Broadway Financial Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The unaudited consolidated results cover the Company, Broadway Federal Bank and a Bank subsidiary.
Financial performance and position
| Metric | Q2 / June 30, 2013 | Comparable period / prior year-end |
|---|---|---|
| Net interest income before loan-loss provision | $2.8 million | $3.5 million in Q2 2012; down 21% |
| Net income (loss) | $(228,000); $(0.29) per diluted share | $1.7 million; $0.81 per diluted share in Q2 2012 |
| Net income (loss), six months | $(844,000); $(0.78) per diluted share | $1.9 million; $0.73 per diluted share in first half 2012 |
| Total assets | $345.2 million | $373.7 million at Dec. 31, 2012 |
| Cash and cash equivalents | $74.5 million | $64.4 million at Dec. 31, 2012 |
| Loans held for investment, net | $225.4 million | $251.7 million at Dec. 31, 2012 |
| Deposits | $229.4 million | $257.1 million at Dec. 31, 2012 |
| Total borrowings | $90.5 million | Unchanged from Dec. 31, 2012: $79.5 million FHLB advances, $6.0 million subordinated debentures and $5.0 million other borrowing |
| Shareholders’ equity | $16.6 million | $18.0 million at Dec. 31, 2012 |
Q2 interest income was $4.1 million, down from $5.2 million a year earlier; interest expense fell to $1.3 million from $1.7 million. Net interest margin declined to 3.27% from 3.53% in Q2 2012. For the first half, net interest income before provision was $5.5 million, down 24%, and net interest margin was 3.15% versus 3.60%.
First-half cash flows were $1.6 million provided by operations, $36.4 million provided by investing activities and $27.9 million used in financing activities. Cash and cash equivalents increased $10.1 million. Investing inflows chiefly reflected loan sales, repayments and REO sales; financing outflows chiefly reflected a $27.7 million deposit decline.
Material changes and credit quality
- Total assets fell 8% in the first half, primarily as the Company reduced its loan portfolio through payoffs and sales of non-performing and classified loans. It sold approximately $15.5 million of loans.
- Management attributed the shift from first-half 2012 profit to a 2013 loss chiefly to the prior-year $2.5 million gain on sale of the former headquarters, as well as lower interest income from a smaller loan portfolio. Q2 2013 non-interest income was $254,000 versus $2.7 million a year earlier.
- No provision for loan losses was recorded in the first half of 2013, compared with $1.1 million in first-half 2012. The allowance was $10.6 million, or 4.49% of loans held for investment, at June 30. First-half charge-offs rose to $1.8 million from $800,000.
- Non-performing assets declined to $24.8 million, or 7.19% of assets, from $45.3 million, or 12.11%, at year-end. Non-accrual loans were $18.6 million versus $37.1 million. Total delinquent loans were $20.2 million versus $41.8 million.
- REO declined to $6.2 million from $8.2 million. Total troubled debt restructurings were $32.8 million, including $13.5 million on non-accrual status.
- The Bank’s June 30 capital ratios were 9.48% Tier 1 core to adjusted assets, 14.98% Tier 1 risk-based and 16.27% total risk-based. These exceeded the special cease-and-desist-order thresholds of 8% and 12% for the applicable core and total risk-based measures.
Outlook, risks and unusual matters
- Going concern: Management states that conditions raise substantial doubt about the Company’s ability to continue as a going concern. The holding company lacks cash to meet operating and debt obligations, cannot rely on Bank dividends without regulatory approval, and is in default on its $5.0 million line of credit. The Bank’s stock secures that borrowing.
- Recapitalization: The proposed plan combines preferred-stock exchanges at generally a 50% discount to liquidation value, an exchange of part of the lender’s debt, forgiveness of accrued line-of-credit interest, and approximately $4 million of new equity placements. At an illustrative $1.00 placement price, the transactions could issue about 18.2 million shares or equivalents, approximately 90.5% of pro forma equity. Terms and completion are uncertain; the plan requires approvals and shareholder authorization for additional shares.
- The Company stopped paying interest on its $6.0 million junior subordinated debentures in September 2010; accrued interest was $540,000 at June 30. These debentures mature in March 2014. The line of credit is overdue and in default, with $1.7 million accrued interest at June 30. Management says it has reached an agreement in principle with the lender, but the restructuring is conditional.
- Both the Company and Bank remain subject to regulatory orders and are described as not in compliance with those agreements. The orders restrict dividends, debt and capital actions, asset growth and brokered deposits. Failure to meet capital requirements or complete the plan could result in further regulatory action, including a conservator or receiver for the Bank.
- Management intends to resume focusing on loan originations and use excess federal funds sold to support near-term loan growth. No quantified earnings guidance is provided. The Bank had $74.5 million of cash and cash equivalents and $6.4 million of additional FHLB borrowing capacity subject to collateral and stock requirements.
- The Company recorded a $9.7 million deferred-tax-asset valuation allowance, leaving no net deferred tax assets. The filing also reports an ongoing regulatory investigation relating to a former loan officer and loans originated by that officer.
- New Basel III capital rules were issued in July 2013, with community banks becoming subject to the rule in 2015 and phase-in provisions extending through 2019; management was evaluating the impact.
Important facts for investors to verify
- Whether the recapitalization, new equity placements, preferred exchanges and lender restructuring close on the proposed terms, and the resulting dilution and ownership.
- How the Company will fund holding-company expenses and debt obligations, including the March 2014 subordinated-debt maturity, if the plan is delayed or fails.
- OCC and Federal Reserve responses, continued compliance with regulatory capital orders, and any changes to the risk of receivership.
- Whether reductions in non-performing loans and delinquency are sustainable, and whether the remaining allowance and collateral valuations adequately reflect credit losses.
- Whether renewed loan originations can rebuild earning assets and improve margins amid continued deposit outflows and asset-quality risks.