Broadway Financial Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated results include Broadway Federal Bank. Unless otherwise noted, amounts are in millions of dollars.
Business context and financial results
The company continued rebuilding its loan portfolio, particularly multifamily lending, while reducing nonperforming assets. Total assets were $334.7 million at June 30, up $2.2 million from December 31, 2013.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Interest income | $3.875 | $4.062 | $7.671 | $8.086 |
| Net interest income before loan-loss recapture | $2.915 | $2.768 | $5.713 | $5.456 |
| Loan-loss provision (recapture) | ($0.500) | $0 | ($1.582) | $0 |
| Net income (loss) | $0.059 | ($0.228) | $1.048 | ($0.844) |
| Diluted earnings (loss) per share | $0.00 | ($0.29) | $0.05 | ($0.78) |
Q2 net interest margin was 3.63%, versus 3.27% a year earlier; first-half margin was 3.55%, versus 3.15%. Lower funding costs and growth in average loans supported net interest income, although lower loan yields reduced interest income. Noninterest income was $0.064 million in Q2 and $0.397 million for the half; noninterest expense was $3.420 million and $6.641 million, respectively. First-half other income included a $0.2 million CDFI grant.
Financial condition, cash flow and asset quality
- Cash and cash equivalents were $34.6 million, down from $58.2 million at year-end. Available-for-sale securities were $18.8 million, up from $9.4 million.
- Net loans held for investment were $265.0 million, up $17.1 million from year-end; gross loans were $272.8 million. Multifamily balances grew $31.9 million, partly offset by reductions in other loan categories.
- Six-month cash flow: operating inflow $0.876 million, investing outflow $24.8 million and financing inflow $0.364 million. Investment outflows primarily reflected loan growth and securities purchases.
- Deposits were $214.7 million, little changed from year-end. Borrowings included $79.5 million of FHLB advances, $6.0 million of junior subordinated debentures, and $2.4 million principal on modified senior debt.
- The allowance for loan losses was $9.4 million, 3.44% of loans, versus $10.1 million and 3.95% at year-end. The first-half $1.582 million recapture reflected improved asset-quality measures and recoveries, including approximately $1.3 million on previously charged-off loans.
- Nonperforming loans declined to $12.9 million from $17.7 million; delinquencies fell to $3.6 million from $11.1 million. Troubled debt restructurings totaled $24.0 million, including $8.8 million on nonaccrual status. REO declined to $1.3 million.
- Stockholders’ equity was $26.7 million, or 7.99% of total assets. The Bank met its Consent Order capital minimums: Tier 1 capital ratio 10.67% against 9% required, and total risk-based capital ratio 17.00% against 13% required.
Material changes, outlook and risks
- The improvement from losses to profits chiefly reflects loan-loss recaptures, lower interest expense and, for the first half, the CDFI grant. Management cautions that interim results are not necessarily indicative of full-year results; the filing gives no numerical earnings guidance.
- The $6.0 million debentures matured March 17, 2014, and the company had not paid principal or accrued interest. Accrued interest was $0.750 million. A proposed extension to March 17, 2024 would require a $0.9 million principal redemption, payment of accrued interest, at least $6.0 million in new equity, regulatory and lender approvals, and other documentation. Completion is not assured.
- The company said it had investor indications of interest exceeding the $6.0 million equity minimum and had sought shareholder approval for a private placement. It also stated that holding-company liquidity was limited and additional capital was needed within nine months to meet operating expenses. Management did not expect Bank dividends to the holding company for at least several quarters.
- Federal Reserve restrictions require prior notice and written non-objection for certain company debt payments and dividends. The Bank is subject to an OCC Consent Order and elevated capital requirements. The Bank reported potential capacity to borrow an additional $20.5 million from the FHLB, subject to collateral and stock requirements.
- Management considers the allowance adequate but notes actual loan losses may exceed estimates and regulators may require an increase. Collateral-dependent loan and REO valuations rely on Level 3 assumptions. The filing reported no legal proceedings and marked risk factors “Not Applicable.”
Important facts for investors to verify
- Whether the equity raise, shareholder approval, regulatory non-objection and other conditions for the debenture extension were ultimately satisfied.
- The company’s ability to fund holding-company expenses and service or restructure matured debenture obligations, given limited liquidity and restrictions on debt payments.
- Whether loan growth and improving delinquencies and nonperforming loans are sustainable, and whether the allowance remains adequate as multifamily exposure expands.
- How much of reported earnings depends on nonrecurring loan-loss recoveries/recaptures and the CDFI grant, versus recurring operating performance.
- The implications of the Bank’s Consent Order, elevated capital requirements and potential future holding-company capital requirements.