Dividends paid (260) (153)
Purchases of treasury stock - (83)
Stock options exercised 88 24
Increase in advances by borrowers for taxes and insurance 222 329
Net cash provided by financing activities 13,534 9,926
Net increase in cash and cash equivalents 5,805 404
Cash and cash equivalents at beginning of period 5,359 5,239
Cash and cash equivalents at end of period $ 11,164 $ 5,643
Supplemental disclosures of cash flow information:
Cash paid for interest $ 2,854 $ 3,453
Cash paid for income taxes $ 582 $ 568
Supplemental disclosure of noncash investing and
financing activities
Transfers of loans to real estate acquired through foreclosure $ - $ 107
Transfers of loans from held for sale to held for investment $ 3,184 $ -
See accompanying notes to unaudited consolidated financial statements.
6
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
NOTE (1) - Basis of Financial Statement Presentation
The unaudited consolidated financial statements included herein have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial statements and pursuant to the
instructions for Form 10-QSB and the rules and regulations of the Securities and
Exchange Commission. In the opinion of the management of Broadway Financial
Corporation (the "Company"), the preceding unaudited consolidated financial
statements contain all material adjustments, consisting solely of normal
recurring accruals, necessary to present fairly the consolidated financial
position of the Company and its subsidiaries at September 30, 2003 and December
31, 2002, the results of their operations and comprehensive earnings for the
three and nine months ended September 30, 2003 and 2002 and their cash flows for
the nine months ended September 30, 2003 and 2002. These unaudited 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, 2002 and, accordingly, should be
read in conjunction with such audited financial statements. The results of
operations for the three and nine months ended September 30, 2003 are not
necessarily indicative of the results to be expected for the full year.
NOTE (2) - Earnings Per Share
Basic earnings per share is determined by dividing net earnings available to
common shareholders by the weighted average number of shares of Common Stock
outstanding for the period (1,802,204 and 1,776,008 shares for the three months
ended September 30, 2003 and 2002, and 1,794,726 and 1,779,612 for the nine
months ended September 30, 2003 and 2002, respectively). Diluted earnings per
share is determined by dividing net earnings available to common shareholders by
the weighted average number of shares of Common Stock outstanding for the
period, adjusted for the dilutive effect of Common Stock equivalents, (1,908,887
and 1,813,192 shares for the three months ended September 30, 2003 and 2002, and
1,894,614 and 1,805,718 for the nine months ended September 30, 2003 and 2002,
respectively).
NOTE (3) - Cash and Cash Equivalents
For purposes of reporting cash flows in the "Consolidated Statements of Cash
Flows", cash and cash equivalents include cash and federal funds sold.
7
BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS -CONTINUED
SEPTEMBER 30, 2003
NOTE (4) - Current Accounting Pronouncements
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS 133. In particular, SFAS
149 clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative and when a derivative contains a
financing component that warrants special reporting in the statement of cash
flows. SFAS 149 is generally effective for contracts entered into or modified
after June 30, 2003. Management anticipates the adoption of SFAS 149 will have
no impact on the Company's consolidated financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, " Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150") which establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity that have been presented either
entirely as equity or between the liabilities section and equity section of the
statement of financial position. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. Management
anticipates the adoption of SFAS 150 will have no impact on the Company's
consolidated financial statements.
Financial Accounting Standards Board Interpretation 46, provides guidance to
improve financial reporting for SPEs, Off-Balance Sheet Structures and Similar
Entities" ("FIN 46"), and requires a variable interest entity to be consolidated
by a company if that company is subject to a majority of the risk of loss from
the variable interest entity's activities or is entitled to receive a majority
of the entity's residual returns or both. Prior to FIN 46, a company included
another entity in its consolidated financial statements only if it controlled
the entity through voting interests. FIN 46 also requires disclosures about
variable interest entities that the company is not required to consolidate but
in which it has a significant variable interest. The consolidation requirements
of FIN 46 apply immediately to variable interest entities created after January
31, 2003. The FASB deferred the effective date for applying the provision of FIN
46 for interests held by public entities in variable interest entities or
potential variable interest entities created before February 1, 2003 until the
end of the first interim or annual period after December 15, 2003. Certain
disclosure requirements apply in all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established. The
Company has no business interests that require consolidation or deconsolidation
as a result of applying the provisions of FIN 46.
