Broadway Financial Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; unaudited consolidated results. Broadway Financial is a bank holding company whose principal subsidiary is Broadway Federal Bank. Unless stated otherwise, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $2.572m | $3.002m | $5.346m | $6.081m |
| Net income (loss) | ($127k) | $533k | ($211k) | $1.765m |
| Basic/diluted EPS | $0.00 | $0.02 | ($0.01) | $0.07 |
| Non-interest income | $170k | $322k | $301k | $1.681m |
| Non-interest expense | $2.923m | $2.668m | $5.955m | $5.711m |
| Net interest margin | 2.62% | 2.72% | 2.70% | 2.80% |
Q2 net interest income fell $430k year over year, mainly on lower loan interest income; six-month net interest income declined $735k. Lower average earning assets and lower loan yields contributed to the decline, while deposit costs rose. The quarterly loss was $127k; the filing reports quarterly EPS rounded to $0.00.
Financial position, cash flow and credit
- Assets and loans: Total assets were $412.1m at June 30, down $1.6m from year-end 2017. Net held-for-investment loans rose to $364.8m from $334.9m; held-for-sale loans fell to $1.1m from $22.4m, including a $16.9m transfer into the investment portfolio.
- Deposits and borrowings: Deposits declined $20.0m to $271.3m, while FHLB advances increased $19.0m to $84.0m. Junior subordinated debentures remained $5.1m. The FHLB advance weighted-average rate was 2.31% at period-end, versus 1.86% at year-end.
- Liquidity and cash flow: Cash and cash equivalents were $13.6m, down $8.6m from year-end. For the six months, operating cash flow was positive $4.8m, investing cash flow negative $12.3m and financing cash flow negative $1.1m. The Bank reported $16.0m of unpledged available-for-sale securities, up to $21.8m of additional FHLB borrowing capacity subject to collateral and stock requirements, and an $11.0m line of credit.
- Capital: Stockholders’ equity was $47.3m, or 11.48% of assets; book value was $1.73 per share. The Bank exceeded regulatory minimums and was above “well capitalized” thresholds, with a 19.28% total capital ratio and 11.98% leverage ratio.
- Credit: The allowance for loan losses was $4.183m, or 1.13% of gross held-for-investment loans. No loan charge-offs or past-due loans were reported at June 30; non-performing loans were $1.247m, down from $1.766m at year-end. TDRs totaled $8.2m, of which $0.9m were non-accrual. Management said the allowance was adequate but cautioned actual losses could exceed estimates.
Changes, outlook and risks
- Year-over-year earnings comparisons were affected by favorable 2017 items that did not recur: a $1.2m insurance litigation settlement in the first half, loan-loss provision recaptures of $300k in Q2 and $650k for six months, and a $700k reversal of a deferred-compensation liability. Q2 2017 also included $139k of expenses tied to U.S. Treasury stock sales.
- Management attributed lower loan interest income in Q2 partly to a $36.1m reduction in average loans and a 19-basis-point decline in average loan yield. Loan sales were made to comply with regulator-set concentration guidelines. The remaining $1.1m held-for-sale multifamily loan was expected to be sold in Q3 2018.
- Management provided no specific earnings or operating guidance. It said the Bank had capacity to grow its held-for-investment portfolio while observing concentration guidelines. Forward-looking statements remain subject to risks and the company undertook no obligation to update them.
- Risks and watch items include deposit funding: one customer represented approximately 11% of deposits; deposits fell $20.0m while FHLB advances rose $19.0m. Management also noted that regulators may require a higher loan-loss allowance. The company expected adoption of the CECL credit-loss standard to increase the allowance, though the amount was not yet determined. The upcoming lease standard was expected to create a lease liability and right-of-use asset, with potentially minor regulatory-capital effects.
- Available-for-sale securities had $347k of gross unrealized losses at June 30, primarily attributed to interest-rate movements; management did not consider the losses other-than-temporary. No legal proceedings or new risk factors were reported in this filing.
Most important facts for investors to verify
- Whether loan growth and portfolio mix can stabilize net interest income and margins as deposit and borrowing costs change.
- Deposit retention, renewal pricing and reliance on the large depositor, CDARS and FHLB funding.
- Credit quality trends, especially church and multifamily exposures, TDR performance, collateral values and the adequacy of the allowance.
- The realized outcome of the expected Q3 sale of the remaining held-for-sale loan, and compliance with loan concentration limits.
- The eventual CECL allowance impact and the effect of lease-accounting adoption on reported assets, liabilities and regulatory capital.