BROADWAY FINANCIAL CORP quarterly report, Q1 FY2023

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Broadway Financial Corporation — Q1 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023. Unaudited consolidated results include City First Bank and subsidiaries. Comparisons are with Q1 2022 unless otherwise noted; balance-sheet comparisons are with December 31, 2022. Dollar amounts below are in millions unless stated otherwise.

Financial performance and condition

  • Profitability: Net income was $1.60 million, up from $0.98 million; net income attributable to Broadway Financial was $1.57 million versus $0.96 million. Basic and diluted EPS were $0.02, compared with $0.01.
  • Interest income and margins: Net interest income rose 15.4% to $8.27 million. Net interest margin increased to 2.96% from 2.76%, while net interest rate spread declined to 2.56% from 2.69%. Total interest income was $11.17 million and interest expense was $2.90 million. The provision for credit losses was $0.09 million.
  • Other income and costs: Non-interest income was $0.29 million versus $0.28 million. Non-interest expense rose to $6.21 million from $5.96 million. Income tax expense was $0.67 million, an effective rate of 29.7%, compared with $0.36 million and 27.0%.
  • Assets and lending: Total assets were $1.205 billion, up $20.8 million. Net loans were $776.1 million, up $8.0 million; gross loan originations were $32.9 million and payoffs and repayments were $24.9 million. Multi-family loans were $509.5 million and commercial real estate loans were $129.0 million.
  • Credit quality: The loan allowance was $6.29 million, or 0.80% of gross loans, versus $4.39 million, or 0.57%, at year-end. The increase principally reflects CECL adoption, which added $1.81 million to the allowance; quarterly provision was $0.09 million. There were no charge-offs, no loans 90 or more days past due, and no non-performing loans at quarter-end. Loans 30–59 days past due totaled $0.41 million.
  • Cash flow and liquidity: Operating cash flow was positive $3.80 million, investing cash flow was negative $6.32 million, and financing cash flow was positive $16.06 million. Cash and cash equivalents ended at $29.65 million, up $13.54 million. Management stated that the Bank had sufficient liquidity to support growth over the next 12 months. It reported $242.7 million of unpledged available-for-sale securities and capacity for an additional $157.2 million of FHLB borrowing, subject to collateral and stock requirements, plus $10 million of other credit lines.
  • Funding and debt: Deposits declined $29.4 million to $657.5 million. Borrowings increased $47.9 million to $253.8 million, including $168.8 million of FHLB advances, $70.9 million of repurchase agreements, and $14.0 million of notes payable. The FHLB advance weighted rate was 4.35%; repurchase agreements were daily-maturity funding at an average rate of 0.24%.
  • Capital and securities: Stockholders’ equity was approximately $279.7 million. The Bank’s Community Bank Leverage Ratio was 15.69%, above the 9% threshold, and the Bank was classified as well capitalized. Available-for-sale securities were $329.0 million, with $21.2 million in gross unrealized losses; the Company attributed the declines to interest rates and market conditions and recorded no securities credit-loss allowance. Tangible book value was $1.38 per common share; reported book value was $1.76.

Material changes and management commentary

  • Management attributed stronger net interest income to higher average interest-earning assets, including securities purchased with proceeds from the $150 million Series C preferred investment under the U.S. Treasury’s Emergency Capital Investment Program, and higher yields on assets. Higher deposit and borrowing costs partly offset these gains.
  • Deposits fell as customers moved funds to seek higher rates elsewhere. CDARS deposits increased $24.5 million, partly offsetting reductions in other deposit categories. Uninsured deposits were approximately 25% of deposits, down from 31% at year-end.
  • The Company adopted CECL on January 1, 2023, recording a $1.3 million after-tax reduction to opening retained earnings. It elected to phase in the regulatory capital impact over three years. The Company says its allowance estimates rely on forecasts and management judgment and may change.
  • Accumulated other comprehensive loss improved by $2.45 million net of tax during the quarter, reflecting securities valuation changes. Total comprehensive income was $4.02 million, versus a $4.89 million comprehensive loss in Q1 2022.
  • The filing provides no specific earnings, margin, loan-growth, or deposit guidance. Management noted that additional capital may be needed over time to support growth and maintain well-capitalized status.

Risks, contingencies, and unusual items

  • One customer represented approximately 10% of deposits and 75% of repurchase-agreement balances at March 31, 2023. Management expects to maintain both relationships, but the concentrations create funding sensitivity.
  • The loan portfolio is concentrated in real estate, particularly multi-family lending. Management identifies economic, employment, property-value, vacancy, rent, and borrower-specific conditions as potential credit risks. Regulatory review or changed forecasts could require higher credit-loss allowances.
  • The $150 million Series C preferred stock has a zero dividend rate for its first two years; thereafter its stated floor and ceiling rates are 0.50% and 2.00%. Redemption is generally unavailable before the fifth anniversary absent specified circumstances and regulatory approval.
  • A $369,000 deferred-tax-asset valuation allowance reflects Section 382 limitations on certain tax attributes. The filing reports no legal proceedings, no applicable new risk-factor disclosure, and no material changes to internal control over financial reporting.

Important facts for investors to verify

  1. Deposit stability, deposit pricing, uninsured-deposit levels, and the effect of continued customer rate competition on funding costs.
  2. Reliance on the concentrated repo counterparty and continued access to FHLB advances and other contingent liquidity.
  3. Loan performance and collateral values, particularly in multi-family, commercial real estate, and construction lending; also monitor watch, special-mention, and substandard exposures.
  4. CECL assumptions, allowance adequacy, and the effect of regulatory capital phase-in and future credit conditions.
  5. Whether the improvement in net interest margin persists as asset yields and deposit and borrowing costs reprice.