8
NOTE (5) - Stock-based Compensation Plans
The Company has stock-based compensation plans (the "Plans"), which provide for
the granting of stock options, stock appreciation rights and restricted stock to
employees and directors. The Plans authorize 428,050 shares (adjusted for stock
dividends and splits) of Common Stock to be available for issuance under the
Plans. Stock options granted under the Plans are exercisable over vesting
periods specified in each Plan and, unless exercised, the options terminate ten
years from the date of the grant. The option price must be no less than the fair
market value of the underlying shares on the date the options are granted. At
September 30, 2003, the Company had 37,457 shares of treasury stock that may be
issued on the exercise of options or for payment of other awards.
The Company measures its employee stock-based compensation arrangements under
the provisions of Accounting Principles Board Option No. 25, "Accounting for
Stock Issued to Employees ("APB 25"). Accordingly, no compensation expense has
been recognized for the Plans, as stock options were granted at fair value at
the date of grant. Had compensation expense for the Plans been determined based
on the fair value method provision of the Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" for previous awards,
the Company's net earnings and earnings per share would have been reduced to the
pro forma amounts indicated for the quarters below:
Three months ended Nine months ended
September 30, September 30,
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
Net Earnings:
As reported $379,000 $440,000 $1,099,000 $1,088,000
Deduct:
Stock-based compensation
expense, net of tax 14,000 17,000 42,000 38,000
-------- -------- ----------- ----------
Pro forma $365,000 $423,000 $1,057,000 $1,050,000
======== ======== ========== ==========
Earnings per share - Basic:
As reported $0.20 $0.24 $0.58 $0.60
Pro forma $0.19 $0.23 $0.56 $0.58
Earnings per share - Diluted:
As reported $0.19 $0.24 $0.55 $0.59
Pro forma $0.18 $0.23 $0.53 $0.57
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements under this caption may constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995, which
involve risks and uncertainties. Actual results may differ significantly from
the results discussed in such forward-looking statements. Factors that may cause
such a difference include, but are not limited to, economic conditions,
competition in the geographic and business areas in which operations are
conducted, fluctuations in the interest rates, credit quality and government
regulation.
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" or "the Bank"). Broadway Federal is a
community-oriented savings institution dedicated to serving the
African-American, Hispanic and other communities of Mid-City and South Los
Angeles, California. 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, 2003, Broadway Federal operated four retail-banking
offices in Mid-City and South Los Angeles. Broadway Federal is subject to
significant competition from other financial institutions, and is also subject
to regulation by federal agencies and undergoes periodic examinations by those
regulatory agencies.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Broadway Federal and BankSmart, Inc.
(a dormant company). All significant inter-company balances and transactions
have been eliminated in consolidation.
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 paid 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 affected by the amount of provisions for loan losses and
the Bank's non-interest expenses, which consist principally of employee
compensation and benefits, occupancy expenses, and technology and communication
costs. 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.
10
Critical Accounting Policy
Accounting for the allowance for loan losses involves significant judgments and
assumptions by management, which have a material impact on the carrying value of
net loans receivable. Management considers this accounting policy to be a
critical accounting policy. The judgments and assumptions used by management are
based on historical experience, current economic trends, the Company's
assessment of the borrowers' ability to repay and repayment performance, and
other factors, which are believed to be reasonable under the circumstances as
described under the heading "Loans Receivable and the Allowance for Loan Losses"
in the Notes to Consolidated Financial Statements included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2002.
Comparison of Operating Results for the Three Months and Nine Months ended
September 30, 2003 and September 30, 2002
General
The Company recorded net earnings of $379,000 and $1,099,000, or $0.19 and $0.55
per diluted share, respectively, for the three and nine months ended September
30, 2003, compared to $440,000 and $1,088,000, or $0.24 and $0.59 per diluted
share, respectively, for the three and nine months ended September 30, 2002.
Compared to 2002, third quarter net earnings decreased 13.86% and net earnings
for the nine months increased 1.01%.
