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 June 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: 1,820,934 shares of the Company's
Common Stock, par value $0.01 per share, were issued and outstanding as of July
31, 2003.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [x]
1
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
as of June 30, 2003 and December 31, 2002 3
Consolidated Statements of Operations and
Comprehensive Earnings (unaudited) for the
three and six months ended June 30, 2003 and 2002 4
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 2003 and 2002 5
Notes to 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
ITEM 1. FINANCIAL STATEMENTS
BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
(Unaudited)
June 30, December 31,
2003 2002
Assets:
Cash 3,516 $ 3,859
Federal funds sold 1,600 1,500
Interest bearing deposits - 1,028
Investment securities held to maturity 2,000 2,000
Investment securities available for sale 2,000 5,007
Mortgage-backed securities held to maturity 8,446 10,843
Mortgage-backed securities available for sale 36,276 27,697
Loans receivable, net 152,911 140,085
Loans receivable held for sale,
at lower of cost or fair value 142 3,770
Accrued interest receivable 1,408 995
Investments in capital stock of Federal Home
Loan Bank, at cost 1,657 1,561
Office properties and equipment, net 5,751 5,811
Other assets 786 750
Total assets $ 216,493 $ 204,906
Liabilities and stockholders' equity
Deposits 163,532 $ 156,148
Advances from Federal Home Loan Bank 32,130 28,724
Advance payments by borrowers for taxes and insurance 244 311
Deferred income taxes 1,085 931
Other liabilities 1,697 1,871
Total liabilities 198,688 187,985
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 of Series A and
100,000 of Series B at June 30, 2003 and December 31, 2002 2 2
Common stock, $.01 par value, authorized 3,000,000 shares;
issued and outstanding 1,819,934 shares at June 30, 2003
and 1,815,294 shares at December 31, 2002 10 10
Additional paid-in capital 10,528 10,512
Accumulated other comprehensive income, net of taxes 307 57
Retained earnings-substantially restricted 7,552 7,005
Treasury stock-at cost, 49,008 shares at June 30, 2003 and
53,648 shares at December 31, 2002 (475) (520)
Unearned Employee Stock Ownership Plan shares (119) (145)
Total stockholders' equity 17,805 16,921
Total liabilities and stockholders' equity $ 216,493 $ 204,906
See accompanying notes to the unaudited consolidated financial statements
3
BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Earnings
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Interest on loans receivable $2,569 $2,752 $5,113 $5,576
Interest on investment securities held to maturity 28 40 58 89
Interest on investment securities available for sale 9 50 45 90
Interest on mortgage-backed securities 404 202 808 404
Other interest income 37 49 75 94
Total interest income 3,047 3,093 6,099 6,253
Interest on deposits 764 966 1,585 2,013
Interest on borrowings 186 122 362 251
Total interest expense 950 1,088 1,947 2,264
Net interest income before provision for loan losses 2,097 2,005 4,152 3,989
Provision for loan losses - - - -
Net interest income after provision for loan losses 2,097 2,005 4,152 3,989
Non-interest income:
Service charges 331 206 601 432
Gain on loans receivable held for sale 5 1 18 -
Other 10 14 16 25
Total non-interest income 346 221 635 457
Non-interest expense:
Compensation and benefits 1,020 876 1,934 1,804
Occupancy expense, net 251 272 509 513
Information services 126 145 256 279
Professional services 107 106 268 199
Office services and supplies 108 94 210 173
Other 249 200 433 391
Total noninterest expense 1,861 1,693 3,610 3,359
Earnings before income taxes 582 533 1,177 1,087
Income taxes 226 211 457 439
Net earnings $ 356 $ 322 $ 720 $ 648
Other comprehensive income:
Unrealized gain on securities available for sale 387 $ 47 $ 404 $ 37
Income tax expense (153) (20) (154) (15)
Other comprehensive income 234 27 250 22
Comprehensive earnings $ 590 $ 349 $ 970 $ 670
Net earnings $ 356 $ 322 $ 720 $ 648
Dividends paid on preferred stock (19) (7) (38) (14)
Earnings available to common shareholders $ 337 $ 315 $ 682 $ 634
Earnings per share-basic $0.19 $0.18 $0.38 $0.36
Earnings per share-diluted $0.18 $0.18 $0.36 $0.35
Dividend declared per share-common stock $0.04 $0.03 $0.08 $0.05
Basic weighted average shares outstanding 1,794,153 1,780,568 1,790,925 1,781,444
Diluted weighted average shares outstanding 1,889,532 1,805,716 1,884,063 1,804,154
See accompanying notes to the unaudited consolidated financial statements
4
BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Six months ended June 30,
2003 2002
Cash flows from operating activities
Net earnings $ 720 $ 648
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation 183 216
Amortization of premiums and discounts on loans purchased 63 (110)
Amortization of net deferred loan origination fees (29) (175)
Amortization of discounts and premium on investment securities
