Broadway Financial Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results include Broadway Financial Corporation and its subsidiaries. Dollar amounts below are in millions unless stated otherwise.
Business context and key financial metrics
- Q2 net income: $1.153 million, or $0.04 per diluted share, versus $0.059 million, or $0.00 per share, in Q2 2014. First-half net income was $2.451 million, or $0.08 per diluted share, versus $1.048 million, or $0.05.
- Net interest income before loan-loss recapture: $3.141 million for Q2, up 8% year over year; $6.100 million for the first half, up 7%. Net interest margin was 3.58% for Q2 (3.63% prior year) and 3.51% for the first half (3.55% prior year).
- Other income and expenses: Q2 non-interest income was $492,000 versus $64,000; non-interest expense was $3.224 million versus $3.420 million. First-half figures were $1.135 million and $6.276 million, respectively, versus $397,000 and $6.641 million.
- Balance sheet: Assets were $359.2 million at June 30, up 2% from year-end 2014. Stockholders’ equity was $39.6 million, or 11.04% of assets, compared with $37.3 million and 10.62% at year-end.
- Liquidity and cash flow: Cash and cash equivalents were $51.7 million, up from $20.8 million at year-end. First-half operating cash flow was negative $14.9 million, investing cash flow positive $39.9 million, and financing cash flow positive $5.8 million; cash increased by $30.9 million overall. The operating outflow primarily reflected originations of loans held for sale.
- Funding and debt: Deposits were $232.2 million, up $14.3 million from year-end; FHLB advances were $77.5 million, down $8.5 million. Junior subordinated debentures remained $5.1 million. Certificates of deposit represented 64% of deposits, versus 62% at year-end.
Material changes versus comparable periods
- Profit improved substantially year over year, reflecting higher net interest income before recaptures, increased non-interest income, lower expenses, and a larger Q2 loan-loss recapture.
- The allowance for loan losses fell to $6.9 million from $8.5 million at year-end, following $1.5 million of first-half recaptures. It equaled 3.43% of gross loans held for investment, versus 2.97% at year-end.
- Loan portfolio balances shifted significantly: $90.2 million of performing multifamily loans were transferred from held for investment to held for sale to comply with concentration guidelines. Held-for-sale loans rose to $82.0 million from $19.5 million; first-half loan sales totaled $59.0 million, including a bulk sale of approximately $45 million.
- Credit indicators improved: nonperforming loans declined to $6.7 million from $8.9 million, total delinquencies to $1.7 million from $2.5 million, and impaired loans to $19.1 million from $23.5 million. Troubled debt restructurings totaled $17.4 million, down from $20.2 million.
Outlook, commentary, risks and unusual items
- Management said it believed the Bank had sufficient liquidity to support growth over the foreseeable future. The filing provides no specific earnings or financial guidance.
- Management attributed the Q2 allowance recapture to a smaller held-for-investment portfolio, improving credit quality, and lower charge-offs and historical loss factors. It stated the allowance was adequate but cautioned actual losses could exceed estimates; regulators may require a higher allowance.
- Unusual or notable income items included a $355,000 CDFI grant in the first half, a $380,000 Q2 gain on loan sales, and a $160,000 special FHLB stock dividend in Q2. Loan-loss recaptures were $750,000 in each of the first two quarters.
- The Bank remains subject to an OCC Consent Order requiring Tier 1 leverage of at least 9% and total capital of at least 13%. At June 30, actual ratios were 11.89% and 19.14%, respectively, and the Bank met the order’s requirements. A separate holding-company order restricts dividends and certain debt or capital actions without Federal Reserve approval or non-objection.
- The company reported a $7.9 million deferred-tax-asset valuation allowance and no net deferred tax assets. Disclosure controls were reported effective; the filing reported no legal proceedings and no applicable new risk factors.
Most important facts for investors to verify
- Whether the loan-sale and concentration-management strategy continues, and how the held-for-sale multifamily portfolio is ultimately sold or retained.
- Whether credit improvement and reduced nonperforming loans persist, and whether the allowance remains adequate as the portfolio mix changes.
- How much reported earnings depend on loan-loss recaptures, loan-sale gains, the CDFI grant, and the special FHLB dividend rather than recurring operations.
- Ongoing compliance with the OCC Consent Order, restrictions on holding-company capital actions, and available liquidity if deposit or collateral conditions change.
- The sustainability of net interest margin given lower loan yields and the company’s funding mix.