Broadway Financial Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated results include Broadway Federal Bank and its subsidiaries. Amounts below are in U.S. dollars; financial statement figures are generally in millions.
Business context and key financial metrics
The company is a bank holding company whose subsidiary focuses on real-estate lending. Management said it was rebuilding the loan portfolio, notably through multifamily originations, while reducing nonperforming assets.
| Metric | Q3 2014 / September 30, 2014 | Comparison |
|---|---|---|
| Total assets | $338.0 million | Up $5.5 million from December 31, 2013 |
| Loans receivable, net | $281.5 million | Up $33.7 million from year-end; gross loans increased $32.0 million |
| Deposits | $217.1 million | Up $2.7 million from year-end |
| Net interest income before loan-loss provision/recapture | Q3: $2.9 million; nine months: $8.6 million | Q3 up 11%; nine-month total up from $8.1 million |
| Net interest margin | Q3: 3.56%; nine months: 3.55% | Prior-year periods: 3.28% and 3.19% |
| Net income (loss) | Q3: $765,000; nine months: $1.813 million | 2013: $584,000 and $(260,000) |
| Diluted earnings per share | Q3: $0.04; nine months: $0.09 | 2013: $0.05 and $(0.23) |
| Cash and cash equivalents | $21.2 million | Down $37.0 million from year-end |
| Stockholders’ equity | $27.4 million | 8.12% of assets, versus $25.6 million and 7.70% at year-end |
For the first nine months, operating cash flow was $630,000, investing cash flow was $(40.8) million, and financing cash flow was $3.2 million. Investing outflows mainly reflected loan growth and securities purchases. At quarter-end, debt included $79.5 million of FHLB advances, $6.0 million of junior subordinated debentures, and senior debt with $2.4 million principal (reported carrying value $2.8 million, including deferred restructuring gain).
Material changes versus prior periods
- Loan-loss recaptures were $950,000 in Q3 and $2.532 million for the nine months, versus $414,000 of provisions in each 2013 comparison period. Recoveries, lower charge-offs, and improving asset-quality measures were cited as drivers.
- Q3 interest income rose 2% to $3.9 million, while interest expense fell 18% to $959,000. Loan balances grew, but average loan yield declined to 5.28% from 5.80%.
- Noninterest income was $165,000 in Q3, down from $1.367 million, principally because Q3 2013 included a $1.221 million debt-restructuring gain. Nine-month 2014 other income included a $200,000 CDFI Fund grant.
- Noninterest expense rose to $3.266 million in Q3 from $3.007 million; higher compensation and occupancy costs were partly offset by lower REO provisions and other expenses.
- Gross loans rose to $288.8 million, with multifamily loans increasing $54.4 million since year-end. Nonperforming loans declined to $9.9 million from $17.7 million; delinquencies fell to $1.8 million from $11.1 million.
- The allowance for loan losses declined to $9.1 million, or 3.14% of loans, from $10.1 million, or 3.95%, at year-end. Its coverage of nonperforming loans increased to 91.93% from 57.32%.
Outlook, risks, contingencies, and unusual items
- Post-quarter financing and debt changes: On October 16, 2014, the company completed private placements of 8,829,549 voting and non-voting shares for $9.7 million gross proceeds. It repaid $2.4 million of defaulted senior bank debt plus accrued interest, paid $900,000 of debenture principal and accrued interest, and extended the remaining $5.1 million debentures to March 17, 2024. Interest-only payments are due for five years, followed by quarterly principal and interest payments beginning June 2019. The company also contributed $2.5 million to the Bank. These transactions occurred after quarter-end and are not reflected in September 30 balances.
- The company and Bank remained subject to regulatory orders. The Bank was required to maintain Tier 1 capital of at least 9% of adjusted assets and total risk-based capital of at least 13%; reported ratios were 10.84% and 16.89%, respectively, at September 30. The company’s order restricted debt payments and dividends absent required regulatory non-objection or approval.
- Management said Bank liquidity was sufficient to support foreseeable growth, but the parent had limited liquidity for operating expenses and relied on raising capital. Management did not expect the Bank to pay dividends to the parent for at least several quarters, or until recurring profitability was achieved.
- The $6.0 million debentures had matured in March 2014 and accrued interest was unpaid at quarter-end; the October transaction subsequently modified the debt. Management expected the remaining $365,000 deferred gain on senior-debt restructuring to be recognized in Q4 2014.
- The company maintained a $10.3 million valuation allowance against deferred tax assets and reported no net deferred tax assets. Management cautioned that actual loan losses could exceed estimates and regulators may require higher reserves.
- No formal earnings guidance was provided. Management cited loan growth and improving asset quality; results for the interim periods were not necessarily indicative of full-year results. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting reported.
Important facts for investors to verify
- Review the October 2014 equity placement, use of proceeds, resulting share dilution, and completed debt repayment and extension terms.
- Track compliance with the Bank’s regulatory capital requirements and restrictions on dividends and debt transactions.
- Assess the sustainability of earnings excluding loan-loss recaptures, the CDFI grant, and deferred debt-restructuring gain recognition.
- Monitor loan growth concentration, nonperforming loans and TDRs, collateral valuations, and the allowance for loan losses.
- Evaluate parent-company liquidity and the Bank’s ability to fund growth while maintaining adequate deposits and other liquidity sources.