Broadway Financial Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Financial statements are unaudited. Broadway Financial is a bank holding company whose principal subsidiary is Broadway Federal Bank.
Financial performance and position
| Metric | Q3 2013 / Sep. 30, 2013 | Comparable period / prior date |
|---|---|---|
| Net income (loss) | $584,000 for Q3; loss of $260,000 for nine months | Q3 2012 loss of $613,000; nine-month 2012 income of $1.238 million |
| Diluted earnings (loss) per common share | $0.05 for Q3; $(0.23) for nine months | $(0.48) for Q3 2012; $0.21 for nine-month 2012 |
| Net interest income before loan-loss provision | $2.638 million for Q3; $8.094 million for nine months | Down 18% and 22%, respectively, year over year |
| Net interest margin | 3.28% for Q3; 3.19% for nine months | 3.39% and 3.53%, respectively |
| Total assets | $345.7 million | Down $28.0 million from Dec. 31, 2012 |
| Cash and cash equivalents | $60.2 million | $64.4 million at Dec. 31, 2012 |
| Deposits | $218.6 million | Down $38.5 million, or 15%, from Dec. 31, 2012 |
| Loans held for investment, net | $251.5 million; gross loans $260.8 million | Net balance broadly unchanged from year-end; gross loans rose $25.4 million from Q2 |
| Allowance for loan losses | $10.3 million, or 3.96% of held-for-investment loans | $11.9 million, or 4.51%, at Dec. 31, 2012 |
| Non-performing assets | $26.7 million, or 7.74% of assets | $45.3 million, or 12.11%, at Dec. 31, 2012 |
| Stockholders’ equity | $25.6 million, or 7.40% of assets | $18.0 million, or 4.82%, at Dec. 31, 2012 |
| Cash flows, nine months | Operating +$1.6 million; investing +$21.1 million; financing −$26.8 million | Cash decreased $4.1 million to $60.2 million |
Material changes and unusual items
- Q3 income included a $1.2 million gain from restructuring the senior line of credit. The lender forgave $1.8 million of accrued interest; $535,000 was added to the remaining loan balance.
- The August recapitalization included $4.2 million gross proceeds from common-stock sales, exchanges of preferred stock and debt for equity, and modified terms on the remaining senior loan. It improved reported equity and bank capital, but included substantial potential common-stock dilution; certain preferred securities were to convert subject to shareholder approvals.
- Nine-month 2013 results were lower than 2012 principally because 2012 included a $2.5 million gain on sale of the former headquarters. Net interest income also declined as average interest-earning assets and net interest margin fell.
- Non-performing assets declined year over year, largely following sales of $15.5 million of non-performing loans and transfers to real estate owned. Non-accrual loans were $20.1 million; troubled debt restructurings totaled $32.2 million.
- Loan-loss provision was $414,000 for nine months, versus $1.19 million in 2012, while charge-offs increased to $2.6 million from $1.9 million.
Liquidity, debt, outlook and risks
- Going-concern warning: Management reported substantial doubt about the holding company’s ability to continue as a going concern. It said the company had limited liquidity, approximately $1.6 million available for holding-company expenses and debt obligations, and would need additional capital within 12–18 months. Management’s plans included raising capital and extending the maturity of $6.0 million of junior subordinated debentures due March 17, 2014; success was not assured.
- The company had stopped paying interest on the subordinated debentures in 2010 and reported $609,000 accrued interest. It also needed Federal Reserve approval for payments on the remaining $2.4 million senior loan. The bank was not expected to pay dividends to the holding company for at least several quarters.
- The bank reported $87.5 million of FHLB advances and the $6.0 million subordinated debentures; holding-company senior debt included $2.4 million principal plus $535,000 deferred restructuring amount. The bank said available FHLB capacity was approximately $11.8 million, subject to collateral and other requirements.
- Effective October 30, 2013, an OCC Consent Order replaced the bank’s prior order. It requires at least 9% Tier 1 core capital to adjusted assets and 13% total risk-based capital, and imposes planning, asset-quality, governance and loan-review requirements. September 30 ratios were 9.75% and 16.08%, respectively. The holding company remained subject to a separate Federal Reserve order.
- Management said it had begun selective loan growth, focusing on multifamily and investor-owned residential loans, while continuing to reduce classified assets. No quantified earnings or financial guidance is provided; management cautions that interim results are not necessarily indicative of full-year results.
- Other key risks include loan and collateral valuation uncertainty, concentrations in church and commercial real estate lending, potential further credit losses, deposit runoff, capital-raising uncertainty, debt refinancing and regulatory restrictions. The company recorded a $9.5 million deferred-tax-asset valuation allowance and reported no net deferred tax assets.
Important facts for investors to verify
- Whether the company raises additional capital and extends the subordinated debentures before the March 2014 maturity.
- Holding-company cash needs, payment restrictions, and required Federal Reserve approvals for debt service.
- Compliance with the OCC Consent Order and maintenance of its elevated capital thresholds.
- Whether non-performing assets, classified loans, charge-offs and collateral values continue to improve.
- Final shareholder approvals and conversion terms for recapitalization securities, including resulting dilution.