Broadway Financial Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results include Broadway Federal Bank and its wholly owned subsidiaries. Financial amounts below are in U.S. dollars; millions are rounded unless otherwise stated.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income before loan-loss recapture | $3.03m | $2.80m | $8.54m | $8.90m |
| Loan-loss provision recapture | $0 | $0.20m | $0.55m | $1.70m |
| Net income | $0.327m | $0.979m | $1.279m | $3.430m |
| Diluted earnings per share | $0.01 | $0.03 | $0.04 | $0.12 |
| Non-interest income | $0.144m | $0.917m | $0.886m | $2.052m |
| Non-interest expense | $2.843m | $2.928m | $8.693m | $9.204m |
- Third-quarter net interest income before recapture rose 8% year over year, primarily on higher loan interest income and lower borrowing costs; higher deposit expense partly offset the increase. Nine-month net interest income fell 4%.
- Net interest margin was 3.02% in Q3 2016 versus 3.09% a year earlier, and 2.93% for the first nine months versus 3.36%. Management attributed the nine-month margin decline mainly to a lower-yielding loan mix following changes made to comply with regulatory concentration limits.
- For the first nine months, lower recaptures and no loan-sale gains were the principal factors behind lower earnings. The company sold no loans in 2016; in 2015 it recognized $1.252m of loan-sale gains for the nine-month period, including $0.738m in Q3. Lower expenses partly offset the earnings decline.
Financial position, liquidity and capital
- At September 30, 2016, assets were $413.4m, up $10.5m from year-end 2015. Net loans were $344.7m, up $40.6m; deposits were $285.1m, up $12.5m. Cash and equivalents declined $29.6m to $38.3m as excess federal funds were invested mainly in multifamily loans.
- Loans grew as multifamily balances increased $71.1m (to $189.7m); single-family loans fell $20.9m (to $110.0m), church loans fell $7.9m (to $38.4m), and commercial real estate loans fell $2.5m (to $9.0m). The company originated $90.8m of multifamily loans during the first nine months.
- Cash and equivalents plus unpledged available-for-sale securities totaled approximately $52.0m. The Bank reported capacity to borrow an additional $52.5m from the FHLB, subject to collateral and stock requirements. Management said liquidity was sufficient to support anticipated growth.
- Total borrowings were $75.1m: $70.0m of FHLB advances and $5.1m of junior subordinated debentures. FHLB advances declined $2.0m during the first nine months. The debentures bear a floating rate, 3.40% at September 30, and mature in 2024; principal payments are scheduled to begin in 2019.
- Stockholders’ equity was $47.5m, or 11.50% of assets; book value was $1.63 per share. The Bank exceeded regulatory minimums and qualified as well capitalized; its total capital ratio was 19.16% and leverage ratio was 11.70%.
- Nine-month cash flows were approximately $0.004m used in operations, $40.0m used in investing, and $10.5m provided by financing. Cash and equivalents declined from $67.8m to $38.3m.
Credit quality, risks and outlook
- The allowance for loan losses was $4.6m, or 1.32% of gross loans, versus $4.8m, or 1.56%, at year-end 2015. The company recorded a $0.55m net recapture and $0.319m of recoveries during the first nine months; there were no loan charge-offs.
- No loans were past due at September 30, compared with $1.4m past due at year-end. Nonperforming loans decreased to $3.0m from $4.2m; all nonperforming loans were current in their payments. Troubled debt restructurings totaled $11.6m, including $2.6m on nonaccrual. Management considered the allowance adequate but cautioned actual losses could exceed estimates and regulators could require an increase.
- One long-standing depositor accounted for approximately 12% of deposits. Management expected to maintain the relationship. Deposits included approximately $26.7m in CDARS placements, of which $5.0m were reciprocal.
- Management expected to reach its regulatory multifamily concentration limit during Q4 2016 and said it would then resume originating loans for sale. The filing provides no formal earnings or full-year financial guidance.
- The company reported a $2.1m valuation allowance against deferred tax assets of $4.6m, citing its assessment of positive and negative evidence, including recent cumulative losses. It reported no legal proceedings, and risk factors were marked not applicable in this filing.
- Management identified newly issued accounting standards under evaluation, including the expected-credit-loss standard (effective for the company after 2019); the impact had not yet been determined.
Important facts for investors to verify
- Whether multifamily originations and loan-sale activity evolve as expected after the regulatory concentration limit is reached.
- Whether margin pressure persists as loan yields, deposit costs and funding mix change.
- Credit trends, especially the church-loan exposure, nonperforming loans, TDRs, and adequacy of the allowance under regulatory review.
- Stability of the depositor representing about 12% of deposits and the terms and availability of wholesale funding.
- Realization of deferred tax assets and the potential effect of the expected-credit-loss accounting standard.