U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For transition period from__________ to___________
Commission file number 0-27464
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BROADWAY FINANCIAL CORPORATION
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(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 95-4547287
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(State of Incorporation) (IRS Employer Identification No.)
4800 Wilshire Boulevard, Los Angeles, California 90010
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(Address of Principal Executive Offices)
(323) 634-1700
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [x] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 910,538 shares of the Company's
Common Stock, par value $0.01 per share, were issued and outstanding as of April
19, 2002.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [x]
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INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
as of March 31, 2002 and December 31, 2001 3
Consolidated Statements of Operations
(unaudited) for the three months
ended March 31, 2002 and March 31, 2001 4
Consolidated Statements of Cash Flows
(unaudited) for the three months ended
March 31, 2002 and March 31, 2001 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
2
BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
(Unaudited)
March 31, December 31,
2002 2001
---- ----
Assets:
Cash $ 5,701 $ 2,639
Fed funds sold 5,000 2,600
Interest bearing deposits 5,028 5,028
Investment securities held to maturity 1,000 -
Investment securities available for sale 4,595 4,604
Mortgage-backed securities held to maturity 12,631 13,931
Loans receivable, net 132,792 133,937
Loans receivable held for sale, at lower of cost or fair value 5,934 7,362
Accrued interest receivable 942 943
Real estate acquired through foreclosure, net 108 -
Investments in capital stock of Federal Home Loan Bank, at cost 1,420 1,399
Office properties and equipment, net 5,951 6,001
Other assets 884 457
Total assets $ 181,986 $ 178,901
Liabilities and stockholders' equity
Deposits $ 153,210 $ 151,156
Advances from Federal Home Loan Bank 9,500 11,000
Advance payments by borrowers for taxes and insurance 41 224
Deferred income taxes 552 556
Other liabilities 3,767 1,337
Total liabilities 167,070 164,273
Stockholders' Equity:
Preferred non-convertible, non-cumulative, and non-voting stock, $.01 par
value, authorized 1,000,000 shares; issued and outstanding 55,199 shares
at March 31, 2002 and December 31, 2001 1 1
Common stock, $.01 par value, authorized 3,000,000 shares; issued and
outstanding 910,538 shares at March 31, 2002 and
December 31, 2001 10 10
Additional paid-in capital 9,486 9,481
Accumulated other comprehensive gain (loss), net of taxes (3) 2
Retained earnings-substantially restricted 6,078 5,804
Treasury stock-51,197 shares, at cost at March 31, 2002 and
December 31, 2001 (469) (469)
Unearned Employee Stock Ownership Plan shares (187) (201)
Total stockholders' equity 14,916 14,628
Total liabilities and stockholders' equity $ 181,986 $ 178,901
See accompanying notes to unaudited consolidated financial statements.
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BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months ended March 31,
2002 2001
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Interest on loans receivable $ 2,823 $ 2,735
Interest on investment securities held to maturity 5 95
Interest on investment securities available for sale 40 --
Interest on mortgage-backed securities 202 170
Other interest income 89 259
Total interest income 3,159 3,259
Interest on deposits 1,047 1,491
Interest on borrowings 129 165
Total interest expense 1,176 1,656
Net interest income before provision for loan losses 1,983 1,603
Provision for loan losses -- 30
Net interest income after provision for loan losses 1,983 1,573
Non-interest income:
Service charges 221 161
Gain (loss) on loans receivable held for sale (1) 1
Other 15 28
Total non-interest income 235 190
Non-interest expense:
Compensation and benefits 928 831
Occupancy expense, net 302 254
Advertising and promotional expense 20 50
Professional services 93 41
Contracted security services 40 39
Telephone and postage 45 56
Stationary, printing and supplies 31 25
Other 205 152
Total non-interest expense 1,664 1,448
Earnings before income taxes 554 315
Income taxes 228 134
Net earnings 326 181
Other comprehensive income (loss):
Unrealized income (loss) on securities available for sale (5) --
Income tax benefits 2 --
Other comprehensive income (loss) (3) --
Comprehensive earnings $ 323 $ 181
Net earnings $ 326 $ 181
Dividends paid on preferred stock (7) (7)
Earnings available to common shareholders $ 319 $ 174
Earnings per share-basic $ 0.36 $ 0.20
Earnings per share-diluted $ 0.35 $ 0.20
Dividend declared per share-common stock $ 0.05 $ 0.05
See accompanying notes to unaudited consolidated financial statements.
