Broadway Financial Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results include Broadway Financial Corporation and its banking subsidiaries. Dollar amounts below are in millions unless otherwise noted.
Business context and financial performance
The company operates a community bank focused primarily on real estate lending. At quarter-end, total assets were $419.5 million, including $355.3 million of net loans held for investment and $19.1 million of loans held for sale.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Interest income | $3.90 | $4.34 | $11.30 | $12.62 |
| Net interest income | $2.50 | $3.24 | $7.85 | $9.32 |
| Net interest margin | 2.46% | 3.03% | 2.62% | 2.87% |
| Net income | $0.75 | $0.50 | $0.54 | $2.27 |
| Basic earnings per share | $0.03 | $0.02 | $0.02 | $0.09 |
Q3 non-interest income was $0.38 million, including a $0.23 million CDFI grant; non-interest expense was $2.80 million. For the first nine months, non-interest income was $0.68 million and non-interest expense was $8.76 million.
Financial position, liquidity and capital
- Compared with December 31, 2017, assets rose $5.8 million; net investment loans increased $20.4 million. Deposits fell $12.4 million to $278.9 million, while FHLB advances rose $17.0 million to $82.0 million. Junior subordinated debentures remained $5.1 million.
- Cash and cash equivalents were $13.4 million, down from $22.2 million. Unpledged available-for-sale securities were $15.2 million. The Bank reported capacity to borrow an additional $41.0 million from the FHLB, subject to collateral and stock requirements, and an $11.0 million line of credit with another institution.
- Nine-month cash flows were $(12.1) million from operations, $(1.2) million from investing, and $4.5 million from financing. Operating outflows principally reflected originations of loans held for sale.
- Stockholders’ equity was $48.0 million, or 11.45% of assets. The Bank exceeded regulatory minimums and was above the stated “well capitalized” thresholds: total capital ratio 19.34% and Tier 1 leverage ratio 11.83%.
Material changes and credit quality
- Q3 net income improved year over year, largely due to a $1.0 million loan-loss provision recapture, the CDFI grant, and lower expenses; these were partly offset by lower net interest income and loan-sale gains. Nine-month net income declined, chiefly because of lower net interest income and the absence of the $1.2 million insurance litigation settlement recorded in 2017.
- Net interest income fell as loan balances and yields declined while deposit costs increased. Q3 deposit cost rose to 1.21% from 0.85%; the average loan yield fell to 3.91% from 4.30%.
- The allowance for loan losses declined to $3.2 million, or 0.89% of gross investment loans, from $4.1 million, or 1.20%, at year-end. The filing attributes the recapture and lower allowance to improving portfolio quality. There were no loan charge-offs in the first nine months.
- Only $39,000 of loans were delinquent at quarter-end; $1.2 million of loans were non-accrual for reasons other than delinquency. Troubled debt restructurings totaled $8.1 million. Management cautioned that actual credit losses could exceed estimates and regulators could require a higher allowance.
Outlook, risks and unusual items
- No earnings or financial guidance was provided. Management said $19.1 million of multifamily loans held for sale were expected to be sold in Q4 2018. It also reported directing most Q3 originations to held-for-sale status as the Bank approached regulator-established loan concentration guidelines.
- One customer relationship represented approximately 11% of deposits. Funding costs and reliance on FHLB advances increased; management also cited greater use of brokered, listing-service and CDARS deposits.
- Available-for-sale securities had $436,000 of gross unrealized losses, compared with $48,000 at year-end, which management attributed primarily to interest-rate movements and did not consider other-than-temporary impairment. Accumulated other comprehensive loss was $405,000.
- The company expects adoption of the CECL credit-loss standard to increase the allowance; the overall impact was still being evaluated. Lease accounting adoption was expected to add approximately $1.0 million in lease liabilities and a corresponding right-of-use asset, with a minor effect on Bank regulatory capital ratios.
- The $5.1 million floating-rate subordinated debentures bear interest at 3-month LIBOR plus 2.54%; principal amortization is scheduled to begin in June 2019. The filing reported no legal proceedings, no applicable new risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether loan growth, multifamily concentration limits, and Q4 planned loan sales develop as management anticipated.
- Whether asset-quality improvement supports the reduced allowance, especially given the $8.1 million in troubled debt restructurings and the expected CECL allowance increase.
- Whether deposit mix and funding costs stabilize, and whether the large depositor relationship is retained.
- How margin pressure, rising borrowing costs, securities valuation changes, and upcoming subordinated-debt principal payments affect future earnings and liquidity.
- The eventual amount and timing of CECL and lease-accounting adoption effects; the filing provides estimates for leases but not a clear quantified CECL impact.