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BYFC > SEC Filings for BYFC > Form 10-Q on 15-Nov-2012All Recent SEC Filings

Show all filings for BROADWAY FINANCIAL CORP \DE\

Form 10-Q for BROADWAY FINANCIAL CORP \DE\


15-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part I "Item 1, Financial Statements," of this Quarterly Report on Form 10-Q and our amended Annual Report on Form 10-K/A for the year ended December 31, 2011.

Overview

Total assets decreased during the first nine months of 2012 primarily due to a decrease in our loan portfolio, as loan repayments, foreclosures and charge-offs exceeded loan originations during the period. The decrease in our loan portfolio consisted of a $15.4 million decrease in our five or more units residential real estate loan portfolio, a $9.7 million decrease in our commercial real estate loan portfolio, a $6.3 million decrease in our church loan portfolio, a $4.5 million decrease in our one-to-four family residential real estate loan portfolio, a $2.8 million decrease in our construction loan portfolio, a $1.5 million decrease in our commercial loan portfolio, and a $798 thousand decrease in our consumer loan portfolio.

Total deposits decreased during the first nine months of 2012, while FHLB borrowings, subordinated debentures and other borrowings remained unchanged.

Our net earnings (loss) for the three and nine months ended September 30, 2012 were ($613) thousand and $1.2 million, respectively, compared to net losses of ($7.5) million and ($9.4) million, respectively, for the same periods a year ago, representing an increase in net earnings of $6.9 million and $10.6 million, respectively. The increase from a net loss to net earnings was primarily due to lower provisions for loan losses, a $2.5 million gain on the sale of our headquarters building, lower provisions for losses on REO and loans held for sale, and lower income tax provision expense for the three and nine months ended September 30, 2012.

Results of Operations

Net Interest Income

For the third quarter of 2012, our net interest income before provision for loan losses was $3.2 million, which represented a decrease of $1.1 million, or 26%, from the third quarter of 2011. The decrease in net interest income was primarily attributable to a decrease in average interest-earning assets, primarily loans receivable, combined with a decrease in net interest margin.

Interest income decreased $1.5 million, or 24%, to $4.7 million for the third quarter of 2012 from $6.2 million for the third quarter of 2011. The decrease in interest income was primarily due to a $71.9 million decrease in the average balance of loans receivable from $391.2 million for the third quarter of 2011 to $319.3 million for the third quarter of 2012, which resulted in a $1.1 million reduction in interest income. Additionally, the average yield on loans decreased from 6.20% for the third quarter of 2011 to 5.76% for the third quarter of 2012, which resulted in a $411 thousand reduction in interest income. The decrease in the average yield on loans was primarily a result of continued higher levels of non-performing loans, payoffs of loans which carried a higher average yield than the average yield of loans receivable and lower yields on loan originations as a result of the low interest rate environment.

Interest expense decreased $419 thousand, or 22%, to $1.5 million for the third quarter of 2012 from $1.9 million for the third quarter of 2011. The decrease in interest expense was primarily attributable to a 23 basis point decline in the average cost of interest bearing liabilities, to 1.67% for the third quarter of 2012 from 1.90% for the third quarter of 2011, which resulted in a $243 thousand reduction in interest expense. The decrease in interest expense reflected a 32 basis point reduction in the cost of deposits and borrowings as a result of the low interest rate environment, and repayment of higher costing FHLB advances that were replaced by lower costing advances. Additionally, the volume of average interest-bearing liabilities decreased $43.3 million, which resulted in a $176 thousand reduction in interest expense.


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For the nine months ended September 30, 2012, net interest income before provision for loan losses totaled $10.4 million, down $2.7 million, or 21%, from $13.1 million of net interest income before provision for loan losses for the same period a year ago. The $2.7 million decrease in net interest income primarily resulted from a $63.9 million decrease in average interest-earning assets and a 30 basis point decrease in net interest margin.

Provision and Allowance for Loan Losses

We record a provision for loan losses as a charge to earnings when necessary in order to maintain the allowance for loan losses at a level sufficient, in management's judgment, to absorb losses inherent in the loan portfolio. At least quarterly, we conduct an assessment of the overall quality of the loan portfolio and general economic trends in the local market. The determination of the appropriate level for the allowance is based on that review, considering such factors as historical loss experience for each type of loan, the size and composition of our loan portfolio, the levels and composition of our loan delinquencies, non-performing loans and net loan charge-offs, the value of underlying collateral on problem loans, regulatory policies, general economic conditions, and other factors related to the collectability of loans in the portfolio.