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BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Three months ended March 31,
2002 2001
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Cash flows from operating activities
Net earnings $ 326 $ 181
Adjustments to reconcile net earnings to net cash provided by
(used in)operating activities:
Depreciation 33 91
Amortization of premiums and discounts on loans purchased (44) 1
Amortization of net deferred loan origination fees (102) 16
Amortization of discounts and premiums on investment securities 40 21
Amortization of deferred compensation 22 14
Loss (gain) on sale of loans receivable held for sale 1 (1)
Loss on disposal of fixed assets 46 -
Provision for loan losses - 30
Loans originated for sale, net of refinances (376) -
Proceeds from sale of loans receivable held for sale 613 60
Changes in operating assets and liabilities:
Accrued interest receivable 1 65
Other assets (427) 16
Deferred income taxes (4) -
Other liabilities 2,395 (318)
Total adjustments 2,198 (5)
Net cash provided by operating activities 2,524 176
Cash flows from investing activities
Loans originated, net of refinances (4,658) (2,696)
Principal repayment on loans 7,066 4,218
Purchases of investment securities held-to-maturity (1,000) (1,000)
Proceeds from maturities of investment securities held-to-maturity - 7,624
Proceeds from maturities of mortgage-backed securities held-
to-maturity 1,260 735
Purchase of Federal Home Loan stock (21) (22)
Capital expenditures for office properties and equipment (29) (78)
Net cash provided by investing activities 2,618 8,781
Cash flows from financing activities
Net increase in deposits 2,054 9,668
Decrease in advances from Federal Home Loan Bank (1,500) -
Dividends paid (51) (51)
Increase in advances by borrowers
for taxes and insurance (183) (189)
Net cash provided by financing activities 320 9,428
Net increase in cash and cash equivalents 5,462 18,385
Cash and cash equivalents at beginning of period 5,239 10,267
Cash and cash equivalents at end of period $ 10,701 $ 28,652
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,245 $ 1,697
Cash paid for income taxes - 408
Supplemental disclosure of non-cash investing and
financing activities
Transfers of real estate acquired through foreclosure $ 73 $ -
See accompanying notes to unaudited consolidated financial statements.
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BROADWAY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
1. The unaudited consolidated financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management of Broadway Financial
Corporation (the "Company"), the preceding unaudited consolidated financial
statements contain all material adjustments, consisting solely of normal
recurring accruals, necessary to present fairly the consolidated financial
position of Broadway Financial Corporation and subsidiaries at March 31,
2002 and the results of their operations and their cash flows for the three
months ended March 31, 2002 and 2001. 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, 2001 and, accordingly, should
be read in conjunction with such audited statements. The results of
operations for the three months ended March 31, 2002 are not necessarily
indicative of the results to be expected for the full year.
2. Basic earnings per share were computed by dividing net earnings available
to common shareholders by the weighted average number of shares of Common
Stock outstanding for the period (891,165 and 874,718 shares for the three
months ended March 31, 2002 and 2001, respectively). Diluted earnings per
share additionally include the dilutive effect of Common Stock equivalents
(900,194 and 874,718 shares for the three months ended March 31, 2002 and
2001, respectively).
3. Certain reclassifications have been made in the prior year financial
statements to conform to the current year's presentation. Certain prior
year average balances and ratios have been changed to conform to the
current year's method of determining average asset or liability balances
and resulting ratios. Prior year average balances were based on month- end
balances. Current year average balances are based on daily balances.
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" 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 Central 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
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deposits, together with borrowings and other funds, to make mortgage loans
secured principally by residential real estate located in Southern California.
At March 31, 2002, Broadway Federal operated four retail-banking offices in Mid
City and South Central 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 its 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 and occupancy expenses. More generally, the results of
operations of thrift and banking institutions are also affected by prevailing
economic conditions, competition, and the monetary and fiscal policies of
governmental agencies.
Comparison of Operating Results for the Three Months Ended March 31, 2002 and
March 30, 2001
General
The Company recorded net earnings of $326,000, or $0.35 per diluted common
share, for the three months ended March 31, 2002, as compared to net earnings of
$181,000, or $0.20 per diluted common share, for the three months ended March
31, 2001. The increase in net earnings for three months ended March 31, 2002
compared to the same period in the prior year resulted primarily from higher net
interest income after provision for loan losses, offset by higher non-interest
expense.
Net Interest Income Before Provision for Loan Losses
Net interest income before provision for loan losses for the quarter ended
March 31, 2002 amounted to $2.0 million compared to $1.6 million for the same
period a year ago. The increase of $380,000 was primarily attributable to the
effect of 1) an increase in the net interest rate spread from 3.42% for the
three months ended March 31, 2001 to 4.31% for the three months ended March 31,
2002, an 89 basis point increase; and 2) a lower provision for loan losses.