and mortgage-backed securities (28) 83
Amortization of deferred compensation 63 42
Gain on sale of securities available for sale - (5)
Gain on sale of loans receivable held for sale (18) -
Loss on disposal of fixed assets - 63
Loans originated for sale (622) (557)
Proceeds from sale of loans receivable held for sale 1,081 645
Changes in operating assets and liabilities:
Accrued interest receivable (413) 8
Other assets (36) (31)
Other liabilities (174) 352
Net cash provided by operating activities 790 1,179
Cash flows from investing activities
Loans originated, net of refinances (18,615) (12,002)
Principal repayment on loans 23,117 14,994
Purchase of loans (14,175) -
Purchases of investment securities held to maturity - (2,000)
Purchases of investment securities available for sale (21,000) (8,028)
Purchases of mortgage-backed securities held to maturity - (2,093)
Purchases of mortgage-backed securities available for sale (12,000) -
Proceeds from maturities of interest bearing deposits 1,028 2,026
Proceeds from maturities of mortgage-backed securities held
to maturity 2,300 2,291
Proceeds from sale of securities available for sale 24,002 4,005
Proceeds from principal paydowns of mortgage-backed securities
available-for-sale 3,955 -
Purchase of Federal Home Loan stock (96) (40)
Capital expenditures for office properties and equipment (123) (181)
Net cash used in investing activities (11,607) (1,028)
See accompanying notes to unaudited consolidated financial statements
5
BROADWAY FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
(Unaudited)
Six months ended June 30,
2003 2002
Cash flows from financing activities
Net increase (decrease) in deposits 7,384 (175)
Increase (decrease) in advances from Federal Home Loan Bank 3,406 (250)
Dividends paid (173) (102)
Purchases of treasury stock - (84)
Stock option exercised 24 -
Increase (decrease) in advances by borrowers
for taxes and insurance (67) 38
Net cash provided by (used in) financing activities 10,574 (573)
Net decrease in cash and cash equivalents (243) (422)
Cash and cash equivalents at beginning of period 5,359 5,239
Cash and cash equivalents at end of period $ 5,116 $ 4,817
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,932 $ 2,387
Cash paid for income taxes 377 309
Supplemental disclosure of non-cash investing and
financing activities:
Transfer of loans to real estate acquired through foreclosure - 107
Transfer of loans held for sale to loans 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
JUNE 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 June 30, 2003, the results of
their operations and comprehensive earnings for the three and six months ended
June 30, 2003 and 2002 and their cash flows for the six months ended June 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 six
months ended June 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 (1,794,153 and 1,780,568 shares for the three months
ended June 30, 2003 and 2002, and 1,790,925 and 1,781,444 for the six months
ended June 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, (1,889,536 and
1,805,716 shares for the three months ended June 30, 2003 and 2002, and
1,884,063 and 1,804,154 for the six months ended June 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
JUNE 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.
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 430,638 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
June 30, 2003, the Company had 49,008 shares of treasury stock that may be
issued on the exercise of options or for payment of other awards.
8
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 Six months ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net Earnings:
As reported $356,000 $322,000 $720,000 $648,000
Deduct stock-based compensation,
net of tax 12,000 7,000 33,000 14,000
-------- -------- -------- --------
Pro forma $344,000 $315,000 $687,000 $634,000
======== ======== ======== ========
Earnings per share - Basic:
As reported $ 0.19 $ 0.18 $ 0.38 $ 0.36
Pro forma $ 0.18 $ 0.17 $ 0.36 $ 0.35
Earnings per share - Diluted:
As reported $ 0.18 $ 0.18 $ 0.36 $ 0.35
Pro forma $ 0.17 $ 0.17 $ 0.34 $ 0.34
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 June 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 Six Months ended June
30, 2003 and June 30, 2002
General
The Company recorded net earnings of $356,000 and $720,000, or $0.18 and $0.36
per diluted share, respectively, for the three and six months ended June 30,
2003, compared to $322,000 and $648,000, or $0.18 and $0.35 per diluted share,
respectively, for the three and six months ended June 30, 2002. Compared to
2002, second quarter net earnings increased 10.56% and net earnings for the
first six months increased 11.11%.
Net Earnings
The increase 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 $92,000 and $163,000, or 4.59% and 4.09%, respectively, for the three
and six months ended June 30, 2003 compared to the same periods in 2002.
