Broadway Financial Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. Dollar figures below are in U.S. dollars. Results include CFBanc from its April 1, 2021 merger date, so comparisons with 2020 and year-end 2020 are not fully like-for-like.
Business context and material changes
Broadway completed its merger with CFBanc on April 1, 2021; the combined bank operates as City First Bank, N.A. CFBanc had $471.0 million of assets, $227.7 million of gross loans and $353.7 million of deposits at acquisition. The merger materially expanded the company’s scale and added $26.0 million of goodwill and a $3.3 million core deposit intangible.
On April 6, the company raised $32.9 million gross (about $30.8 million net) through private placements. The merger and capital raise substantially increased shares outstanding.
Financial performance and condition
| Metric | Q2 2021 / June 30, 2021 | Comparable period / date |
|---|---|---|
| Interest income | $6.9 million | $4.6 million in Q2 2020 |
| Net interest income | $5.8 million; $5.7 million after $81,000 loan-loss provision | $3.0 million in Q2 2020, before provision |
| Net interest margin | 2.33% | 2.43% in Q2 2020 |
| Non-interest income | $2.2 million, including a $1.8 million CDFI Fund grant | $242,000 in Q2 2020 |
| Non-interest expense | $5.4 million | $3.4 million in Q2 2020 |
| Net income attributable to Broadway Financial | $701,000; $0.01 per share | $216,000; $0.01 per share in Q2 2020 |
| Six-month net income (loss) attributable to Broadway Financial | $(2.8) million; $(0.06) per share | $183,000; $0.01 per share in first-half 2020 |
| Total assets | $1.041 billion | $483.4 million at December 31, 2020 |
| Loans held for investment, net | $614.7 million | $360.1 million at December 31, 2020 |
| Deposits | $705.0 million | $315.6 million at December 31, 2020 |
| Total borrowings | About $183.5 million | $113.8 million at December 31, 2020 |
| Cash and cash equivalents | $210.4 million | $96.1 million at December 31, 2020 |
| Stockholders’ equity | $143.5 million | $48.9 million at December 31, 2020 |
For the six months, net cash used in operating activities was $2.6 million; investing activities provided $58.4 million and financing activities provided $58.5 million. Cash and cash equivalents increased by $114.3 million to $210.4 million. The company reported book value of $1.96 per share and tangible book value of $1.55 per share at June 30.
Management commentary, outlook and risks
- Management attributed improved Q2 earnings primarily to higher net interest income following the merger and the $1.8 million CDFI grant. Six-month results were weighed down by $5.6 million of merger-related costs and higher operating expenses.
- The Q2 effective tax rate was 71.3%; management cited updated annual tax assumptions and a $370,000 valuation allowance. The private placement triggered limitations on certain tax attributes under Section 382, which may restrict use of net operating losses.
- Management said liquidity was sufficient to support growth. Liquid assets included $210.4 million of cash and $68.4 million of unpledged available-for-sale securities; additional stated borrowing capacity included $24.6 million from the FHLB and $11 million in other credit lines.
- The Bank’s Community Bank Leverage Ratio was 10.10%, above the 8.5% 2021 threshold; the filing states the Bank met capital requirements and was well capitalized. Management noted additional capital might be needed to support growth and maintain that status.
- Credit measures included $1.9 million of loans 30–89 days past due, no loans past due 90 days or more, and $735,000 of non-accrual loans. The allowance for loan losses was $3.3 million, or 0.53% of gross loans; management cautioned actual losses could exceed estimates, particularly amid COVID-19 uncertainty.
- The filing reports a deposit relationship representing about 9% of deposits and one customer representing 80% of repurchase-agreement borrowings. These concentrations could make funding sensitive to changes in customer relationships.
- The Bank originated $26.4 million of PPP loans in Q2. The filing reports no COVID-related delinquencies, but contains differing statements about modification requests: one passage says none had been requested, while another says two borrowers had requested modifications; no modifications had been granted.
- No specific earnings or financial guidance is provided. Management warned that forward-looking statements are subject to risks and actual results may differ. The company was integrating CFBanc’s operations and controls, with integration changes expected to be completed within one year of acquisition.
Important facts for investors to verify
- Reconcile the filing’s inconsistent descriptions of COVID-related loan modification requests (none versus two requests).
- Assess recurring earnings excluding the CDFI grant and merger-related costs, and monitor whether merger expenses and acquired operating costs persist.
- Review the preliminary acquisition fair values, goodwill impairment exposure and realization of the acquired core deposit intangible.
- Track Section 382 restrictions and any further valuation allowance against deferred tax assets or limits on NOL use.
- Monitor loan delinquencies, non-accruals, allowance coverage, acquired-loan credit performance and the transition to CECL, scheduled for 2023.
- Assess funding concentration, borrowing capacity, capital adequacy and progress integrating CFBanc’s internal controls.