Broadway Financial Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; unaudited. Broadway Financial is a bank holding company whose subsidiary, Broadway Federal Bank, has a loan portfolio concentrated in real estate, particularly multifamily lending. Amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Interest income | $4.02 | $3.90 | $12.47 | $11.30 |
| Net interest income | $2.39 | $2.50 | $7.67 | $7.85 |
| Net interest margin | 2.33% | 2.46% | 2.49% | 2.62% |
| Loan-loss provision/(recapture) | $0.05 | ($1.00) | ($0.30) | ($1.00) |
| Non-interest income | $0.34 | $0.38 | $0.86 | $0.68 |
| Non-interest expense | $3.14 | $2.80 | $9.23 | $8.76 |
| Net income/(loss) | ($0.28) | $0.75 | ($0.14) | $0.54 |
| Diluted earnings/(loss) per share | ($0.01) | $0.03 | ($0.01) | $0.02 |
Financial position, liquidity and capital
- At September 30, total assets were $414.6 million, up from $409.4 million at December 31, 2018. Cash and cash equivalents were $21.8 million; available-for-sale securities were $13.7 million.
- Net loans held for investment were $354.8 million, versus $355.6 million at year-end. Gross loans were predominantly multifamily ($248.1 million). Loans held for sale were $8.2 million.
- Deposits were $280.1 million, down $1.3 million from year-end. FHLB advances were $75.0 million, up $5.0 million; junior subordinated debentures were $4.6 million, down $0.5 million.
- Stockholders’ equity was $48.9 million, or 11.78% of assets; book value was $1.75 per share, versus $1.77 at year-end.
- For the first nine months, operating cash flow was $8.5 million, investing cash outflow was $6.5 million, and financing cash inflow was $3.1 million. Cash and cash equivalents increased $5.2 million to $21.8 million.
- The Bank reported regulatory capital ratios of 19.41% for CET1 and Tier 1, 20.57% for total capital, and 11.74% for leverage; it exceeded the stated well-capitalized thresholds. The Bank also reported capacity for an additional $52.4 million of FHLB borrowing, subject to collateral and stock requirements, plus an $11.0 million line of credit.
Changes and material developments
- Quarterly net interest income fell $112,000 year over year and margin contracted 13 basis points. Higher deposit costs were the primary pressure; deposit interest expense rose $284,000. For the nine-month period, deposit and borrowing costs increased faster than interest income, reducing net interest income by $183,000.
- Quarterly results turned from $751,000 income to a $279,000 loss, principally because the prior-year quarter included a $1.0 million loan-loss reserve recapture, compared with a $47,000 provision in Q3 2019. Higher non-interest expense and lower net interest income also contributed.
- Nine-month results included a $301,000 loan-loss recapture, versus a $1.0 million recapture in 2018. Management attributed the 2019 recapture primarily to problem-loan recoveries and payoffs.
- Non-interest expense increased $343,000 for the quarter and $470,000 for nine months. Professional-services costs included non-recurring legal, audit and consulting matters; management identified $360,000 of the nine-month increase as related to non-recurring matters.
- The Bank sold $22.8 million of performing multifamily loans in July to comply with regulatory loan-concentration guidelines. It recorded a $204,000 gain on loan sales in the quarter. The sole REO property was sold in Q2.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management cited a flat yield curve and deposit-cost pressure as factors compressing margins. Credit risks include potential losses exceeding the allowance and the possibility that regulators may require a higher allowance.
- The allowance for loan losses was $2.8 million, or 0.79% of gross loans, compared with $2.9 million, or 0.82%, at year-end. Nonperforming loans were $699,000; troubled debt restructurings totaled $5.0 million. No loan charge-offs occurred in the first nine months.
- One customer relationship represented approximately 10% of deposits. Management expected to maintain the relationship.
- The Company adopted lease accounting in 2019 and recognized an initial $1.2 million operating lease asset and liability. It had not determined the timing or expected financial impact of adopting the expected-credit-loss standard (CECL); the filing cited a proposed delayed effective date for smaller reporting companies.
- The Company reported effective disclosure controls, no material changes in internal control during the quarter, no legal proceedings, and no additional risk factors in this filing.
Important facts for investors to verify
- Whether margin and funding-cost trends improve, especially the cost of certificates of deposit and other deposits.
- How recurring earnings compare with reported results after excluding the prior-year reserve recapture and identified non-recurring professional-services costs.
- Credit quality, multifamily concentration, allowance adequacy, and developments in nonperforming loans and TDRs.
- Deposit stability and concentration, along with continued access to FHLB borrowing and the separate credit line.
- The loan-transfer amount differs between disclosures: cash-flow notes report $10.684 million transferred from held-for-investment to held-for-sale, while MD&A describes $9.6 million. Verify the amount and related loan portfolio presentation.