Non-interest income increased $125,000 and $178,000, or 56.56% and 38.95%,
respectively, for the three and six months ended June 30, 2003 compared to the
same periods in 2002. Non-interest expense increased $168,000 and $251,000, or
9.92% and 7.47%, respectively, for the three and six months ended June 30, 2003
compared to the same periods in 2002.
Net Interest Income
Net interest income after provision for loan losses increased to $2,097,000 and
$4,152,000 for the three and six months ended June 30, 2003, from $2,005,000 and
$3,989,000 for the same periods in 2002. A six month rate/volume analysis
indicates that the $163,000 increase in net interest income in the first six
months of 2003 over 2002 was primarily attributable to the impact of the growth
in average interest-earning assets of $33.8 million, or 19.71%, and
interest-bearing liabilities of $30.9 million, or 19.08%, which resulted in an
increase in net interest income of $731,000 (volume impact), offset by the
impact of a decrease in the net interest rate spread of 58 basis points, which
resulted in a decrease in net interest income of $568,000 (rate impact).
11
Loan originations were $6.6 million and $19.0 million for the three and six
months ended June 30, 2003 compared to $8.3 million and $13.4 million for the
same periods in 2002. Loan purchases totaled $14.2 million in the first quarter
of 2003. No loans were purchased in the 2002 periods or in the second quarter of
2003. Mortgage-backed securities ("MBS") purchases were $10.0 million and $12.0
million for the three and six months ended June 30, 2003 compared to $2.1
million for the second quarter of 2002. Loan prepayments amounted to $14.4
million and $23.1 million for the three and six months ended June 30, 2003
compared to $8.0 million and $15.0 million for the same periods in 2002.
Management anticipates that prepayments will continue at a comparable rate in
the current low interest rate environment, and is focused on increasing lending
volume and continuing purchases of loans and MBSs.
Interest-bearing liabilities increased $900,000 during the second quarter of
2003. The increase was primarily attributable to the net effect of a decrease in
deposits of $6.0 million and an increase in Federal Home Loan Bank ("FHLB")
advances of $6.9 million. For the six months ended June 30, 2003,
interest-bearing liabilities increased $10.8 million, resulting from a $7.4
million increase in deposits and a $3.4 million increase in FHLB advances.
The net interest rate spread for the three and six months ended June 30, 2003
was 3.88% and 3.93%, respectively, compared to 4.52% and 4.51%, respectively,
for the same periods in 2002. The 64 and 58 basis point decrease in spread, or
margin compression, was attributable to the fact that the weighted average yield
on the loan portfolio declined more than the weighted average cost of funds on
interest-bearing liabilities. The yield on interest-earning assets declined 139
and 135 basis points to 5.81% and 5.95%, respectively, for the three and six
months ended June 30, 2003 from 7.20% and 7.30%, respectively, for the same
periods in 2002. The weighted average cost of funds declined to 1.93% and 2.02%,
respectively, for the three and six months ended June 30, 2003 compared to 2.68%
and 2.80% for the same periods in 2002. The primary spread (weighted average
interest rate on loans minus weighted average interest rate on deposits) at June
30, 2003 was 4.88% compared to 5.36% at June 30, 2002. The Company's interest-
earning assets are substantially adjustable rate assets, and as interest rates
have fallen such assets have repriced downward to a greater extent than the
interest- bearing liabilities. A substantial portion of the Company's
interest-bearing liabilities have fixed rates and maturities that reprice at
different intervals compared to the interest-earning assets.
Provision for Loan Losses
As of June 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 0.92% of gross loans at June 30, 2003, compared to 0.98% at
December 31, 2002.
12
Total non-performing assets, consisting of non-accrual loans and real estate
acquired through foreclosure ("REO"), decreased by $55,000, to $80,000 at June
30, 2003 from $135,000 at December 31, 2002. Non-accrual loans at June 30, 2003
consisted of one loan totaling $80,000 secured by a single-family dwelling.
There was no REO as of June 30, 2003 and December 31, 2002. As a percentage of
total assets, non-performing assets were 0.04% at June 30, 2003, compared to
0.07% at December 31, 2002.
Management believes that the allowance for loan losses is adequate to cover
inherent losses in Broadway Federal's loan portfolio as of June 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 $346,000 and $635,000 for the three and
six months ended June 30, 2003, from $221,000 and $457,000 for the same periods
in 2002. The $125,000 increase for the second quarter was primarily attributable
to an increase in service charges.
Non-interest Expense
Total non-interest expense increased to $1,861,000 and $3,610,000 for the three
and six months ended June 30, 2003, from $1,693,000 and $3,359,000 for the same
periods in 2002. The $168,000 increase in the second quarter from 2002 to 2003
was primarily attributable to an increase in compensation and benefits costs.