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The 89 basis point increase in the net interest rate spread was primarily
attributable to the rapid decline in deposit cost of funds, and a slower decline
in yield on the loan portfolio. The weighted average rate paid on deposits
decreased from 4.26% for first quarter 2001 to 2.88% for first quarter 2002, a
138 basis point decrease. The weighted average rate paid on borrowings also
decreased from 6.60% to 5.41% for the same periods, a 119 basis point decrease,
however the amount of average borrowings were significantly less than the amount
of average deposits, and therefore did not have as much of an impact on the cost
of funds.
The yield on the loan portfolio decreased from 8.65% for first quarter 2001 to
8.09% for first quarter 2002, a 56 basis point decrease. This decrease was the
primary reason for a 49 basis point decrease in the yield on interest-earning
assets from 7.84% during first quarter 2001 to 7.35% during first quarter 2002.
Provision for Loan Losses
There was no provision for loan losses for the three months ended March 31, 2002
as compared to a $30,000 provision for loan losses for the same period in 2001.
Total non-performing assets, consisting of non-accrual loans and real estate
acquired through foreclosure ("REO"), decreased by $193,000 from $538,000 at
March 31, 2001 to $345,000 at March 31, 2002. The decrease resulted from a
decrease in non-accrual loans of $301,000 offset by an increase in REO of
$108,000. As a percentage of total assets, non-performing assets were 0.19% at
March 31, 2002, compared to 0.30% and 0.26% at March 31, 2001 and December 31,
2001, respectively. Since December 2001, non-accrual loans decreased by $231,000
to $237,000. There was one REO for $108,000 at March 31, 2002 and no REO at
December 31, 2001. Non-accrual loans at March 31, 2002 included three loans
totaling $94,000 secured by one- to four-unit properties and three unsecured
loans totaling $143,000.
As of March 31, 2002, the Company's allowance for loan losses totaled $1.6
million, unchanged from the balance at December 31, 2001. The allowance for loan
losses represents 1.12% of gross loans at March 31, 2002 compared to 1.10% at
December 31, 2001. The allowance for loan losses was 662.87% of non-accrual
loans at March 31, 2002, compared to 335.68% at December 31, 2001.
The provision for loan losses for the quarter ended March 31, 2002 results from
management's ongoing assessment of the Company's level of credit risk inherent
in the portfolio and changes within the loan categories resulting from various
factors, including new loan originations, loan repayments, prepayments and
changes in asset classifications.
Management believes that the allowance for loan losses is adequate to cover
inherent losses in its loan portfolio as of March 31, 2002, but, there can be no
assurance that actual losses will not exceed the estimated amounts. In addition,
the Office of Thrift Supervision and the Federal Deposit Insurance Corporation
periodically review the Company's allowance for loan losses as an integral part
of their examination process. These agencies may require the Company to increase
the allowance for loan losses based on their judgments of the information
available to them at the time of the examination.
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Non-interest Income
Non-interest income increased by $45,000 to $235,000 for the three months ended
March 31, 2002 as compared to the same period in 2001. Service charges increased
$60,000 to $221,000, for the three months ended March 31, 2002 from $161,000 for
the same period in the prior year. The increases primarily resulted from higher
fees earned from customers on deposit accounts.
Non-interest Expense
Non-interest expense increased by $216,000 during the three-month period ended
March 31, 2002, as compared to the same period in 2001. The increase in
non-interest expense primarily resulted from increases in compensation and
benefits, occupancy expense, professional services and other expense offset by a
decrease in advertising and promotional expense and telephone and postage.
Compensation and benefits expense increased by $97,000 for three months ended
March 31, 2002 as compared to the same period in 2001. The increase was
principally due to a higher accrual of vested stock grants and bonuses, and
higher employees' compensation expense due to the addition of new management
personnel.
Occupancy expense increased by $48,000 for three months ended March 31, 2002, as
compared to the same period in 2001. The increase was primarily due to a
non-recurring reversal of $51,000 in equipment lease termination cost for
SmartCopy, a discontinued business in 2001.
Professional services increased by $52,000 for the three months ended March 31,
2002, as compared to the same period in 2001. The increase principally resulted
from a $17,000 increase in legal fees, and a $30,000 increase in operational
consulting fees.
