Broadway Financial Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; balance-sheet comparisons are to December 31, 2018. Unaudited consolidated results include Broadway Federal Bank and its wholly owned subsidiary. Dollar amounts below are in millions unless otherwise stated.
Business context and financial performance
The company is a bank holding company whose bank’s loan portfolio is primarily real estate, particularly multifamily lending. It reported a second-quarter net loss and first-half net income.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest income | $4.085 | $3.634 | $8.458 | $7.392 |
| Net interest income | $2.462 | $2.572 | $5.275 | $5.346 |
| Net interest income after loan-loss recapture | $2.620 | $2.572 | $5.623 | $5.346 |
| Net income (loss) | $(0.135) | $(0.127) | $0.142 | $(0.211) |
| Basic and diluted EPS | $(0.01) | $(0.00) | $0.01 | $(0.01) |
| Net interest margin | 2.40% | 2.62% | 2.57% | 2.70% |
For the second quarter, higher interest income was more than offset by a $0.561 million increase in interest expense. The $0.263 million pretax loss was partly offset by a $0.128 million income-tax benefit. First-half net income included a $0.348 million loan-loss provision recapture and a $0.233 million CDFI Fund grant.
Financial condition, liquidity and capital
- Total assets were $429.8 million, up $20.4 million from year-end. Cash and cash equivalents were $20.1 million; available-for-sale securities were $14.1 million.
- Loans held for sale increased to $26.1 million from $6.2 million, largely reflecting originations and transfers from the held-for-investment portfolio. Net loans held for investment were $353.3 million, down from $355.6 million.
- Deposits rose $14.4 million to $295.8 million; FHLB advances rose $5.0 million to $75.0 million. Junior subordinated debentures were $4.8 million, down $0.3 million after the first required principal payment. Total liabilities were $380.8 million.
- Stockholders’ equity was $49.0 million, or 11.40% of assets, versus $48.4 million, or 11.83%, at year-end. Book value was $1.76 per share versus $1.77.
- Six-month operating cash flow was negative $10.2 million, primarily due to originations of loans held for sale; investing cash flow was negative $5.4 million. Financing cash flow was positive $19.1 million, mainly from deposit growth and net FHLB borrowing. Cash and cash equivalents increased $3.5 million to $20.1 million.
- The Bank reported regulatory capital above well-capitalized thresholds: 11.83% Tier 1 leverage, 18.79% CET1 and Tier 1 risk-based, and 19.86% total capital. The Bank also reported $50.6 million of additional FHLB borrowing capacity, subject to collateral and stock requirements, and an $11.0 million line of credit.
Material changes, outlook and risks
- Net interest margin declined year over year as deposit and borrowing costs rose faster than loan yields. The six-month deposit cost increased to 1.49% from 0.93%; the average FHLB advance cost increased to 2.42% from 1.86%.
- The allowance for loan losses fell to $2.8 million, or 0.78% of gross held-for-investment loans, from $2.9 million, or 0.82%. There were no loan charge-offs in the first half. Nonperforming loans were $0.728 million; troubled debt restructurings totaled $5.1 million.
- One customer relationship represented approximately 10% of deposits. Management said it expected to maintain the relationship. This remains a deposit-concentration exposure.
- The Bank transferred loans between held-for-investment and held-for-sale classifications for concentration management and reported no loan sales in the first half of 2019. Held-for-sale loans were predominantly multifamily.
- CECL was not yet adopted. Management was evaluating implementation and expected adoption may increase the allowance for loan losses; the amount of any effect was not stated. Lease-accounting adoption resulted in a $1.2 million right-of-use asset and liability at adoption, with no reported effect on operations or cash flows.
- The filing provides no specific earnings or financial guidance. Management stated results for the interim period are not necessarily indicative of full-year results. Forward-looking statements are subject to risks and uncertainties; the filing lists no risk-factor update, legal proceedings, or defaults on senior securities. Management reported disclosure controls effective as of June 30, 2019.
Important facts for investors to verify
- Whether the loan-loss recapture and CDFI grant materially contributed to first-half profitability and whether either is likely to recur.
- Deposit pricing, reliance on the large customer relationship and deposit-listing/CDARS funding, alongside continued FHLB borrowing needs.
- Credit quality and reserve adequacy, particularly multifamily and church exposures, TDRs, nonaccrual loans, and the expected CECL impact.
- The purpose, timing and potential sale or retention of the $26.1 million held-for-sale loan balance.
- The company’s ability to improve margins as funding costs rise and to generate sustainable earnings without one-time or nonrecurring items.