Broadway Financial Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited consolidated results include Broadway Financial Corporation and its subsidiaries. Balance-sheet comparisons are with December 31, 2019. Amounts below are in millions unless otherwise noted.
Key financial metrics
| Metric | Q3 / September 30, 2020 | Comparable period / prior date |
|---|---|---|
| Total assets | $499.2 | $440.4 at December 31, 2019 |
| Deposits | $325.3 | $297.7 at December 31, 2019 |
| FHLB advances | $115.5 | $84.0 at December 31, 2019 |
| Junior subordinated debentures | $3.6 | $4.3 at December 31, 2019 |
| Stockholders’ equity | $49.4; 9.89% of assets | $48.8; 11.09% of assets at December 31, 2019 |
| Net interest income | Q3: $3.38; nine months: $9.31 | Q3 2019: $2.39; nine months 2019: $7.67 |
| Net interest margin | Q3: 2.82%; nine months: 2.57% | Q3 2019: 2.33%; nine months 2019: 2.49% |
| Net loss | Q3: $0.24; nine months: $0.06 | Q3 2019: $0.28; nine months 2019: $0.14 |
| Cash and cash equivalents | $69.7 | $15.6 at December 31, 2019 |
| Loans held for investment, net | $361.8 | $397.8 at December 31, 2019 |
| Loans held for sale | $40.7 | None at December 31, 2019 |
Results, changes, and cash flow
- Q3 net loss was $244,000 versus $279,000 a year earlier. Higher net interest income and no quarterly loan-loss provision were offset by higher operating expenses, lower non-interest income, and higher income-tax expense.
- For the first nine months, net loss was $61,000 versus $137,000 in 2019. Net interest income increased $1.6 million, but non-interest expense rose $1.1 million and non-interest income fell $214,000. The 2020 period included a $273,000 tax benefit from resolution of a California tax audit issue.
- Q3 net interest margin increased 49 basis points year over year, reflecting lower funding costs and increased average interest-earning assets. The nine-month margin was 2.57%, up from 2.49% in 2019.
- Professional-services expense included $595,000 of City First merger costs in Q3; nine-month professional-services expense also included $210,000 related to actions by a former stockholder. The filing says that related activities and litigation were withdrawn early in Q3.
- Operating cash flow was negative $39.8 million for the nine months, largely reflecting $118.6 million of loan originations held for sale, partly offset by $77.6 million of sale proceeds. Investing cash flow was positive $35.6 million and financing cash flow positive $58.3 million. Cash rose $54.2 million to $69.7 million.
- Deposits increased $27.6 million; liquid deposits rose to $177.6 million, or 55% of deposits, while certificates of deposit declined $42.5 million. Total borrowings increased $30.7 million to $119.1 million.
Outlook, risks, and notable items
- City First transaction: On August 25, 2020, the Company agreed to merge with CFBanc Corporation (City First), with Broadway Financial surviving. City First shares are to convert into Broadway voting and non-voting shares at 13.626 shares per City First share, subject to the merger agreement. Following the holding-company merger, Broadway’s bank is to merge into City First Bank of D.C., which would survive. Completion remains subject to the agreement’s terms and conditions.
- COVID-19: Management reported no COVID-related delinquencies, no borrower requests for loan modifications, and no modifications granted as of the filing. The Bank adopted modified lending guidelines, stress-tested its portfolio, and did not participate as a PPP lender. Management cautioned that actual credit losses could exceed estimates amid pandemic uncertainty.
- Credit quality: The allowance for loan losses was $3.2 million, or 0.88% of gross held-for-investment loans. Non-performing loans rose to $820,000 from $424,000 at year-end; there were no loans at least 90 days past due that were still accruing. Management considered the allowance adequate but noted that regulators may require an increase.
- Liquidity and capital: Management said liquidity was sufficient for foreseeable needs. Unpledged cash and securities totaled approximately $80.1 million; the Bank also had $31.1 million of additional FHLB borrowing capacity and an $11.0 million line of credit. The Bank exceeded regulatory capital requirements and was above “well capitalized” thresholds.
- Concentration: Two deposit customers represented approximately 13% of deposits; one customer represented 8%. Multi-family loans were a major portfolio exposure. Management cited low loan-to-value ratios and high debt-service coverage in that portfolio as mitigating factors.
- No specific financial guidance was provided. The Company said results for the interim periods are not necessarily indicative of full-year results.
Important facts for investors to verify
- Merger status, required approvals, closing conditions, exchange mechanics, and expected integration costs for the City First transaction.
- Whether loan-sale activity and the $40.7 million held-for-sale balance continue, and how related cash flows affect reported operating cash flow.
- Subsequent trends in non-performing loans, delinquencies, borrower relief requests, and allowance adequacy as pandemic conditions evolve.
- Deposit concentration and funding mix, including reliance on FHLB advances, deposit-service balances, and the availability of stated borrowing capacity.
- How much of ongoing profitability is affected by merger-related costs, other professional fees, and the one-time tax audit adjustment.