Net Earnings
The change in net earnings in 2003 over 2002 was primarily attributable to the
increase in net interest income and non-interest income, offset by an increase
in non-interest expense. Net interest income after provision for loan losses
increased $39,000 and $201,000, or 1.95% and 3.36%, respectively, for the three
and nine months ended September 30, 2003 compared to the same periods in 2002.
Non-interest income increased $133,000 and $267,000, or 59.38% and 41.98%,
respectively, for the three and nine months ended September 30, 2003 compared to
the same periods in 2002. Non-interest expense increased $200,000 and $405,000,
or 12.55% and 8.25%, respectively, for the three and nine months ended September
30, 2003 compared to the same periods in 2002.
Net Interest Income
Net interest income after provision for loan losses increased to $2,037,000 and
$6,189,000 for the three and nine months ended September 30, 2003, from
$1,998,000 and $5,988,000 for the same periods in 2002. A nine month rate/volume
analysis indicates that the $201,000 increase was primarily attributable to the
impact of the growth in average interest-earning assets of $32.9 million, or
19.02%, and interest-bearing liabilities of $30.8 million, or 18.85%, which
resulted in an increase in net interest income of $1,080,000 (volume impact),
offset by the impact of a decrease in the net interest rate spread of 57 basis
points, which resulted in a decrease in net interest income of $879,000 (rate
impact).
11
Loan originations were $18.8 million and $37.8 million for the three and nine
months ended September 30, 2003 compared to $7.0 million and $20.4 million for
the same periods in 2002. Loan purchases totaled $3.8 million and $17.8 million
for the three and nine months ended September 30, 2003, compared to $820,000 and
$820,000 for the same periods in 2002. Mortgage-backed securities ("MBS")
purchases were $3.4 million and $15.4 million for the three and nine months
ended September 30, 2003 compared to $5.0 million and $9.0 million for the same
periods in 2002. Loan prepayments amounted to $12.9 million and $36.0 million
for the three and nine months ended September 30, 2003 compared to $6.8 million
and $21.8 million for the same periods in 2002. In the current low interest rate
environment, prepayments are not expected to abate until interest rates rise
significantly, and therefore management is focusing on increasing loan volume
through originations and purchases. Loans receivable, net grew $20.5 million
since December 31, 2002, and reflects the improvements made by management in the
Bank's loan product offerings as well as in its efficiency in service to new
loan customers.
Interest-bearing liabilities increased $2.7 million during the third quarter of
2003. The increase was primarily attributable to the net effect of an increase
in deposits of $3.8 million and a decrease in Federal Home Loan Bank ("FHLB")
advances of $1.1 million. For the nine months ended September 30, 2003,
interest-bearing liabilities increased $13.5 million, comprised of an $11.1
million increase in deposits and a $2.4 million increase in FHLB advances.
The net interest rate spread for the three and nine months ended September 30,
2003 was 3.78% and 3.90%, respectively, compared to 4.39% and 4.47%,
respectively, for the same periods in 2002. The 61 and 57 basis point decrease
in spread was attributable to the larger decline in the weighted average yield
on the loan portfolio compared to the decline in the weighted average cost of
funds on interest-bearing liabilities. The yield on interest-earning assets
declined 120 and 128 basis points to 5.65% and 5.87%, respectively, for the
three and nine months ended September 30, 2003 from 6.85% and 7.15%,
respectively, for the same periods in 2002. The weighted average cost of funds
declined to 1.88% and 1.97%, respectively, for the three and nine months ended
September 30, 2003 compared to 2.46% and 2.68% for the same periods in 2002. The
primary spread (weighted average interest rate on loans minus weighted average
interest rate on deposits) at September 30, 2003 was 4.62% compared to 4.76% at
September 30, 2002, a decline of 14 basis points.
Provision for Loan Losses
As of September 30, 2003, the Company's allowance for loan losses totaled $1.4
million, unchanged from the balance at December 31, 2002. The allowance for loan
losses represents 0.87% of gross loans at September 30, 2003, compared to 0.98%
at December 31, 2002.
Total non-performing assets, consisting of non-accrual loans and real estate
acquired through foreclosure ("REO"), decreased by $55,000, to $80,000 at
September 30, 2003 from $135,000 at December 31, 2002. Non-accrual loans at
September 30, 2003 consisted of one loan totaling $80,000 secured by a
single-family dwelling. There was no REO as of September 30, 2003 and December
31, 2002. As a percentage of total assets, non-performing assets were 0.04% at
September 30, 2003, compared to 0.07% at December 31, 2002.