Loans Receivable, Net
Loans receivable, net increased $12.8 million, or 9.2%, to $152.9 million at
June 30, 2003 from $140.1 million at December 31, 2002. During February 2003,
the Bank purchased $14.2 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.
13
Deposits
Total deposits increased $7.4 million, or 4.73%, to $163.5 million from $156.1
million at December 31, 2002. Core deposits (NOW, demand, money market and
passbook accounts) increased by $10.0 million during the first six months of
2003 as the Company focused on increasing such account types. At June 30, 2003
core deposits represented 44.6% of total deposits, compared to 40.4% at December
31, 2002, and 40.0% at June 30, 2002.
Capital
Total capital at June 30, 2003 was $17.8 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 June 30, 2003, the Company's return on average equity
declined slightly to 8.03% compared to 8.51% for the same period in 2002. The
return on average assets also declined slightly to 0.65% for the three months
ended June 30, 2003 compared to 0.72% for the same period in 2002. The ratio of
non-interest expense to average assets improved to 3.41% for the three months
ended June 30, 2003 compared to 3.76% 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
slightly to 76.18% in second quarter 2003 compared to 76.06% in second quarter
2002.
Income Taxes
The Company's effective tax rate was approximately 39% for the three months and
six months ended June 30, 2003, compared to 40% 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.
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
June 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 June 30,
for Broadway Federal Requirement Requirement 2003
------------------------- ----------- ------------------ ------------
Tangible capital 1.50% N/A 7.52%
Core capital 4.00% 5.00% 7.52%
Risk-based capital 8.00% 10.00% 14.02%
Tier 1 risk-based capital N/A 6.00% 12.89%
ITEM 3. DISCLOSURE CONTROLS AND PROCEDURES
As of June 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 June 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 June 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
The Annual Meeting of Stockholders of the Company was held
on June 18, 2003 for the following purposes:
(a) To elect three directors to serve until the Annual Meeting
to be held in the year 2006 and until their successors are
elected and have been qualified.
At the meeting, the Stockholders re-elected Paul C. Hudson
and Kellogg Chan and elected David M. N. Harvey to serve as
directors for three-year terms. The number of votes for each
of the directors was as follows:
Mr. Paul C. Hudson
For 1,172,577
Abstain 431,392
Mr. Kellogg Chan
For 1,192,397
Abstain 411,592
Mr. David M. W. Harvey
For 1,602,909
Abstain 1,080
(b) To ratify the appointment of KPMG LLP as the Company's
independent auditors for 2003.
At the meeting, the Stockholders ratified the appointment of
KPMG LLP as the Company's independent auditors based upon
1,594,052 shares voting "for", 3,666 shares voting "against"
and 3,865 shares abstaining.
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 as adopted Exchange Act of 1934
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 May 2, 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 first 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: August 14, 2003 By: /s/ PAUL C. HUDSON
Paul C. Hudson
President and Chief Executive Officer
Broadway Financial Corporation
Date: August 14, 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 report on Form 10-QSB of Broadway Financial
Corporation.
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
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer'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 small business
issuer 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 small
business issuer, 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 small business issuer'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 small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small business
issuer's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect,
the small business issuer's internal control over financial reporting;
and
5. The small business issuer's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee
of small business issuer'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 small business issuer'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 small business issuer's
internal control over financial reporting.
Date: August 14, 2003
/s/ Paul C. Hudson
Signature
Paul C. Hudson
Chief Executive Officer
Broadway Financial Corporation
18
Exhibit 31
SECTION 302 CERTIFICATION
I, Alvin D. Kang, certify that:
1. I have reviewed this report on Form 10-QSB of Broadway Financial
Corporation.
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
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer'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 small business
issuer 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 small
business issuer, 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 small business issuer'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 small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small business
issuer's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect,
the small business issuer's internal control over financial reporting;
and
5. The small business issuer's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee
of small business issuer'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 small business issuer'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 small business issuer's
internal control over financial reporting.
Date: August 14, 2003
/s/ Alvin D. Kang
Signature
Alvin D. Kang
Chief Financial Officer
Broadway Financial Corporation
19
Exhibit 32
Section 906 Certification
The Company is furnishing to the Securities and Exchange Commission pursuant to
the requirements of Form 10Q-SB 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: August 14, 2003 By: /s/ PAUL C. HUDSON
Paul C. Hudson
President and Chief Executive Officer
Broadway Financial Corporation
Date: August 14, 2003 By: /s/ ALVIN D. KANG
Alvin D. Kang
Chief Financial Officer
Broadway Financial Corporation
20