Broadway Financial Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. Unaudited consolidated results include Broadway Financial Corporation and its subsidiaries. Dollar amounts are in millions unless otherwise noted.
Financial performance and condition
- Profit: Net income was $277,000, or $0.01 per basic and diluted share, versus a net loss of $84,000 in Q1 2018. Comprehensive income was $415,000 versus a comprehensive loss of $284,000.
- Interest income and margin: Interest income rose to $4.37 million from $3.76 million; interest expense increased to $1.56 million from $984,000. Net interest income was $2.81 million versus $2.77 million. Net interest margin narrowed to 2.75% from 2.79%; net interest rate spread was 2.57% versus 2.66%.
- Other income and expenses: Non-interest income was $376,000, including a $233,000 CDFI grant, compared with $131,000. Non-interest expense was $3.06 million versus $3.03 million. Professional services expense rose $151,000, including higher loan-review expense.
- Assets and lending: Total assets increased to $421.1 million from $409.4 million. Net loans held for investment rose to $365.0 million from $355.6 million, primarily reflecting loan originations and transfers into the portfolio. Cash and cash equivalents were $19.2 million, up from $16.7 million.
- Credit quality: The $2.93 million allowance for loan losses was unchanged and equaled 0.80% of gross loans, versus 0.82% at year-end. A $190,000 provision recapture reflected recoveries on two paid-off, partially charged-off church loans. Non-performing loans declined to $782,000 from $911,000; total delinquencies increased to $576,000 from $358,000. Impaired loans declined to $5.2 million from $6.4 million. No loans were charged off during the quarter.
- Funding and debt: Deposits rose to $286.7 million from $281.4 million; FHLB advances increased to $75.0 million from $70.0 million. Junior subordinated debentures remained $5.1 million. Total stockholders’ equity was $49.0 million, or 11.62% of assets, versus $48.4 million, or 11.83%, at year-end.
- Cash flow: Operating activities provided $229,000, versus $752,000 used in Q1 2018. Investing activities used $7.9 million; financing activities provided $10.2 million, including $5.2 million of net deposit growth and $5.0 million of net FHLB borrowing. Cash and cash equivalents increased $2.6 million.
Material changes and management commentary
- Net income improved from the prior-year loss, supported by higher net interest income after the loan-loss recapture and higher non-interest income. The CDFI grant accounted for most of the increase in non-interest income and is a notable non-recurring item.
- Higher loan yields contributed to interest-income growth; management attributed $351,000 of the increase to interest recoveries on payoffs of non-accrual loans. Deposit costs rose as certificate-of-deposit rates increased amid rising short-term rates and competitive pricing.
- Certificates of deposit increased $8.0 million, while liquid deposits declined $2.7 million. One customer relationship represented approximately 11% of deposits. CDARS balances included $43.0 million reciprocal and $29.7 million one-way buy deposits at quarter-end.
- Management said liquidity was sufficient to support foreseeable growth. The Bank reported $53.1 million of additional FHLB borrowing capacity, subject to collateral and stock requirements, and an $11.0 million line of credit with another financial institution.
- The Bank exceeded regulatory capital requirements and was above the thresholds to be considered well capitalized. At March 31, its leverage, CET1, Tier 1, and total capital ratios were 11.99%, 19.40%, 19.40%, and 20.55%, respectively.
Outlook, risks, contingencies, and unusual items
- No numerical earnings or revenue guidance was provided. Management cautioned that first-quarter results are not necessarily indicative of full-year results.
- The Company was evaluating adoption of the expected-credit-loss standard (CECL), effective for it in 2020, and expected adoption may increase the allowance for loan losses; the amount was not yet clear.
- Beginning June 2019, the $5.1 million subordinated debentures move from interest-only payments to quarterly principal-and-interest payments, with maturity in March 2024.
- Adoption of lease accounting requirements resulted in recognition of approximately $1.1 million each in right-of-use assets and lease liabilities at March 31, with no material income-statement or cash-flow impact; management said regulatory capital ratios were affected only modestly.
- Management considered the allowance adequate but noted actual losses could exceed estimates and regulators could require an increase. The filing reported no legal proceedings and listed risk factors as not applicable. Disclosure controls were concluded effective, with no material internal-control changes reported.
Important facts for investors to verify
- Whether underlying earnings remain positive excluding the $233,000 CDFI grant, the $190,000 loan-loss recapture, and loan-payoff interest recoveries.
- Trends in deposit pricing, certificate maturities and mix, the 11% depositor concentration, and reliance on CDARS and FHLB funding.
- Credit performance in church and multifamily loans, delinquency trends, and the adequacy of the allowance, including the eventual CECL impact.
- The effect of scheduled debenture principal payments beginning June 2019 on funding costs and liquidity.