12
Management believes that the allowance for loan losses is adequate to cover
inherent losses in Broadway Federal's loan portfolio as of September 30, 2003,
but there can be no assurance that actual losses will not exceed the estimated
amounts. In addition, the Office of Thrift Supervision ("OTS") and the Federal
Deposit Insurance Corporation periodically review Broadway Federal's allowance
for loan losses as an integral part of their examination process. These agencies
may require Broadway Federal to increase the allowance for loan losses based on
their judgments of the information available to them at the time of their
examination.
Non-interest Income
Total non-interest income increased to $357,000 and $903,000 for the three and
nine months ended September 30, 2003, from $224,000 and $636,000 for the same
periods in 2002. The $133,000 increase for the third quarter was primarily
attributable to an increase in loan fees and service charges, and net gains on
sale of investments and MBS available for sale.
Non-interest Expense
Total non-interest expense increased to $1,793,000 and $5,313,000 for the three
and nine months ended September 30, 2003, from $1,593,000 and $4,908,000 for the
same periods in 2002. The $200,000 increase in the third quarter from 2002 to
2003 was primarily attributable to an increase in compensation and benefits
costs and occupancy expenses.
Loans Receivable, Net
Loans receivable, net increased $20.5 million, or 14.6%, to $160.6 million at
September 30, 2003 from $140.1 million at December 31, 2002. During the nine
months ended September 30, 2003, the Bank purchased $17.8 million of adjustable
rate mortgage loans having an initial fixed rate period ("hybrid ARMs"). This
purchase of hybrid ARMs, along with loan originations, offset the combined
negative effect of a decline in the yield on the loan portfolio and the
continuing high level of loan prepayments.
Deposits
Total deposits increased $11.1 million, or 7.11%, to $167.2 million from $156.1
million at December 31, 2002. Core deposits (NOW, demand, money market and
passbook accounts) increased by $1.2 million during the third quarter of 2003.
At September 30, 2003 core deposits represented 44.6% of total deposits,
compared to 40.4% at December 31, 2002, and 39.4% at September 30, 2002.
Management has focused on increasing core deposit customers and closely managing
the cost of deposits. Management expects deposit growth to be the primary source
of funds for loan growth and plans to aggressively market deposit products to
targeted customers.
13
Capital
Total capital at September 30, 2003 was $17.9 million, compared to $16.9 million
at December 31, 2002. The increase was primarily due to net earnings for the
period.
Performance Ratios
For the three months ended September 30, 2003, the Company's return on average
equity declined to 8.49% compared to 11.39% for the same period in 2002. The
return on average assets also declined to 0.69% for the three months ended
September 30, 2003 compared to 0.95% for the same period in 2002. The ratio of
non-interest expense to average assets improved to 3.28% for the three months
ended September 30, 2003 compared to 3.46% for the same period in 2002. The
efficiency ratio (total non-interest expense divided by the sum of net interest
income before provision for loan losses and non-interest income) increased to
74.90% in third quarter 2003 compared to 71.69% in third quarter 2002.
Income Taxes
The Company's effective tax rate was approximately 37% and 38% for the three
months and nine months ended September 30, 2003, compared to 30% and 37% for the
same periods in the prior year. Income taxes are computed by applying the
statutory federal income tax rate of 34% and the California income tax rate of
10.84% to earnings before income taxes. California income taxes are reduced by
tax credits relating to the California Enterprise Zone Incentive, which were
substantially higher in 2002.
Liquidity, Capital Resources and Market Risk
Sources of liquidity and capital for the Company on a stand-alone basis include
distributions from the Bank and the issuance of equity securities such as the
preferred stock issued in 2002. Dividends and other capital distributions from
the Bank are subject to regulatory restrictions.
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed securities and investments, and advances from
the Federal Home Loan Bank of San Francisco. Other sources of liquidity include
principal repayments on mortgage-backed securities and other investments, and
contributions of capital by the Company. During the first quarter of 2003, the
Company contributed $1 million to the Bank, which was raised from the issuance
of preferred stock to Fannie Mae.
