Broadway Financial Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; comparisons are primarily with 2013. Broadway Financial operates Broadway Federal Bank, a Los Angeles-area community bank focused on real-estate lending and deposit gathering.
Financial performance and position
- Profitability: Net income was $2.529 million ($0.11 per diluted share), versus a net loss of $301,000 ($0.13 per share) in 2013. Net interest income before loan-loss provision or recapture rose 7% to $11.861 million. Net interest margin improved to 3.62% from 3.32%; net interest rate spread was 3.52%, up from 3.26%.
- Drivers and earnings quality: The 2014 result included a $2.932 million recapture of loan-loss provisions and a $365,000 debt-restructuring gain, as well as a $200,000 CDFI grant. In 2013, the provision was $414,000 and the debt-restructuring gain was $1.221 million. Non-interest expense rose to $13.346 million from $13.107 million, including higher compensation and professional-services costs.
- Revenue and margins: Interest income decreased 1% to $15.729 million; interest expense fell 20% to $3.868 million. Loan yield declined to 5.43% from 5.90%, partly offset by loan growth and lower deposit and borrowing costs.
- Balance sheet: Total assets were $350.9 million, up 6%; stockholders’ equity was $37.3 million, or 10.62% of assets, versus $25.6 million, or 7.70%, a year earlier. Net loans held for investment were $276.6 million; loans held for sale were $19.5 million. Securities available-for-sale totaled $17.1 million.
- Funding and debt: Deposits totaled $217.9 million, including $135.1 million of certificates of deposit. FHLB advances were $86.0 million. The company had $5.1 million of junior subordinated debentures and no senior debt at year-end; the debentures’ maturity was extended to March 2024. Cash and cash equivalents were $20.8 million, down from $58.2 million.
- Cash flow: Operating activities provided $1.309 million; investing activities used $54.370 million; financing activities provided $15.655 million. Cash and cash equivalents decreased $37.406 million.
- Credit quality: Non-performing assets declined to $10.944 million, or 3.12% of assets, from $19.786 million, or 5.95%. Non-accrual loans fell to $8.862 million from $17.702 million; total delinquencies fell to $2.512 million from $11.133 million. The allowance for loan losses was $8.465 million, 2.99% of loans held for investment, versus $10.146 million, or 3.95%.
Material changes and business developments
- The company issued 8.83 million common shares, including non-voting shares, for $9.7 million gross proceeds in October 2014. Proceeds funded debt payments, a $2.5 million capital contribution to the Bank, and holding-company liquidity.
- Multi-family originations increased substantially: $95.5 million in 2014 versus $37.3 million in 2013. Multi-family loans reached $171.8 million, about 61% of gross loans, compared with 44% a year earlier. Church loans were $54.6 million, about 19% of gross loans.
- To address regulatory loan concentration limits, the Bank transferred $22.8 million of loans, primarily multi-family, to held for sale and sold $3.3 million in the fourth quarter. Year-end held-for-sale loans totaled $19.5 million.
- More than 99% of mortgage loans had adjustable rates. Deposit costs and average FHLB borrowing costs declined, while average loan yield also declined.
Outlook, risks and contingencies
- Regulatory orders: The Bank’s OCC Consent Order requires Tier 1 capital to adjusted assets of at least 9% and total risk-based capital of at least 13%; year-end ratios were 11.34% and 17.69%, respectively. The OCC had not issued a non-objection to the Bank’s strategic plan, and the loan-concentration risk plan remained in progress. The company’s separate Federal Reserve order remained in effect, restricting dividends, debt actions and certain governance or compensation changes without regulatory approval.
- Management expected that meeting reduced multi-family concentration limits could require additional loan sales, potentially lowering net interest income while generating gains on sales. No quantified earnings guidance was provided.
- Management said Bank liquidity was sufficient for foreseeable growth, with $20.8 million of cash and $15.9 million of unpledged securities, plus reported capacity for up to $14 million in additional FHLB borrowing subject to collateral. The holding company remains dependent on financing because it has not received Bank dividends since 2010.
- Key risks include Southern California real-estate and economic conditions, concentration in multi-family and church lending, borrower repayment and collateral values, interest-rate changes, competition, regulatory requirements, and the adequacy of loan-loss reserves. Management noted that actual losses could exceed estimates and regulators could require higher reserves.
- The $8.8 million deferred tax asset was fully offset by a valuation allowance. The filing reports ordinary-course litigation, which management did not expect to materially affect financial position, results or cash flows. The financial statements received an unqualified audit opinion; management reported effective disclosure controls and internal control over financial reporting, without an auditor attestation of internal controls.
Important facts for investors to verify
- Progress and required timing for OCC acceptance of the strategic and concentration-risk plans, and whether further multi-family loan sales are necessary.
- Whether improvement in non-performing assets and reserve levels is sustained, especially given remaining non-accrual and restructured loans and the 2014 reserve recapture.
- Realized prices, gains or losses, and resulting income impact from loans held for sale and any additional required sales.
- Deposit stability and certificate maturities: $99.4 million of certificates were due within one year, alongside $35 million of FHLB advances due in 2015.
- Holding-company liquidity and restrictions on dividends, debt actions and capital distributions, as well as the effect of new capital rules and any future tax-asset realization.