Broadway Financial Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited consolidated results include Broadway Federal Bank and its subsidiaries. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
- Second quarter: Net income was $319,000, or $0.01 per diluted share, versus $1.153 million, or $0.04 per share, in Q2 2015. Net interest income before the loan-loss provision recapture was $2.841 million, down 10% from $3.141 million. A $250,000 provision recapture brought net interest income after recapture to $3.091 million. Non-interest income was $199,000, down from $506,000; non-interest expense was $2.971 million, down from $3.238 million.
- First half: Net income was $952,000, or $0.03 per diluted share, compared with $2.451 million, or $0.08 per share, in 2015. Net interest income before the $550,000 provision recapture was $5.512 million, versus $6.100 million; after recapture it was $6.062 million. Non-interest income was $742,000 versus $1.135 million, while non-interest expense declined to $5.850 million from $6.276 million.
- Margins and drivers: First-half net interest margin was 2.89%, down from 3.51%; Q2 margin was 2.99%, down from 3.58%. Lower loan yields and reduced loan-sale gains and provision recaptures weighed on earnings. Lower borrowing costs and operating expenses partly offset the declines.
- Cash flow: First-half operating cash flow was $145,000, investing cash outflow was $37.452 million, and financing cash inflow was $5.158 million. Cash and cash equivalents fell $32.149 million to $35.690 million, chiefly as funds were deployed into loans and securities.
Financial position and material changes
- Total assets were $408.393 million at June 30, up $5.481 million from year-end 2015. Net loans rose to $341.264 million from $304.171 million; securities available-for-sale increased to $15.453 million from $14.140 million.
- Gross loans increased $36.8 million to $345.8 million. Multifamily loans rose $55.3 million, while single-family loans declined $15.6 million. The Bank originated $59.9 million of loans in the first half and made no loan sales, compared with $59.0 million of sales in the 2015 period.
- Deposits increased $7.158 million to $279.772 million. FHLB advances declined $2.0 million to $70.0 million; junior subordinated debentures remained $5.1 million. Total borrowings were $75.1 million.
- Stockholders’ equity was $47.224 million, or 11.56% of assets, versus $46.163 million, or 11.46%, at year-end. Book value was $1.62 per share, compared with $1.59.
- The allowance for loan losses declined to $4.545 million, or 1.31% of gross loans, from $4.828 million, or 1.56%. There were no first-half charge-offs. Non-performing loans decreased to $3.718 million from $4.227 million; total delinquencies increased to $2.076 million from $1.445 million. The allowance was 122.24% of non-performing loans.
Outlook, risks and unusual items
- Management said it expected to reach its regulatory multifamily-loan concentration limit early in Q3 2016 and then resume originating loans for sale. The Bank had invested excess federal funds in multifamily loans and securities to improve asset yields.
- Management believed liquidity was sufficient for foreseeable growth. At quarter-end, liquid assets included $35.7 million in cash and cash equivalents and $14.8 million in unpledged securities; additional FHLB borrowing capacity was stated as $46.2 million, subject to collateral and stock requirements.
- One customer relationship represented approximately 12% of deposits. Management expected to maintain the relationship; its concentration creates a funding risk if the relationship changes.
- Troubled debt restructurings totaled $14.0 million, including $3.3 million on non-accrual status. Management considered the allowance adequate but cautioned actual losses could exceed estimates; regulators may require an increase.
- The company reported $4.5 million of net deferred tax assets after a $2.2 million valuation allowance. Management cited cumulative losses among the evidence considered in assessing realization.
- Provision recaptures included a $248,000 recovery on payoff of a previously partially charged-off loan. First-half other income included an $80,000 early-withdrawal fee, a $50,000 loan-extension fee, and $38,000 in foreclosure-forbearance fees. The company received a lower CDFI grant than in the prior-year period.
- The Bank exceeded regulatory minimum and “well capitalized” thresholds at June 30: Tier 1 leverage ratio 12.23%, CET1 and Tier 1 risk-based ratios 17.97%, and total capital ratio 19.23%. Management warned forward-looking statements are subject to risks and actual results may differ; no specific earnings guidance was provided.
- No legal proceedings or risk factors were reported in this filing. Management said disclosure controls were effective and there were no significant quarterly changes in internal control over financial reporting.
Important facts for investors to verify
- Whether loan yields and net interest margin stabilize as the portfolio grows, and how the expected return to loan sales affects earnings.
- Multifamily concentration-limit timing and any resulting changes in loan originations, sales, and asset mix.
- Credit trends, including the increased delinquency balance, non-accrual/TDR performance, collateral values, and adequacy of the allowance.
- Deposit stability and the concentration in the large customer relationship; liquidity and available FHLB capacity under applicable collateral conditions.
- Realizability of deferred tax assets and any future change in the valuation allowance.