Broadway Financial Corporation — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012; this is an annual report, not a quarterly filing. Broadway Financial operates Broadway Federal Bank, a community savings institution focused on deposits and Southern California real-estate lending.
Financial results and condition
- Earnings: Net income was $588,000, versus a $14.3 million net loss in 2011. Pretax income was $1.4 million; income tax expense was $829,000. After $1.281 million in preferred dividends and discount accretion, the loss attributable to common shareholders was $693,000, or $0.38 per diluted share.
- Interest income and margin: Interest income was $19.9 million, down 21%; interest expense was $6.4 million, down 20%. Net interest income before loan-loss provision fell 21% to $13.5 million. Net interest margin declined to 3.47% from 3.83%; net interest spread was 3.39%, versus 3.70%.
- Non-interest items: Non-interest income rose to $3.1 million from $713,000, including a $2.5 million gain on sale of the headquarters building. Non-interest expense declined to $14.0 million from $18.0 million, helped by lower real-estate-owned and held-for-sale loan loss provisions.
- Credit quality: The loan-loss provision fell to $1.2 million from $12.2 million. The allowance was $11.9 million, or 4.51% of loans held for investment, versus $17.3 million, or 5.09%, a year earlier. Non-accrual loans were $37.1 million; non-performing assets were $45.3 million, or 12.11% of total assets. Net charge-offs were $7.1 million, compared with $15.4 million in 2011.
- Balance sheet and liquidity: Total assets fell 10% to $373.7 million. Net loans held for investment were $251.7 million; loans held for sale were $19.1 million. Cash and cash equivalents increased to $64.4 million from $31.6 million. Deposits declined 13% to $257.1 million; FHLB advances were $79.5 million. Shareholders’ equity was $18.0 million.
- Cash flows: The consolidated cash-flow statement reports operating inflows of $2.9 million, investing inflows of $70.8 million, financing outflows of $41.0 million, and a $32.8 million increase in cash. The MD&A gives different operating and investing cash-flow figures; see investor verification items below.
- Capital: The Bank reported a 14.41% total risk-based capital ratio, 13.12% Tier 1 risk-based ratio, and 8.82% core/tangible capital ratio at year-end. It met the higher capital thresholds in its regulatory order at December 31, 2012, but remained subject to that order and could not be classified as well-capitalized while it remained in effect.
Changes versus 2011
- Return to consolidated net income from a $14.3 million loss, principally reflecting a much lower loan-loss provision, the headquarters-sale gain, and lower real-estate-related provisions.
- Loan balances, deposits, and total assets contracted as repayments, foreclosures, and charge-offs exceeded originations, and higher-cost deposits ran off. Gross loans declined $76.7 million; deposits declined $37.6 million.
- Non-accrual loans decreased $7.7 million and non-performing assets declined $6.2 million, but non-performing assets remained elevated at 12.11% of assets.
- Net interest income and margin weakened as average interest-earning assets and loan yields declined, despite lower funding costs.
Outlook, risks, and unusual matters
- Going concern: Management and the independent auditor cite substantial doubt about the Company’s ability to continue as a going concern. The Company lacked sufficient holding-company cash for obligations, was in default on a $5.0 million senior credit line, and had stopped paying interest on $6.0 million of junior subordinated debentures. The statements retain the going-concern basis and include no adjustments for the uncertainty.
- Recapitalization: The plan contemplated exchanging preferred stock and part of the senior debt for common stock or equivalents and raising approximately $4–$5 million in new equity, subject to conditions and approvals. The Company estimated issuance of about 17.8 million new shares, approximately 90% of pro forma common shares; shareholder approval to increase authorized shares was needed. Completion was not assured.
- Regulatory restrictions: Cease-and-desist orders restrict dividends, debt payments, asset growth, brokered deposits, and other actions absent regulatory non-objection or approval. Management said the capital plan had preliminary regulatory approval subject to successful completion of the recapitalization. Failure to comply could lead to further sanctions, including a conservator or receiver for the Bank.
- Credit and market risks: The loan portfolio was concentrated in multifamily, commercial real estate, and church loans. The Bank had suspended new church and construction lending. Asset quality remained vulnerable to Southern California economic conditions, property values, borrower cash flows, and unemployment; interest-rate changes also affect asset yields and funding costs.
- Other matters: A former loan officer remained subject to an OTS investigation concerning loan documentation and possible unauthorized benefits; the filing does not specify an outcome. The Company recorded a $9.0 million valuation allowance against deferred tax assets, leaving no net deferred tax asset. The main office was sold and leased back in 2012.
- Reporting controls and audit: Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The auditor issued an unqualified opinion on the financial statements while highlighting the going-concern uncertainty.
Key facts for investors to verify
- Whether the recapitalization and required private placement were completed, on what terms, and what dilution resulted; the filing states these were still conditional and not assured.
- The status of regulatory orders, capital-plan compliance, and any subsequent regulatory action or dividend approvals.
- Holding-company liquidity, the $5.0 million credit-line default and accrued interest, and unpaid junior-debenture interest and preferred dividends.
- Subsequent loan-sale proceeds and remaining non-performing assets, including the reported February 2013 sale of one-to-four-family loans.
- Cash-flow reconciliation: the audited statement reports $2.9 million operating and $70.8 million investing inflows, while MD&A narrative reports $6.0 million and $67.7 million, respectively.
- The sustainability of 2012 earnings, which included a one-time $2.5 million property-sale gain and materially lower credit provisions.