The provision for loan losses for the third quarter of 2012 totaled $129 thousand, compared to $3.8 million for the same period a year ago. The decrease in loan provision was primarily due to our loan portfolio shrinkage of $13.6 million during the third quarter of 2012 and a $5.2 million decrease in charge-offs.

For the nine months ended September 30, 2012, the provision for loan losses totaled $1.2 million compared to $8.5 million of provisions for the same period a year-ago. The decrease in loan loss provision was primarily due to a $40.8 million decrease in our gross loan portfolio and a $7.2 million decrease in charge-offs.

At September 30, 2012 our allowance for loan losses was $17.0 million, or 5.68% of our gross loans receivable, compared to $17.3 million, or 5.09% of our gross loans, at year-end 2011. The ratio of the allowance for loan losses to NPLs, excluding loans held for sale, was 43.21% at September 30, 2012, compared to 44.20% at year-end 2011. As of September 30, 2012, 64% of our NPLs had been written down to their adjusted fair value less estimated selling costs, by establishing specific reserves or charge-offs as necessary. The remaining 36% of NPLs are reported at cost as the fair value of collateral less estimated selling costs exceeded the recorded investment in the loan.

Loan charge-offs during the first nine months of 2012 were $1.9 million, or 0.77% of average loans, compared to $9.2 million, or 2.99% of average loans, during the first nine months of 2011. Of the $1.9 million of charge-offs, $255 thousand were reserved for at year-end 2011. The remaining $1.7 million of charge-offs were reserved for during 2012 and were primarily related to loans that became impaired during 2012 and with respect to which recent valuations of the underlying collateral reflected impairment losses. Charge-offs in one-to-four family residential real estate loans totaled $894 thousand and represented 46% of charge-offs during 2012. Charge-offs in church loans totaled $608 thousand and represented 32% of charge-offs during 2012. Charge-offs in commercial real estate loans totaled $404 thousand and represented 21% of charge-offs during 2012. Charge-offs in five or more unit residential real estate loans totaled $14 thousand and represented 1% of charge-offs during 2012.

Impaired loans at September 30, 2012 were $55.2 million, compared to $56.3 million at December 31, 2011. Specific reserves for impaired loans were $3.4 million, or 6.12% of the aggregate impaired loan amount at September 30, 2012, compared to $3.9 million, or 7.00%, at December 31, 2011. Excluding specific reserves for impaired loans, our coverage ratio (general allowance as a percentage of total non-impaired loans) was 5.59% at September 30, 2012, compared to 4.71% at December 31, 2011.

We performed an impairment analysis for all non-performing and restructured loans, and established specific reserves for impaired loans of $3.4 million at September 30, 2012. Of the $3.4 million specific reserves at September 30, 2012, $594 thousand was related to $1.7 million of loans that are non-performing. Additionally, we recorded $2.8 million of specific reserves for impairment related to $17.7 million of accruing loans that were modified in troubled debt restructurings. On $16.7 million of impaired loans, the fair value of collateral less estimated selling costs exceeded the recorded investment in the loan and did not require a specific reserve. The remaining $19.1 million of impaired loans had been written down to fair value after charge-offs of $13.5 million.


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Management believes that the allowance for loan losses is adequate to cover probable incurred losses in the loan portfolio as of September 30, 2012, but there can be no assurance that actual losses will not exceed the estimated amounts. In addition, the OCC and the FDIC periodically review the allowance for loan losses as an integral part of their examination process. These agencies may require an increase in the allowance for loan losses based on their judgments of the information available to them at the time of their examinations. The provisions for loan losses and corresponding allowance for loan losses in these financial statements contained in Part 1, Item 1 of this Form 10-Q reflect judgments by the OCC made during its supervisory examination of our Bank completed in July 2012.

Non-interest Income

Non-interest income (loss) for the third quarter of 2012 totaled ($217) thousand compared to $114 thousand for the third quarter of 2011. The decrease from income to a loss was primarily due to higher losses on sales of loans and REOs.

For the nine months ended September 30, 2012, non-interest income totaled $2.9 million compared to $494 thousand for the same period a year ago. The increase primarily reflects the gain on the sale of our headquarters building and higher net gains on sales of REO, which were partially offset by lower service charges and higher losses on sales of loans for the first nine months of 2012.

Non-interest Expense

Non-interest expense for the third quarter of 2012 totaled $3.5 million, compared to $5.1 million for the third quarter of 2011. Lower non-interest expense in the third quarter of 2012 was primarily due to lower provisions for losses on REO and loans held for sale and lower compensation and benefits expense, which were partially offset by higher FDIC insurance expense and higher other expenses, primarily appraisal expenses and directors and officers liability insurance expense.

