Broadway Financial Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; balance-sheet comparisons are with December 31, 2019. Broadway is a bank holding company whose principal subsidiary is Broadway Federal Bank. Financial amounts below are in U.S. dollars; “million” and “thousand” are abbreviated.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Interest income | $4.57m | $4.09m | $9.14m | $8.46m |
| Net interest income | $3.03m | $2.46m | $5.93m | $5.28m |
| Loan-loss provision (recapture) | $0 | ($158k) | $29k | ($348k) |
| Non-interest income | $242k | $139k | $439k | $515k |
| Non-interest expense | $3.40m | $3.02m | $6.55m | $6.08m |
| Pre-tax income (loss) | ($129k) | ($263k) | ($212k) | $56k |
| Net income (loss) | $216k | ($135k) | $183k | $142k |
| Basic and diluted EPS | $0.01 | ($0.01) | $0.01 | $0.01 |
| Net interest margin | 2.43% | 2.40% | 2.45% | 2.57% |
- Q2 net income improved by $351k year over year, but included a $273k tax adjustment following resolution of a California tax audit issue covering 2009–2013. The quarter had a pre-tax loss.
- Net interest income rose as average interest-earning assets and loan balances increased and deposit costs declined. The six-month margin fell 12 basis points, primarily because of lower average loan yields.
- Q2 non-interest expense increased $380k; the six-month increase was $469k. Higher professional-services costs included $152k in Q2 and $200k for the first half to respond to actions by a former stockholder. The related litigation was withdrawn early in Q3.
Financial condition, cash flow and liquidity
- Total assets were $491.3m, up $50.9m from year-end. Cash and cash equivalents were $39.8m, versus $15.6m; available-for-sale securities were $10.2m. Loans held for sale were $49.7m, all multi-family, while net loans held for investment declined to $374.4m from $397.8m.
- Deposits increased $18.1m to $315.8m. Liquid deposits rose to $162.4m, or 51% of deposits; certificates of deposit fell to $153.4m, or 49%. One customer represented approximately 13% of deposits.
- FHLB advances increased $32.5m to $116.5m; junior subordinated debentures declined $510k to $3.825m. Total borrowings were $120.3m. The FHLB advance weighted rate was 1.84%, and advances were secured by $210.4m of first-mortgage loans.
- Stockholders’ equity was $49.5m, 10.08% of assets; book value was $1.77 per share. The Bank exceeded regulatory minimums and was above all stated “well capitalized” thresholds; its June 30 leverage ratio was 9.71% and total capital ratio was 17.15%.
- For the first half, operating cash flow was negative $49.2m, primarily reflecting $110.9m of loan originations for sale, partly offset by $61.0m of sale proceeds. Investing cash flow was positive $23.4m and financing cash flow positive $50.0m. Cash and cash equivalents rose $24.3m.
- Management reported $39.8m cash and $10.2m of unpledged securities. The Bank could borrow an additional $44.5m from the FHLB subject to collateral and stock requirements and had an $11m line of credit at another financial institution. Management said liquidity was sufficient to support foreseeable needs.
Credit, outlook and notable matters
- The allowance for loan losses was $3.215m, or 0.85% of gross held-for-investment loans, compared with $3.182m, or 0.79%, at year-end. No charge-offs occurred in the first half. Management considered the allowance adequate but cautioned that COVID-19 uncertainty could produce actual losses above estimates.
- No loans were delinquent at June 30; non-performing loans were $846k, up from $424k at year-end, primarily after a church loan became non-accrual. All non-performing loans were current on payments. Troubled debt restructurings totaled $4.5m.
- The Bank established a COVID-19 borrower-modification program. Two borrowers had requested modifications by the filing date; none had been granted. Management cited multi-family portfolio loan-to-value ratios below 59% and debt-service coverage ratios above 1.49% as mitigating factors, while noting that the end of $600 weekly federal stimulus payments could pressure some tenants’ rent payments.
- Broadway did not participate in the SBA Paycheck Protection Program. Management described operational safety measures, updated portfolio stress testing, contingency planning and revised lending guidelines intended to moderate concentrations and enhance liquidity. No quantified earnings or other financial guidance was provided.
- Management stated that the Bank had no material change in critical accounting policies; CECL adoption was expected in 2023, with financial impact not yet determined. Disclosure controls were deemed effective at June 30, 2020. The filing reported no legal proceedings at filing and no new risk factors.
Important facts for investors to verify
- How much reported profitability depends on the one-time $273k tax adjustment, and whether pre-tax results improve.
- Subsequent credit performance, COVID-related loan modifications, multi-family borrower and tenant resilience, and adequacy of the allowance.
- Funding and liquidity trends, including reliance on FHLB advances, deposit mix and the customer representing 13% of deposits.
- Whether loan-sale activity and the $49.7m held-for-sale balance continue, and the resulting impact on cash flow and earnings.
- Future legal or professional-services costs following the former stockholder matter, and the eventual impact of CECL adoption.