Broadway Financial Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed March 31, 2014. Amounts are in U.S. dollars unless noted. The Company operates Broadway Federal Bank, a community bank focused on deposits and real-estate lending in Southern California.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Total assets at year-end | $332.5 million | $373.7 million |
| Interest income | $16.0 million | $19.9 million |
| Net interest income before loan-loss provision | $11.1 million | $13.5 million |
| Net interest margin | 3.32% | 3.47% |
| Provision for loan losses | $0.4 million | $1.2 million |
| Non-interest income | $2.1 million | $3.1 million |
| Non-interest expense | $13.1 million | $14.0 million |
| Net income (loss) | $(0.3) million | $0.6 million |
| Net loss allocable to common stockholders | $(1.1) million; $(0.13) per diluted share | $(0.7) million; $(0.38) per diluted share |
| Operating cash flow | $1.7 million | $2.9 million |
| Investing cash flow | $31.4 million | $70.8 million |
| Financing cash flow | $(39.2) million | $(41.0) million |
- Year-end cash and cash equivalents were $58.2 million, down from $64.4 million. Deposits were $214.4 million, down 17% year over year; FHLB advances were $79.5 million.
- Year-end debt included $6.0 million of junior subordinated debentures and $2.9 million of senior debt, including a deferred restructuring gain. Stockholders’ equity rose to $25.6 million from $18.0 million.
- Net loans held for investment were $247.8 million; the allowance for loan losses was $10.1 million, or 3.95% of those loans.
- Nonperforming assets fell to $19.8 million, or 5.95% of assets, from $45.3 million, or 12.11%. Non-accrual loans were $17.7 million; REO was $2.1 million. Net charge-offs were $2.1 million versus $6.6 million in 2012.
Material changes and unusual items
- The August 2013 recapitalization exchanged preferred stock and accumulated dividends, exchanged $2.6 million of senior debt for equity, modified the remaining senior loan, and raised $4.2 million in a private stock placement. The filing says the transactions increased common equity by $26.9 million and added about 18.2 million common and non-voting shares, substantially diluting existing holders.
- The recapitalization eliminated preferred stock and associated accumulated dividends, reduced senior debt, and produced a $1.2 million gain from forgiven interest. A further $535,000 of forgiven interest was deferred and is being amortized.
- 2013 net loss followed 2012 net income. The comparison was affected by the $2.5 million gain on the former headquarters sale in 2012 and the $1.2 million debt-restructuring gain in 2013. Net interest income fell 18%, mainly as average loans and other interest-earning assets declined.
- Management began pursuing selective loan growth, primarily in multifamily and investor-owned single-family lending. Multifamily loans increased to $113.3 million from $83.4 million; total gross loans declined to $256.9 million from $263.1 million.
Outlook, liquidity, risks and contingencies
- Management said the Bank had sufficient liquidity to support foreseeable growth, with $58.2 million in cash and cash equivalents and stated FHLB capacity for up to $20.5 million of additional borrowing, subject to collateral and other conditions. The Company itself had $1.2 million of cash and said it needed additional capital within 18–24 months to support holding-company expenses.
- The $6.0 million debentures matured March 17, 2014. Interest had not been paid since 2010, and the auditor reported the debentures in default as to principal and interest. Holders conditionally approved extending maturity to 2024, subject to regulatory and senior-lender approvals, documentation, and raising at least $6 million of additional equity. Completion was not assured.
- The Bank is subject to an OCC Consent Order requiring minimum Tier 1 capital of 9% and total risk-based capital of 13%. Management reported year-end ratios of 10.24% and 16.95%, respectively. However, the auditor stated that both the Company and Bank were not in compliance with formal regulatory agreements at December 31, 2013. This difference between the capital-ratio disclosure and the auditor’s statement merits clarification.
- The Company remained subject to an FRB order limiting, among other things, dividends, debt actions and certain executive changes without regulatory non-objection. Management did not expect Bank dividends to the Company for at least several quarters. No dividends were paid.
- Key exposures include commercial and multifamily real-estate conditions, church-loan repayment and collateral values, interest-rate changes, deposit retention, loan-loss estimates, and the ability to raise capital and obtain regulatory approvals. The Bank had $17.7 million of non-accrual loans, including $11.5 million of TDRs; total TDRs were $27.3 million.
- The filing describes an ongoing regulatory investigation into a former loan officer’s lending activities. Management said reviewed loans were considered in its allowance estimates. The auditor issued an unmodified financial-statement opinion but highlighted the debenture default and regulatory matters.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether the required $6 million equity raise, approvals and documentation for the debenture extension were completed, and the resulting debt and liquidity position.
- The precise basis for the auditor’s statement that the Company and Bank were not in compliance with formal regulatory agreements, compared with management’s reported compliance with the Consent Order capital ratios.
- Subsequent trends in nonperforming assets, TDR performance, charge-offs and the adequacy of the $10.1 million loan-loss allowance.
- Deposit stability and funding costs, including the substantial 2014 certificate-of-deposit maturities and restrictions on brokered deposits.
- The effect of recapitalization-related share issuance and any further capital raising on ownership dilution and per-share value.
- Developments in the former loan-officer investigation and any resulting losses, regulatory action or required reserve changes.