For the nine months ended September 30, 2012, non-interest expense totaled $10.1 million compared to $12.7 million for the same period a year ago. The decrease in non-interest expense during the first nine months of 2012 primarily reflected lower provisions for losses on REO and loans held for sale, lower compensation and benefits expense and lower legal expenses, which were partially offset by higher other expenses, primarily REO and appraisal expenses and director and officer's liability insurance expense.

Income Taxes

The Company's effective income tax rate was (0.33%) and 40.68% for the three and nine months ended September 30, 2012 compared to (68.21%) and (23.20%) for the three and nine months ended September 30, 2011. Income taxes for interim periods are computed by applying the projected annual effective income tax rate for the year to the year-to-date earnings plus discrete items (items incurred in the quarter). The projected effective tax rate incorporates certain non-taxable federal and state income items and expected increases to the valuation allowance for projected deferred tax assets.

Financial Condition

Total Assets

Total assets were $384.3 million at September 30, 2012, which represented a decrease of $29.5 million, or 7%, from December 31, 2011. During the first nine months of 2012, net loans decreased by $40.5 million, loans held for sale decreased by $1.8 million, securities decreased by $4.4 million, REO decreased by $4.4 million, office properties and equipment decreased by $2.0 million and deferred tax assets decreased by $850 thousand, while cash and cash equivalents increased by $24.9 million.

Loan Portfolio

Our gross loan portfolio decreased by $41.0 million to $298.8 million at September 30, 2012 from $339.8 million at


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December 31, 2011, as loan repayments, foreclosures and charge-offs exceeded loan originations during the first nine months of 2012. The decrease in our loan portfolio consisted of a $15.4 million decrease in our five or more units residential real estate loan portfolio, a $9.7 million decrease in our commercial real estate loan portfolio, a $6.3 million decrease in our church loan portfolio, a $4.5 million decrease in our one-to-four family residential real estate loan portfolio, a $2.8 million decrease in our construction loan portfolio, a $1.5 million decrease in our commercial loan portfolio, and a $798 thousand decrease in our consumer loan portfolio.

Loan originations for the first nine months of 2012 totaled $18.2 million, compared to $3.6 million for the first nine months of 2011. Loan repayments for the first nine months of 2012 totaled $53.2 million, compared to $28.3 million for the comparable period in 2011. The increase in loan repayments was primarily attributable to a higher level of refinancings by borrowers who could take advantage of historically low interest rates and new financing opportunities in the stabilized commercial and single family markets. Loan charge-offs for the first nine months of 2012 totaled $1.9 million, compared to $9.2 million of charge-offs for the first nine months of 2011. Loans transferred to REO during the first nine months of 2012 totaled $3.5 million, compared to $7.7 million during the first nine months of 2011. Loans transferred to loans held for sale during the first nine months of 2012 totaled $616 thousand, compared to $2.5 million of loans transferred to loans held for sale during the first nine months of 2011.

Loans held for sale decreased from $13.0 million at December 31, 2011 to $11.2 million at September 30, 2012. The $1.8 million decrease during the first nine months of 2012 was primarily due to non-performing loan sales of $1.8 million and loan repayments of $367 thousand. Loans held for sale that were transferred to REO during the nine months ended September 30, 2012 totaled $333 thousand.

Deposits

Deposits totaled $262.8 million at September 30, 2012, down $31.9 million, or 11%, from year-end 2011. During the first nine months of 2012, core deposits (NOW, demand, money market and passbook accounts) decreased by $7.0 million and represented 35% and 33% of total deposits at September 30, 2012 and December 31, 2011, respectively. Our certificates of deposit ("CDs") decreased by $24.9 million during the first nine months of 2012 and represented 64% of total deposits at September 30, 2012 and December 31, 2011, respectively. Of the $24.9 million decrease in CDs during 2012, $6.3 million were from brokered deposits. At September 30, 2012, brokered deposits represented 1% of total deposits, compared to 3% of total deposits at December 31, 2011.

Borrowings

Since year-end 2011, FHLB borrowings, subordinated debentures and other borrowings remained unchanged at $83.0 million, $6.0 million, and $5.0 million, respectively. FHLB advances were 22% and 20% of total assets at September 30, 2012 and December 31, 2011, respectively. During the second quarter of 2012, $13.5 million of FHLB advances were restructured which resulted in a decrease of the weighted average cost of advances from 3.09% at December 31, 2011 to 2.52% at September 30, 2012. See Liquidity for further information on subordinated debentures and other borrowings.