Since December 31, 2002, there has been no material change in the Company's
interest rate sensitivity. For a discussion on the Company's interest rate
sensitivity and market risk, see the Company's annual report on Form 10-KSB for
the year ended December 31, 2002, including the Company's audited financial
statements and the notes thereto.
14
Regulatory Capital
The OTS capital regulations include three separate minimum capital requirements
for savings institutions that are 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
that core capital (tangible capital plus certain qualifying intangible assets)
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 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, 2003, and met 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:
FIRREA FDICIA Actual
Regulatory Capital Ratios Minimum "Well-capitalized" At September 30,
for Broadway Federal Requirement Requirement 2003
-------------------------- ----------- ------------------ ----------------
Tangible capital 1.50% N/A 7.53%
Core capital 4.00% 5.00% 7.53%
Total risk-based capital 8.00% 10.00% 13.19%
Tier 1 risk-based capital N/A 6.00% 12.14%
ITEM 3. DISCLOSURE CONTROLS AND PROCEDURES
As of September 30, 2003, an evaluation was performed under the supervision of
the Company's Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO") of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's CEO
and CFO concluded that the Company's disclosure controls and procedures were
effective as of September 30, 2003. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect these controls subsequent to September 30, 2003.
15
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31 - Certifications pursuant to Rules 13a-14 or 15d-14 of the
Securities Exchange Act of 1934 as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
Exhibit 32 - Certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On October 29, 2003, the Company filed a current report on Form 8-K,
pursuant to which it furnished to the Securities and Exchange
Commission a copy of the Company's press release regarding financial
results for the third fiscal quarter of 2003.
16
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized
Date: November 13, 2003 By: /s/ PAUL C. HUDSON
Paul C. Hudson
President and Chief Executive Officer
Broadway Financial Corporation
Date: November 13, 2003 By: /s/ ALVIN D. KANG
Alvin D. Kang
Chief Financial Officer
Broadway Financial Corporation
17
Exhibit 31
SECTION 302 CERTIFICATION
I, Paul C. Hudson, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Broadway Financial
Corporation ( the "Company").
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Broadway Financial Corporation as of, and for, the periods presented in
this report.
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e) for the Company and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Company, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the Company's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation;
c) Disclosed in this report any changes in the Company's internal control
over financial reporting that occurred during the Company's most
recent fiscal quarter (the Company's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over
financial reporting; and
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
Company's auditors and the audit committee of the Company's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the Company's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
control over financial reporting.
Date: November 13, 2003
/s/ Paul C. Hudson
Signature
Paul C. Hudson
Chief Executive Officer
Broadway Financial Corporation
18
SECTION 302 CERTIFICATION
I, Alvin D. Kang, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Broadway Financial
Corporation (the "Company").
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Broadway Financial Corporation as of, and for, the periods presented in
this report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e) for the Company and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Company, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the Company's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation;
c) Disclosed in this report any changes in the Company's internal control
over financial reporting that occurred during the Company's most
recent fiscal quarter (the Company's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over
financial reporting; and
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
Company's auditors and the audit committee of the Company's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the Company's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
control over financial reporting.
Date: November 13, 2003
/s/ Alvin D. Kang
Signature
Alvin D. Kang
Chief Financial Officer
Broadway Financial Corporation
19
Exhibit 32
Section 906 Certification
Broadway Financial Corporation is furnishing to the Securities and Exchange
Commission pursuant to the requirements of Form 10-QSB the following
Certification provided by the undersigned to accompany the foregoing Report on
Form 10-QSB pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section
906 of the Sarbanes-Oxley Act of 2002.
Each of the undersigned certifies that the foregoing Report on Form 10-QSB fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. Section 78m) and that the information contained
in the Form 10-QSB fairly presents, in all material respects, the financial
condition and results of operations of Broadway Financial Corporation.
Date: November 13, 2003 /s/ Paul C. Hudson
-----------------
Paul C. Hudson
President and Chief Executive Officer
Broadway Financial Corporation
Date: November 13, 2003 /s/ Alvin D. Kang
-----------------
Alvin D. Kang
Chief Financial Officer
Broadway Financial Corporation
20