BROADWAY FINANCIAL CORP quarterly report, Q1 FY2014

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Broadway Financial Corporation — Q1 2014 Form 10-Q

Business context and period. The filing covers the unaudited three months ended March 31, 2014, compared with the three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2013. Broadway Financial is a bank holding company whose principal subsidiary is Broadway Federal Bank, serving the Los Angeles area. Unless noted, amounts below are in U.S. dollars.

Financial performance and condition

  • Earnings: Net income was $989,000, or $0.05 per diluted share, versus a net loss of $616,000, or $0.49 per diluted share, a year earlier. Income before taxes was $992,000; income tax expense was $3,000.
  • Interest income and margins: Interest income declined 6% to $3.796 million from $4.024 million. Net interest income before the loan-loss provision/recapture increased 4% to $2.798 million. Net interest margin rose to 3.46% from 3.03%; average yield on earning assets was 4.70% versus 4.54%, while the average cost of interest-bearing liabilities fell to 1.33% from 1.56%.
  • Drivers of earnings: Results included a $1.082 million recapture of loan losses and a $200,000 CDFI Fund grant. Non-interest income was $333,000, up from $221,000; non-interest expense declined to $3.221 million from $3.520 million.
  • Assets and loans: Total assets were $335.1 million, up $2.6 million from year-end. Net loans held for investment were $250.0 million, compared with $247.8 million; gross loans were $258.7 million. Available-for-sale securities rose to $19.4 million from $9.4 million, while cash and cash equivalents fell to $47.5 million from $58.2 million.
  • Credit quality: The allowance for loan losses was $10.1 million, or 3.90% of loans, versus $10.1 million, or 3.95%, at year-end. Non-performing loans declined to $13.1 million from $17.7 million; total past-due loans fell to $4.4 million from $11.1 million. Impaired loans were $28.9 million versus $33.5 million. REO increased to $2.5 million from $2.1 million.
  • Deposits, debt, and equity: Deposits declined $4.7 million to $209.7 million. FHLB advances remained $79.5 million; junior subordinated debentures were $6.0 million; senior debt was reported at $2.885 million, including an unamortized restructuring gain (principal was $2.4 million). Stockholders’ equity was $26.6 million, or 7.93% of assets.
  • Cash flow and liquidity: Operating, investing, and financing activities used $0.4 million, $5.1 million, and $5.2 million, respectively. Cash and equivalents declined $10.7 million during the quarter. The Bank reported $18.1 million of unpledged securities in addition to cash and said it could borrow a further $20.5 million from the FHLB, subject to collateral and stock requirements.
  • Regulatory capital: At March 31, the Bank’s Tier 1 capital-to-adjusted-assets ratio was 10.56% against a 9% Consent Order minimum; total risk-based capital was 17.40% against a 13% minimum. The Bank reported compliance with these requirements.

Material changes versus the prior comparable period

  • The company moved from a quarterly loss to profit, primarily due to the $1.1 million loan-loss recapture and the $200,000 CDFI grant; improved net interest income and lower expenses also contributed.
  • Interest income fell, reflecting lower average loan balances and slightly lower loan yields. Lower deposit and borrowing costs more than offset this decline, supporting higher net interest income and margin.
  • Loan originations increased to $16.7 million from $1.4 million, including $11.8 million of growth in multifamily loans compared with year-end. Loan charge-offs declined to $213,000 from $1.8 million in Q1 2013.
  • Compared with year-end, the securities portfolio grew as excess cash was invested; deposits and cash declined. Credit indicators improved, although REO rose.
  • Operating cash flow shifted from a $1.2 million inflow in Q1 2013 to a $399,000 outflow in Q1 2014. Investing cash flow was a $5.1 million outflow versus a $20.0 million inflow, reflecting securities purchases and loan activity.

Outlook, management commentary, and risks

  • Management said it continued rebuilding the loan portfolio, originating $16.7 million of multifamily loans, and reported lower delinquencies and non-performing loans. It considered the allowance adequate but cautioned that actual losses could exceed estimates and regulators could require an increase.
  • The $6.0 million debentures matured on March 17, 2014 and remained unpaid; accrued interest was $703,000. Holders conditionally approved a proposal to extend maturity to March 17, 2024, with up to $900,000 of principal redemption and payment of accrued interest. Completion depends on raising at least $6.0 million in equity, regulatory and senior-lender approvals, and other documentation and conditions. Management gave no assurance these conditions would be met.
  • The Company is subject to a cease-and-desist order restricting debt and capital transactions and dividend payments without prior regulatory non-objection. The Bank is subject to an OCC Consent Order and elevated capital requirements. Management said the Bank had sufficient liquidity for foreseeable needs, but the Company would need to raise capital within 12–18 months to fund its operating expenses; it did not expect the Bank to pay dividends to the Company for at least several quarters.
  • The Bank’s $200 million-plus loan book includes substantial multifamily and church lending. Management noted that 74% of non-performing loans were current on payments, but remained classified as non-performing for other reasons. Securities had $7.9 million in unrealized losses; management attributed these primarily to interest rates, not credit quality, and did not consider them other-than-temporarily impaired.
  • No formal earnings guidance was provided. The filing reported no legal proceedings and listed Risk Factors as “Not Applicable.” Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  1. Whether the Company raises the required $6.0 million of equity and obtains all approvals and satisfies conditions for the debenture extension; confirm the status of the matured, unpaid debentures and accrued interest.
  2. The Company’s parent-level liquidity and ability to fund expenses, given management’s stated 12–18 month capital need and restrictions on dividends and debt payments.
  3. Whether the improvement in earnings and credit quality is sustainable, separating recurring performance from the loan-loss recapture and CDFI grant.
  4. Subsequent trends in non-performing loans, delinquencies, TDRs, REO, recoveries, and allowance adequacy, particularly for church and multifamily exposures.
  5. Continued compliance with the OCC Consent Order capital thresholds and the Bank’s access to FHLB funding under applicable collateral requirements.