Non-Performing Assets

Non-performing assets ("NPAs") include loans that are 90 days or more delinquent and still accruing, non-accrual loans and real estate owned through foreclosure or deed in lieu of foreclosure ("REO"). NPAs at September 30, 2012 were $45.2 million, or 11.75% of total assets, compared to $51.4 million, or 12.43% of total assets, at December 31, 2011.

As of September 30, 2012, five loans to a single borrower totaling $1.5 million were 90 days past due and were accruing interest.

At September 30, 2012, non-accrual loans were $41.4 million compared to $44.7 million at December 31, 2011. These loans consist of delinquent loans that are 90 days or more past due and troubled debt restructurings ("TDRs") that do not qualify for accrual status. The non-accrual loans at September 30, 2012 included 31 church loans totaling $22.1 million, 22 one-to-four family residential real estate loans totaling $8.6 million, 13 commercial real estate loans totaling $6.4 million, 8 five or more units residential real estate loans totaling $3.9 million, a land loan for $284 thousand, and a consumer loan for $69 thousand.


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During the first nine months of 2012, REO decreased by $4.4 million to $2.3 million at September 30, 2012, from $6.7 million at the end of 2011. At September 30, 2012, the Bank's REO consisted of seven commercial real estate properties, four of which are church buildings. As part of our efforts to reduce non-performing assets, we sold thirteen REO properties for total proceeds of $7.8 million, and recorded a corresponding net gain of $288 thousand, during the first nine months of 2012.

Performance Ratios

The annualized return (loss) on average equity for the three and nine months ended September 30, 2012 were (12.52%) and 8.76%, compared to annualized losses on average equity of (104.17%) and (39.86%) for the three and nine months ended September 30, 2011. The annualized return (loss) on average assets for the three and nine months ended September 30, 2012 were (0.64%) and 0.41%, compared to annualized losses on average assets of (6.89%) and (2.71%) for the three and nine months ended September 30, 2011. The efficiency ratios for the three and nine months ended September 30, 2012 was 110.70% and 70.49%, compared to 71.03% and 73.30% for the three and nine months ended September 30, 2011.

Liquidity

The objective of liquidity management is to ensure that we have the continuing ability to fund operations and meet other obligations on a timely and cost-effective basis. The Bank's sources of funds include deposits, advances from the FHLB and other borrowings, proceeds from the sale of loans, mortgage-backed and investment securities, and principal and interest payments from loans and mortgage-backed and other investment securities. Primary uses of funds include withdrawal of and interest payments on deposits, originations of loans, purchases of mortgage-backed and other investment securities, and payment of operating expenses.

Net cash inflows from operating activities totaled $5.2 million and $21.0 million during the nine months ended September 30, 2012 and 2011, respectively. Net cash inflows from operating activities for the first nine months of 2012 were primarily attributable to proceeds from sales of loans receivable held for sale and interest payments received on loans and securities.

Net cash inflows from investing activities totaled $51.2 million and $31.3 million during the nine months ended September 30, 2012 and 2011, respectively. Net cash inflows from investing activities for the first nine months of 2012 were attributable primarily to principal repayments on loans and securities, proceeds from the sales of REOs and proceeds from sale of the headquarters building.

Net cash outflows from financing activities totaled $31.5 million and $53.3 million during the nine months ended September 30, 2012 and 2011, respectively. Net cash outflows from financing activities for the first nine months of 2012 were attributable primarily to the net decrease in deposits.

When the Bank has more funds than required for reserve requirements or short-term liquidity needs, the Bank sells federal funds to other financial institutions. Conversely, when the Bank has less funds than it requires, the Bank may borrow funds from the FHLB. The Bank is currently approved by the FHLB to borrow up to $100.0 million to the extent the Bank provides qualifying collateral and holds sufficient FHLB stock. That approved limit and collateral requirement would have permitted the Bank, as of September 30, 2012, to borrow an additional $15.9 million.

At times we maintain a portion of our liquid assets in interest-bearing cash deposits with other banks, in overnight federal funds sold to other banks, and in securities available-for-sale that are not pledged. The Bank's liquid assets at September 30, 2012 consisted of $56.5 million in cash and cash equivalents and $13.0 million in securities available-for-sale that are not pledged, compared to $31.6 million in cash and cash equivalents and $17.4 million in securities available-for-sale that are not pledged at December 31, 2011.

