Broadway Financial Corporation — Q1 2017 Form 10-Q
Business context and period: Unaudited consolidated results for the three months ended March 31, 2017, compared with Q1 2016 for earnings and cash flow. Balance-sheet comparisons are with December 31, 2016. The Company operates through Broadway Federal Bank, a thrift institution. Amounts below are in millions unless noted.
Financial performance and condition
- Earnings: Net income was $1.232 million, or $0.05 per diluted share, versus $0.633 million, or $0.02, in Q1 2016. Income before taxes was $1.745 million; income-tax expense was $0.513 million.
- Interest income and margins: Net interest income before loan-loss recapture rose 15% to $3.079 million from $2.671 million. Net interest margin increased to 2.88% from 2.79%. Interest income was $4.137 million and interest expense was $1.058 million.
- Non-interest items: Non-interest income rose to $1.359 million from $0.543 million, including a $1.183 million litigation settlement. Non-interest expense increased 6% to $3.043 million.
- Assets and loans: Total assets increased 6% to $454.1 million. Loans held for sale were $33.8 million, all multifamily, after $48.7 million of originations and $14.8 million of sales during the quarter. Net loans held for investment fell to $361.7 million from $379.5 million.
- Credit quality: The allowance for loan losses was $4.392 million, or 1.20% of gross loans held for investment, down from $4.603 million. The Company recorded a $0.350 million provision recapture and $0.139 million in recoveries; there were no charge-offs. Nonperforming loans increased to $4.2 million from $2.9 million, mainly after a $1.3 million commercial real estate loan entered non-accrual status. Troubled debt restructurings totaled $10.8 million.
- Funding and liquidity: Deposits increased to $296.6 million from $287.4 million; FHLB advances increased to $101.0 million from $85.0 million. Cash and cash equivalents rose to $27.2 million. The Bank reported $11.9 million of unpledged securities and $25.7 million of additional FHLB borrowing capacity, subject to collateral and stock requirements.
- Cash flow: Operating activities used $34.7 million, primarily due to originations of loans held for sale; investing activities provided $18.3 million and financing activities provided $25.1 million. Cash and cash equivalents increased $8.8 million during the quarter.
- Capital: Stockholders’ equity was $46.9 million, 10.33% of assets, and book value was $1.71 per share. The Bank exceeded regulatory minimums and was categorized as well capitalized; its total capital ratio was 16.64% and Tier 1 leverage ratio was 10.77%.
Material changes and management commentary
- Management attributed higher year-over-year earnings primarily to increased net interest income, the litigation settlement, and a larger loan-loss provision recapture. Higher expenses and a higher tax charge partly offset those increases.
- The $1.183 million settlement related to claims in the Paul Ryan case. Q1 2016 included a $0.265 million CDFI grant, while no grant had been awarded for 2017 as of the filing; 2016 also included unusually high early-withdrawal fees.
- Management said multifamily loans were originated for sale to comply with loan concentration guidelines. Loan originations held for investment were $1.9 million, compared with $27.8 million in Q1 2016.
- One customer relationship represented approximately 11% of deposits. Certificates of deposit represented 65% of deposits, including growth in CDARS deposits.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantified earnings or revenue guidance. Management cautioned that quarterly results are not necessarily indicative of full-year results and that forward-looking statements are subject to risks and uncertainties.
- Management considered the allowance adequate but warned actual credit losses could exceed estimates and regulators may require a higher allowance. Credit metrics included higher nonperforming loans and a lower allowance-to-nonperforming-loans ratio, 105.48% versus 156.35% at year-end.
- A subsequent event may affect Q2: on April 12, 2017, the Bank terminated a former executive’s salary continuation agreement. It agreed to pay $0.5 million over four years, replacing an accrued obligation of $1.2 million; management expected an approximately $0.42 million after-tax increase in Q2 earnings.
- The Company expects the future credit-loss standard (ASU 2016-13) may increase its allowance because it will incorporate expected lifetime losses and forecasts. The amount was not yet determined.
- The filing reported no legal proceedings in Part II and no applicable risk-factor disclosure in this quarterly report. Disclosure controls were assessed as effective at March 31, 2017.
Most important facts for investors to verify
- Whether earnings excluding the one-time litigation settlement and provision recapture show sustainable improvement.
- Subsequent credit performance of the $1.3 million commercial real estate loan, nonperforming loans, TDRs, and allowance adequacy.
- Multifamily loans held for sale, sale volumes and gains, and compliance with regulatory concentration guidelines.
- Deposit stability, including the 11% customer concentration and CDARS funding, and the cost and availability of FHLB borrowing.
- The accounting and timing of the former executive agreement’s expected Q2 earnings benefit, and the eventual impact of the expected-credit-loss standard.