Business context and reporting period
Broadway Financial Corporation, through Broadway Federal Bank, reported unaudited consolidated results for the three months ended March 31, 2018. The company is a community banking organization focused on real-estate lending and deposits. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $3.76 million | $4.14 million in Q1 2017 |
| Net interest income | $2.77 million | $3.08 million in Q1 2017 |
| Net interest margin | 2.79% | 2.88% in Q1 2017 |
| Net income (loss) | $(84,000) | $1.23 million in Q1 2017 |
| Total assets | $401.5 million | $413.7 million at December 31, 2017 |
| Net loans held for investment | $346.2 million | $334.9 million at December 31, 2017 |
| Deposits | $280.3 million | $291.3 million at December 31, 2017 |
| Borrowings | $70.1 million | Unchanged from December 31, 2017 |
| Cash and cash equivalents | $16.2 million | $22.2 million at December 31, 2017 |
| Stockholders’ equity | $47.4 million | $47.7 million at December 31, 2017 |
Net cash used in operating activities was $752,000; investing activities provided $5.85 million; and financing activities used $11.07 million. Cash and cash equivalents declined by $5.97 million during the quarter. The allowance for loan losses was $4.18 million, or 1.19% of gross loans held for investment. FHLB advances were $65.0 million and junior subordinated debentures were $5.1 million.
Material changes versus comparable periods
- The company moved from $1.23 million of net income in Q1 2017 to an $84,000 net loss in Q1 2018. The prior-year quarter included $1.18 million of litigation-settlement income and a $350,000 loan-loss provision recapture; neither recurred in Q1 2018.
- Net interest income declined $305,000, primarily as average interest-earning assets fell by $29.7 million and net interest margin narrowed by 9 basis points. Lower average loan balances and yields reduced loan interest income.
- Assets decreased $12.2 million from year-end. The $16.9 million decrease in loans held for sale largely reflected a transfer of multi-family loans into the held-for-investment portfolio; net held-for-investment loans rose $11.3 million.
- Deposits fell $11.0 million. A $25.0 million customer transfer from a money-market account to CDARS contributed to lower liquid deposits and higher certificate balances. Liquid deposits were 42% of deposits, versus 48% at year-end.
- Available-for-sale securities had $279,000 of gross unrealized losses at quarter-end, compared with $48,000 at year-end; management attributed the losses primarily to interest-rate movements and did not consider them other-than-temporary.
Outlook, risks, contingencies and unusual items
- No earnings or financial guidance is provided. Management said it believes the Bank has sufficient liquidity to support growth over the foreseeable future.
- Available liquidity included $16.2 million of cash and cash equivalents and $16.7 million of unpledged securities. The Bank could borrow an additional $33.7 million from the FHLB, subject to collateral and stock requirements, and had an $11.0 million line of credit with another financial institution.
- Management reported the Bank exceeded regulatory capital requirements and was well-capitalized. At March 31, 2018, its CET1 and total capital ratios were 18.97% and 20.23%, respectively; its leverage ratio was 11.88%.
- Credit indicators improved: total delinquencies were $102,000, non-performing loans were $1.7 million, and there were no loans 90 days or more past due that were accruing. The filing cautions that actual loan losses could exceed estimates and regulators may require a higher allowance.
- One customer relationship represented approximately 11% of deposits. Management expected to maintain the relationship, but a loss or reduction of these deposits could affect funding.
- The company expected adoption of the CECL credit-loss standard to increase the allowance for loan losses; the total impact was still being evaluated. It anticipated the 2019 lease standard would add a lease liability and right-of-use asset, with a possible minor effect on Bank regulatory capital ratios.
- The Bank recorded a $45,000 write-down of its sole real-estate-owned property. The filing reported no legal proceedings and no material change in internal control over financial reporting; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether core earnings and net interest margin stabilize after the nonrecurring litigation settlement and provision recapture in the prior-year comparison.
- Deposit retention and funding concentration, including the large customer relationship and CDARS balances.
- Loan portfolio performance, particularly multi-family and church loans, impaired loans, TDRs, and the adequacy of the allowance as CECL implementation progresses.
- Liquidity availability in practice, including borrowing collateral requirements, the external line of credit, and the continuing decline in cash.
- Effects of interest-rate movements on deposit costs, asset yields, securities values, and the floating-rate subordinated debentures.