Broadway Financial Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Figures are in millions of dollars unless stated otherwise. The filing reports unaudited consolidated results for the Company and its subsidiaries.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income before loan-loss provision | $3.2 | $4.3 | $10.4 | $13.1 |
| Provision for loan losses | $0.1 | $3.8 | $1.2 | $8.5 |
| Non-interest income (loss) | $(0.2) | $0.1 | $2.9 | $0.5 |
| Non-interest expense | $3.5 | $5.1 | $10.1 | $12.7 |
| Net earnings (loss) | $(0.6) | $(7.5) | $1.2 | $(9.4) |
| Basic and diluted earnings (loss) per common share | $(0.48) | $(4.47) | $0.21 | $(5.86) |
- Nine-month 2012 results included a $2.5 million gain from selling the Bank’s headquarters building. Improved year-over-year earnings also reflected materially lower loan-loss provisions and lower REO and held-for-sale loan provisions.
- Q3 net interest income before provision fell 26% year over year; the nine-month figure fell 21%. Management attributed the decline chiefly to reduced average interest-earning assets, especially loans, and lower net interest margin. The nine-month margin declined 30 basis points; Q3 loan yield was 5.76% versus 6.20% a year earlier.
- Net cash from operating activities was $5.2 million for the first nine months, versus $21.0 million in 2011. Investing activities provided $51.2 million, including loan repayments and proceeds from REO and the headquarters sale; financing activities used $31.5 million, mainly due to deposit outflows. Cash and cash equivalents rose to $56.5 million.
Financial position, liquidity and credit quality
- Total assets were $384.3 million at September 30, down $29.5 million, or 7%, from year-end 2011. Net loans were $282.3 million; gross loans declined $41.0 million to $298.8 million as repayments, foreclosures and charge-offs exceeded originations.
- Deposits fell $31.9 million, or 11%, to $262.8 million. FHLB advances remained $83.0 million; junior subordinated debentures were $6.0 million and other borrowings $5.0 million. Total shareholders’ equity was $19.0 million.
- Available liquidity included $56.5 million of cash and cash equivalents and $13.0 million of unpledged available-for-sale securities. The Bank reported capacity to borrow an additional $15.9 million from the FHLB, subject to collateral and stock requirements.
- Non-performing assets were $45.2 million, or 11.75% of assets, compared with $51.4 million, or 12.43%, at year-end. Non-accrual loans were $41.4 million. The allowance for loan losses was $17.0 million, 5.68% of gross loans; nine-month charge-offs were $1.9 million, down from $9.2 million in 2011.
- Troubled debt restructurings totaled $37.8 million, including $19.8 million on non-accrual status. Five restructured church loans totaling $3.8 million defaulted within 12 months of modification during the nine-month period.
Outlook, significant risks and unusual matters
- Going concern: Management disclosed substantial doubt about the Company’s ability to continue as a going concern. The holding company lacks cash to meet operating and debt obligations; the Bank cannot distribute funds to it without regulatory approval, which management said was unlikely. Continued operations depend on raising capital and completing the proposed recapitalization.
- Recapitalization: Proposed transactions include exchanges of preferred stock and part of the senior line of credit for common equity, potential forgiveness of approximately $1.3 million of accrued line-of-credit interest, and a common-stock placement of at least $5 million—or $3.5 million if Treasury approves a lower amount. The plan could issue approximately 17 million new shares, about 90% of pro forma shares, and requires additional conditions and shareholder approval to increase authorized shares. Completion is not assured.
- Debt default and restrictions: The $5.0 million senior line of credit is past due and in default; the lender did not extend its forbearance. The Company stopped paying interest on the line and its $6.0 million subordinated debentures in September 2010. Regulatory orders restrict debt payments and dividends without prior written non-objection or approval.
- Regulatory capital: At September 30 the Bank met the cease-and-desist order’s higher capital thresholds: Tier 1 capital to adjusted assets was 8.65% against an 8% requirement, and total risk-based capital was 13.92% against 12%. The Bank nevertheless cannot be classified as well-capitalized while the order remains in effect. Failure to maintain required capital could prompt further regulatory action, including conservatorship or receivership.
- Financial reporting controls: Management concluded disclosure controls were ineffective because of material weaknesses, including errors in loan impairment valuations, appraisal handling, low-income-housing amortization and deferred-tax calculations. Corrective procedures and additional review were introduced, but their effectiveness remains important to monitor.
- The Company recorded a full valuation allowance against deferred tax assets, leaving net deferred tax assets at zero. The filing also describes an ongoing regulatory investigation concerning a former loan officer and loans originated during that officer’s employment.
- No formal earnings guidance is provided. If recapitalization fails, management said it plans to continue shrinking assets, reducing non-performing assets and pursuing earnings improvement.
Most important facts for investors to verify
- Whether the recapitalization, preferred-stock exchanges and equity placement close, on what terms, and with what final dilution and authorized-share approvals.
- Whether the Company can meet holding-company obligations and resolve the defaulted credit line; confirm the status of accrued interest and any lender or regulatory agreements.
- Trends in non-performing assets, restructured-loan performance, collateral values, charge-offs and adequacy of the loan-loss allowance.
- Whether the Bank continues to meet cease-and-desist capital requirements and whether regulators modify or lift the orders.
- Progress in remediating material weaknesses and any further adjustments to financial statements or loan valuations.