Broadway Financial Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited consolidated results include Broadway Federal Bank. Dollar amounts below are in millions unless noted.
Business context and financial performance
The company is a bank holding company whose loan portfolio is concentrated in real estate lending. It shifted a substantial share of multifamily originations to loans held for sale to comply with regulatory concentration guidelines.
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net interest income | $3.00 | $2.84 | $6.08 | $5.51 |
| Loan-loss provision recapture | $0.30 | $0.25 | $0.65 | $0.55 |
| Non-interest income | $0.32 | $0.20 | $1.68 | $0.74 |
| Non-interest expense | $2.67 | $2.97 | $5.71 | $5.85 |
| Net income | $0.53 | $0.32 | $1.77 | $0.95 |
| Diluted EPS | $0.02 | $0.01 | $0.07 | $0.03 |
| Net interest margin | 2.72% | 2.99% | 2.80% | 2.89% |
Net income improved year over year, while net interest margin declined. Higher loan balances supported interest income, but loan yields fell; increased deposit and borrowing costs also weighed on net interest income. First-half non-interest income included a $1.18 million insurance litigation settlement and $0.22 million in loan-sale gains. The prior-year period included a $0.27 million CDFI grant.
Financial condition, cash flow, and credit
- Balance sheet: Assets were $435.5 million at June 30, up $6.4 million from year-end 2016. Equity was $47.5 million, or 10.92% of assets; book value was $1.73 per share.
- Loans: Net loans held for investment were $350.3 million, down from $379.5 million at year-end. Loans held for sale were $39.0 million, all multifamily; first-half originations were $85.9 million and sales were $46.6 million, producing $0.22 million in gains.
- Funding and debt: Deposits decreased $13.6 million to $273.8 million, while FHLB advances rose $19.0 million to $104.0 million. Junior subordinated debentures remained $5.1 million. One customer represented approximately 12% of deposits.
- Liquidity and cash flow: Cash and equivalents were $16.8 million; unpledged securities were $11.5 million. First-half operating cash flow was negative $37.3 million, primarily reflecting originations of loans held for sale; investing cash flow was positive $30.3 million and financing cash flow positive $5.4 million. Cash declined $1.6 million to $16.8 million. The Bank had $16.6 million of additional FHLB borrowing capacity subject to collateral and stock requirements, plus an $11.0 million line of credit.
- Credit quality: The allowance for loan losses was $4.25 million, or 1.20% of gross loans held for investment. Nonperforming loans were $2.8 million versus $2.9 million at year-end; delinquent loans were $1.7 million versus $1.4 million. There were no first-half charge-offs. Troubled debt restructurings totaled $10.3 million.
- Regulatory capital: The Bank exceeded the regulatory thresholds to be considered well capitalized. At June 30, its Tier 1 leverage ratio was 10.51%, CET1 ratio 15.87%, and total capital ratio 17.12%.
Changes, outlook, and risks
- First-half earnings growth reflected the litigation settlement, loan-sale gains, higher net interest income, loan-loss recaptures, and lower expenses. The settlement and expense reductions are not necessarily recurring.
- Management cited lower loan yields, competitive lending conditions, deposit and borrowing costs, and regulatory loan-concentration guidelines. It provided no specific earnings or financial guidance; interim results are not necessarily indicative of full-year results.
- Management considered the allowance adequate but cautioned that actual losses could exceed estimates and regulators may require an increase. The company also expected the forthcoming expected-credit-loss accounting standard could increase its allowance; the amount was not yet determinable.
- Liquidity and funding warrant attention given declining deposits, increased FHLB borrowing, and the concentration of deposits in one customer. The filing also identifies forward-looking statements as subject to risks and uncertainties.
- The company reported effective disclosure controls, no material quarterly change in internal controls, and no legal proceedings or newly identified risk factors in this filing.
Important facts for investors to verify
- Whether multifamily loan originations for sale and loan-sale gains remain sustainable, and how the portfolio meets concentration guidelines.
- Deposit trends, retention of the large depositor, FHLB borrowing capacity and collateral availability, and use of the separate credit line.
- Credit performance of church and other criticized loans, nonperforming loans, restructurings, and the adequacy of the allowance.
- How much earnings depended on the one-time litigation settlement and reductions in deferred compensation expense, and the future effect of taxes and funding costs.
- The eventual impact of the expected-credit-loss accounting standard and any regulatory changes or examination findings.