Other non-interest expense increased by $53,000 for the three-month period ended
March 31, 2002, as compared to the same period during 2001. The increase in
other expense was primarily due to the write off of obsolete furniture, fixtures
and equipment, and an increase in item processing fees, offset by decreases in
savings losses, loan expense, FDIC premiums and courier service expense.
Advertising and promotional expense decreased by $30,000 for three months ended
March 31, 2002 as compared to the same period in 2001 because of a reduction in
promotions and customer give-aways in 2002.
Income Taxes
The Company's estimated effective tax rate was approximately 41.15% for the
three months ended March 31, 2002, compared to approximately 42.54% for the same
period in the prior year. Broadway Federal computes income taxes by applying the
statutory federal income tax rate of 34% and California income tax rate of
10.84% to taxable earnings before income taxes.
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Comparison of Financial Condition at March 31, 2002 and December 31, 2001
Total assets at March 31, 2002 were $182.0 million compared to $178.9 million at
December 31, 2001, representing an increase of $3.1 million. Net loans
receivable (excluding loans held for sale) decreased from $133.9 million at
December 31, 2001 to $132.8 million at March 31, 2002 as a result of $4.7
million in new loan originations, offset by $5.8 million in principal
repayments. Historically, the Bank has experienced lower loan origination
volumes in the first quarter, and this trend, coupled with the higher level of
loan pay-offs that occurred during first quarter 2002, caused a decrease in
loans receivable, net compared to the balance at December 31, 2001.
Loans held for sale at March 31, 2002 were $5.9 million as compared to $7.4
million at December 31, 2001. During the period, single-family fixed rate loans
originated that were classified as held-for-sale amounted to $376,000 and the
principal amount of such type of loans sold totaled $614,000.
Total liabilities at March 31, 2002 were $167.1 million compared to $164.3
million at December 31, 2001. The $2.8 million increase was primarily
attributable to the increase in deposits and other liabilities, offset by
decreases in advances from the Federal Home Loan Bank ("FHLB") and advance
payments by borrowers for taxes and insurance.
Since December 31, 2001, deposits have increased by $2.0 million. The increase
is attributable to an increase in core deposits (NOW, Demand, Money Market and
Passbook) of $5.9 million, and a decrease in CD accounts (principally Jumbo CDs)
of $3.9 million.
FHLB advances decreased by $1.5 million since December 31, 2001 as a result of
pay-offs of short-term borrowings.
Total capital at March 31, 2002 was $14.9 million compared to $14.6 million at
December 31, 2001. The $288,000 increase was primarily due to net earnings for
the period and the allocation of ESOP shares, offset by cash dividends declared.
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 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, to a lesser extent, principal repayments on
mortgage-backed securities, proceeds from the sale of loans and advances from
the FHLB. While maturities and scheduled amortization of Bank loans are
relatively predictable sources of funds, deposit flows and mortgage prepayments
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are greatly influenced by general interest rates, economic conditions, and
competition. Broadway Federal's short-term liquid assets (cash, Federal funds
sold, interest bearing deposits, and investment securities available for sale)
amounted to $20.3 million at March 31, 2002, as compared to $14.9 million at
December 31, 2001. The increase is primarily due to the increase in cash
provided from operations of $2.5 million and net cash provided from investing
activities of $2.6 million.
FHLB advances are the Bank's principal source of liquidity in the event that a
need for additional funds arises. At March 31, 2002 and December 31, 2001, FHLB
advances totaled $9.5 million and $11.0 million, respectively. The Bank's
borrowing capacity with the FHLB of San Francisco, based on collateral held by
the FHLB, was $17.5 million at March 31, 2002.
Since December 31, 2001 there has been no material change in the Company's
interest rate sensitivity as of March 31, 2002. For a discussion on the
Company's interest rate sensitivity and market risk, see the Company's annual
report for the year ended December 31, 2001 and the notes thereto.
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
March 31, 2002, 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).
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The following table reflects the required and actual regulatory capital ratios
of Broadway Federal at the date indicated:
OTS FDICIA Actual
Regulatory Capital Ratios Minimum "Well-capitalized" At March 31,
for Broadway Federal Requirement Requirement 2002
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Tangible capital 1.50% N/A 7.20%
Core capital 4.00% 5.00% 7.20%
Risk-based capital 8.00% 10.00% 12.64%
Tier 1 Risk-based capital N/A 6.00% 11.36%
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BROADWAY FINANCIAL CORPORATION
Date: May 15, 2002 By: /s/ PAUL C. HUDSON
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Paul C. Hudson
President and Chief Executive Officer
By: /s/ ALVIN D. KANG
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Alvin D. Kang
Chief Financial Officer
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