Broadway Financial Corporation — FY 2011 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2011; it does not provide a separate fourth-quarter financial-results summary. The company is a bank holding company whose principal business is Broadway Federal Bank, a Southern California community bank focused on real-estate lending and retail deposits. The bank and company remain subject to formal cease-and-desist orders.
Key financial metrics
| Metric | 2011 | 2010 |
|---|---|---|
| Total assets | $418.5 million | $483.9 million |
| Net interest income, before loan-loss provision | $17.1 million | $20.8 million |
| Net income (loss) | $(9.5) million | $1.9 million |
| Diluted earnings (loss) per common share | $(6.10) | $0.44 |
| Net interest margin | 3.83% | 4.01% |
| Net cash from operating activities | $6.3 million | $10.9 million |
- At year-end, net loans were $326.3 million, gross loans were $342.3 million, and loans held for sale were $13.9 million. Approximately 97% of mortgage loans had adjustable rates.
- The loan-loss provision was $8.6 million, versus $4.5 million in 2010. Net charge-offs rose to $12.9 million (3.24% of average loans) from $4.5 million (0.97%). The allowance was $16.2 million, or 4.73% of gross loans.
- Non-performing assets were $50.1 million, or 11.97% of assets, compared with $46.5 million, or 9.60%, a year earlier. Non-accrual loans were $43.1 million; REO was $7.0 million. Total troubled-debt-restructured loans were $37.6 million.
- Deposits were $294.7 million, down 15%; FHLB advances were $83.0 million. The company also reported $6.0 million of junior subordinated debentures and $5.0 million of other borrowings, the latter being its defaulted senior line of credit.
- Cash and cash equivalents were $31.6 million; available-for-sale securities were $19.0 million, of which $17.4 million were reported as unpledged. The bank reported $50.6 million in liquid assets. FHLB collateral and borrowing limits left capacity for only $5.2 million of additional advances.
- Stockholders’ equity fell to $23.0 million from $32.9 million. The bank’s Tier 1 core capital ratio was 8.38% and total risk-based capital ratio was 13.01%, above the cease-and-desist order thresholds of 8% and 12%, respectively.
Material changes versus 2010
- The company swung from $1.9 million of net earnings to a $9.5 million net loss. Management attributed the change mainly to higher loan-loss and REO provisions, lower net interest and non-interest income, higher non-interest expense, and increased tax expense.
- Average interest-earning assets declined $73.0 million and net interest margin narrowed 18 basis points. Net interest income fell 18%, to $17.1 million.
- Gross loans declined $60.3 million; originations fell to $5.1 million from $17.5 million. Total assets contracted 14% as the bank reduced lending and allowed deposits to run off.
- Non-interest income fell to $0.7 million from $2.4 million, in part because 2010 included $1.5 million of CDFI grants. REO loss provision increased to $2.3 million from $1.1 million.
- Brokered deposits declined to $9.2 million from $18.2 million. The allowance for loan losses fell to $16.2 million from $20.5 million, while charge-offs increased substantially.
Outlook, risks, and unusual items
- Going concern and parent liquidity: The auditor’s report and management state that substantial doubt exists about the company’s ability to continue as a going concern. The parent had only $641,000 of cash and cash equivalents at year-end, a $5 million senior line of credit in default, and a tax-sharing liability to the bank expected to be settled by April 2, 2012. The bank cannot distribute funds to the parent without regulatory approval, which management said was unlikely.
- Recapitalization: The plan depends on preferred-stock conversions, resolving part of the defaulted line of credit, and raising at least $5 million in new common equity. If completed as contemplated, it would issue about 11.2 million shares, approximately 87% of pro forma common shares. The company needs shareholder approval to increase authorized shares. Completion and terms are uncertain.
- If recapitalization fails, management said it may continue shrinking assets, sell the headquarters building, reduce non-performing assets, and pursue earnings improvements. The headquarters sale was also the stated support for the remaining $850,000 net deferred tax asset; the expected second-quarter 2012 closing was not assured.
- Regulatory orders restrict asset growth, dividends, debt actions, management changes, and brokered-deposit growth without required regulatory non-objections or approvals. The bank is not considered well-capitalized under prompt-corrective-action rules while subject to the orders. Failure to maintain required capital could lead to further action, including a conservator or receiver.
- Real-estate credit risk remains significant, especially in Southern California and the church-loan portfolio. Church and construction originations were suspended, and the bank cited weak economic and property-market conditions.
- The company disclosed ineffective disclosure controls and material weaknesses in internal control over financial reporting. Audit-identified corrections to 2011 statements increased the reported net loss by $677,000. The auditor gave an unqualified opinion on the financial statements but highlighted the going-concern uncertainty; it did not audit internal-control effectiveness.
- The OCC was investigating a former loan officer’s activities, including possible inaccurate loan-application documentation or unauthorized benefits. The company said reviewed loans were considered in its loss estimates; the filing does not state an investigation outcome.
- No specific earnings guidance was provided. Management described continuing economic, interest-rate, credit-loss, regulatory, competitive, and recapitalization risks.
Important facts for investors to verify
- Whether the recapitalization, preferred-stock exchanges, new equity raise, share-authorization increase, and lender negotiations were completed—and the resulting dilution and capital structure.
- Whether the parent met its tax-sharing and debt obligations after the stated deadlines, and whether it obtained regulatory approval or lender forbearance.
- Subsequent trends in non-performing assets, church and commercial-real-estate exposures, charge-offs, REO values, and the adequacy of loan-loss reserves.
- Whether the headquarters sale closed and supported realization of the deferred tax asset.
- Progress in remedying material weaknesses and any outcome or financial effect from the former loan officer investigation.
- How reported liquid-asset figures reconcile, including the stated $50.6 million of bank liquid assets and the separately reported cash and unpledged securities.