The Company has a tax sharing liability to the Bank which exceeds operating cash at the Company level. The liability


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was partially settled pursuant to the terms of the Tax Allocation Agreement between the Bank and the Company on March 30, 2012, which settlement consumed the Company's operating cash. During the three months ended September 30, 2012, we sold 115,386 shares of our common stock held as treasury shares to certain directors and officers for $150,000. This capital was retained by the Company to help offset outstanding payables. Our ability to service our debt obligations and pay dividends and holding company expenses is dependent primarily on the recapitalization plan discussed herein under the caption "Capital Resources". The Company's debt obligations, which are included in other borrowings, are described below.

On March 17, 2004, the Company issued $6.0 million of Floating Rate Junior Subordinated Debentures in a private placement. The debentures mature in 10 years and interest is payable quarterly at a rate per annum equal to the 3-month LIBOR plus 2.54%. The interest rate is determined as of each March 17, June 17, September 17, and December 17, and was 2.93% at September 30, 2012. The Company stopped paying interest on the debentures in September 2010. As disclosed previously, the Company is not permitted to make payments on any debts without prior notice to and receipt of written notice of non-objection from the FRB. In addition, under the terms of the subordinated debentures, the Company is not allowed to make payments on the subordinated debentures if the Company is in default on any of its senior indebtedness, which term includes the senior line of credit described below.

On February 28, 2010, the Company borrowed an aggregate of $5.0 million under its $5.0 million line of credit with another financial institution, and invested all of the proceeds in the equity capital of the Bank. Borrowings under this line of credit are secured by the Company's assets. The interest rate on the line of credit adjusts annually, subject to a minimum of 6.00%, and increases by an additional 5% in the event of default. The full amount of this borrowing became due and payable on July 31, 2010. The Company does not have sufficient cash available to repay the borrowing at this time and would require approval of the FRB to make any payment on this senior line of credit or to obtain a dividend from the Bank for such purpose. On April 7, 2011, the lender agreed to forbear from exercising its rights (other than increasing the interest rate by the default rate margin) pursuant to the line of credit agreement until January 1, 2012 subject to certain conditions. The lender has declined to extend the forbearance agreement. This senior line of credit has not been repaid and the Company is now in default under the line of credit agreement. The accrued interest on this line was approximately $1.3 million as of September 30, 2012. See Note 7 of the Notes to Consolidated Financial Statements.

Due to the current regulatory cease and desist order that is in effect, the Bank is not allowed to make distributions to the Company without regulatory approval, and such approval is not likely to be given. Accordingly, the Company will not be able to meet its payment obligations within the foreseeable future unless the Company is able to secure new capital.

These conditions and the Company's operating losses raise substantial doubt about the Company's ability to continue as a going concern. These and related matters are discussed in Note 12 "Going Concern" of the Notes to Consolidated Financial Statements.

Capital Resources

On November 14, 2008, the Company issued 9,000 shares of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series D, having a liquidation preference of $1,000 per share, together with a ten-year warrant to purchase 183,175 shares of Company common stock at $7.37 per share which was subsequently cancelled, to the U.S. Treasury Department for gross proceeds of $9.0 million. The sale of the Series D Preferred Stock was made pursuant to the U.S. Treasury Department's TARP Capital Purchase Program.

On December 8, 2009, the Company issued 6,000 shares of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series E, having a liquidation preference of $1,000 per share, to the U.S. Treasury Department for gross proceeds of $6.0 million. The sale of the Series E Preferred Stock was made pursuant to the U.S. Treasury Department's TARP Capital Purchase Program.


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We are pursuing a comprehensive recapitalization plan to improve the Company's capital structure. To date, we have entered into written agreements with:

The U.S. Treasury Department pursuant to which the U.S. Treasury will exchange the shares of our Series D and E Fixed Rate Cumulative Perpetual Preferred Stock held by it for our common stock at a discount of 50% of the liquidation amount, plus an undiscounted exchange of the accumulated but unpaid dividends on such preferred stock for common stock, subject to various conditions, including the exchange of the Company's other outstanding series of preferred stock at discounts of 50% of the aggregate liquidation values, the placement of at least $5 million of new common equity capital, and other conditions; and

The holder of our Series A Perpetual Preferred Stock to exchange its holdings for common stock at a discount of 50% of the liquidation amount, subject to various conditions, including the exchange of the Company's other outstanding series of preferred stock, the placement of new common equity capital, and other conditions.

We are also in negotiations regarding definitive agreements with the holders of our Series B Perpetual Preferred Stock and Series C Noncumulative Perpetual Convertible Preferred Stock regarding exchange of their holdings for common . . .

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