Broadway Financial Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. The filing was signed September 21, 2012. The company says it restated first-quarter 2012 results; the filing text does not provide a clear reconciliation to the previously reported quarter.
Financial results and condition
Amounts below are in millions unless otherwise noted. Per-share amounts are in dollars.
| Metric | Q1 2012 / March 31, 2012 | Comparable period / prior date |
|---|---|---|
| Interest income | $5.494 | $6.574 in Q1 2011 |
| Net interest income before loan-loss provision | $3.686 | $4.346 in Q1 2011, down 15% |
| Loan-loss provision | $0.959 | $1.240 in Q1 2011 |
| Net earnings (loss) | $0.154 | $(0.129) in Q1 2011 |
| Loss available to common shareholders | $(0.132); $(0.08) per basic and diluted share | $(0.412); $(0.24) per share in Q1 2011 |
| Net cash from operating activities | $1.805 | $0.345 in Q1 2011 |
| Total assets | $408.860 | $413.737 at year-end 2011 |
| Cash and cash equivalents | $45.177 | $31.597 at year-end 2011 |
| Deposits | $290.352 | $294.686 at year-end 2011 |
| Net loans / gross loans | $309.578 / $327.137 | $322.770 / $339.816 at year-end 2011 |
| Allowance for loan losses | $17.752; 5.42% of gross loans | $17.299; 5.09% at year-end 2011 |
| Non-performing assets | $51.4; 12.57% of assets | $51.4; 12.43% at year-end 2011 |
| Shareholders’ equity | $18.269 | $18.276 at year-end 2011 |
Interest expense declined to $1.808 million from $2.228 million. Management reported an annualized yield on average interest-earning assets of 5.47% and cost of average interest-bearing liabilities of 1.87%. The efficiency ratio improved to 71.60% from 75.15%; annualized return on average assets was 0.15%, and return on average equity was 3.34%.
Cash from investing activities was $16.587 million, principally from loan repayments and REO sales; financing activities used $4.812 million, mainly reflecting deposit outflows. Liquid assets included $45.2 million of cash and cash equivalents and $15.5 million of unpledged available-for-sale securities. The Bank reported potential additional FHLB borrowing capacity of $7.9 million, subject to collateral and stock requirements.
Debt and borrowings included $83.0 million of FHLB advances, $6.0 million of junior subordinated debentures, and a $5.0 million senior line of credit. The line was past due and in default; the company had stopped paying interest on the line and debentures in September 2010.
Material changes versus comparable periods
- Net income improved from a loss to a small profit, but common shareholders still recorded a loss after preferred dividends and discount accretion.
- Net interest income fell $660,000, primarily because average interest-earning assets declined $78.1 million year over year. Management attributed the asset contraction to its strategy of preserving capital ratios by shrinking the balance sheet.
- Non-interest income rose to $423,000 from $181,000, primarily due to REO-sale gains. Five REO properties sold for $4.0 million, generating a $412,000 net gain.
- Non-interest expense declined to $2.921 million from $3.502 million, reflecting lower credit-related provisions, compensation, occupancy, and office costs; two branches had closed at the end of 2011.
- Gross loans declined $12.7 million during the quarter as repayments, foreclosures, and charge-offs exceeded originations. REO fell $2.7 million to $4.0 million, while non-accrual loans increased to $47.4 million from $44.7 million.
Outlook, risks, contingencies, and unusual items
- Capital and regulatory constraints: A cease-and-desist order requires Bank Tier 1 capital-to-adjusted-assets and total risk-based capital ratios of at least 8% and 12%, respectively. At March 31, the reported ratios were 7.70% and 12.23%; the Bank therefore fell short of the order’s Tier 1 requirement. The order restricts dividends and certain debt actions absent regulatory non-objection. The company said the Bank met generally applicable capital standards, but those do not remove the higher order requirements.
- Recapitalization plan: The company described proposed preferred-stock-for-common-stock exchanges and a planned common-equity raise of at least $5 million, or $3.5 million if Treasury approval is obtained. If completed, the transactions were expected to issue approximately 17.1 million shares, or about 91% of pro forma common shares. The plan depended on multiple conditions, including other preferred-stock exchanges, financing, and shareholder approval to increase authorized shares. Management cautioned there was no assurance it would succeed.
- Going concern and holding-company liquidity: Management disclosed substantial doubt about the company’s ability to continue as a going concern. The holding company had used available cash toward its tax-sharing liability to the Bank and said it lacked cash for operating expenses. It depended on new capital and/or lender forbearance; Bank distributions required regulatory approval, which management considered unlikely.
- Credit quality: Impaired loans were $59.0 million, non-accrual loans were $47.4 million, and TDRs totaled $38.1 million, including $20.5 million on non-accrual. The allowance covered 42.39% of non-performing loans excluding loans held for sale. Management said it believed the allowance adequate, while warning actual losses could exceed estimates and regulators could require additional reserves. One modified church loan with a $100,000 pre-modification balance defaulted within 12 months.
- Restatement and controls: The 10-Q filing was delayed pending restatement work, and the company had also restated 2011 financial statements. Management identified material weaknesses involving loan-collateral valuations, impairment calculations, low-income housing amortization, and income-tax accounting. Disclosure controls were deemed ineffective as of March 31. The company reported actions to improve appraisal collection and review, valuation methods, and financial-reporting oversight.
- Other developments: The Bank’s headquarters sale closed in the second quarter of 2012; management had cited the expected gain as support for the remaining deferred tax asset. The filing also described an ongoing regulatory investigation concerning a former loan officer and certain originated loans. No specific forward earnings guidance was provided.
Most important facts for investors to verify
- Review the September 2012 Q1 restatement release and subsequent filings for the exact changes from the original Q1 results and any later corrections.
- Confirm whether the proposed capital raise, preferred-stock exchanges, authorized-share increase, and lender restructuring were completed, and assess resulting dilution and debt terms.
- Track the Bank’s compliance with the cease-and-desist capital thresholds, regulatory restrictions, and any further supervisory action.
- Monitor non-accrual loans, TDR performance, collateral valuations, charge-offs, and allowance adequacy, particularly in church and commercial real estate lending.
- Assess the holding company’s ability to fund expenses and address its defaulted line of credit, including whether lender forbearance or regulatory approvals were obtained.
- Follow remediation of material weaknesses, the former-loan-officer investigation, and the effect of the headquarters sale on liquidity and deferred-tax-asset realization.