Broadway Financial Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023. Broadway Financial’s consolidated subsidiary is City First Bank. Amounts below are in U.S. dollars; financial amounts are rounded to millions unless stated otherwise.
Financial performance and condition
- Earnings: Interest income was $14.8 million, up from $11.2 million a year earlier, but interest expense rose to $7.3 million from $2.9 million. Net interest income fell 9.1% to $7.5 million. After a $0.26 million credit-loss provision and $7.8 million of non-interest expense, the consolidated net loss was $0.183 million; net loss attributable to Broadway Financial was $0.164 million. Basic and diluted loss per share were both $0.02.
- Margins and expenses: Net interest margin declined to 2.27% from 2.96%; management cited a 156-basis-point increase in average funding cost, partly offset by a 46-basis-point increase in earning-asset yield. Non-interest expense increased 25.8% to $7.81 million, including $0.905 million of additional non-recurring professional services expense and $0.648 million of higher compensation and benefits.
- Loans and credit: Net loans held for investment increased to $926.5 million from $880.5 million. Gross originations were $71.5 million, partly offset by $25.5 million of payoffs and repayments. The allowance for credit losses was $7.55 million, or 0.81% of gross loans, versus $7.35 million, or 0.83%, at year-end. There were no charge-offs. A $0.401 million multifamily loan was on nonaccrual and more than 90 days past due; total loans 30–89 days past due were $0.369 million. Management considers the allowance adequate, while noting actual losses could exceed estimates.
- Liquidity and cash flow: Cash and cash equivalents were $67.1 million, down from $105.2 million. Unpledged available-for-sale securities were $107.5 million, versus $173.3 million at year-end. Operating cash flow was negative $11.7 million; investing cash flow was negative $23.4 million and financing cash flow was negative $3.0 million. Management believes liquidity is sufficient to support growth over the next 12 months and longer term. Available sources include an additional $105 million of FHLB borrowing capacity, subject to collateral and stock requirements, and $10 million of unused credit lines.
- Funding and debt: Deposits rose to $695.5 million from $682.6 million. Outstanding borrowings included $209.3 million of FHLB advances, $100 million under the Bank Term Funding Program (BTFP), and $71.7 million of repurchase agreements. The $14 million CFC 45 notes were repaid in January. The BTFP borrowing matures December 29, 2024, at a fixed 4.84%; the program ended for new borrowing in March. FHLB advances had a weighted average contractual maturity of two months.
- Capital and assets: Total assets were $1.370 billion, down from $1.375 billion; stockholders’ equity was $281.3 million, or 20.5% of assets. The Bank’s Community Bank Leverage Ratio was 13.65%, above the 9% well-capitalized threshold. Available-for-sale securities were $293.2 million and carried $19.8 million of gross unrealized losses, which management attributed to interest rates and market conditions rather than credit; no credit-loss allowance was recorded for these securities.
Material changes and management commentary
- Higher funding costs and increased average borrowings drove the decline in net interest income and margin despite higher loan and other interest income.
- Loans grew by $46.0 million net, while cash and securities declined. The company attributed the securities decrease mainly to $23.2 million of principal paydowns.
- Management said hiring over the prior 12 months supported operational capacity and strategic balance-sheet growth. The company also incurred added professional-services costs for a third-party review of certain general-ledger reconciliations.
- No formal earnings or financial guidance is provided. Management cautions that first-quarter results are not necessarily indicative of full-year results.
- Credit exposure is concentrated in multifamily lending: it represented 64.4% of gross loans. Approximately 61.7% of the loan portfolio consisted of multifamily loans in an initial fixed-rate period. Management noted some borrowers are retaining loans rather than refinancing in the higher-rate environment.
Risks, controls and contingencies
- Material control weaknesses: Management concluded disclosure controls were not effective at the reasonable-assurance level as of March 31, 2024. Identified weaknesses include insufficient appropriately skilled personnel, ineffective risk assessment and controls over consolidation, reporting, close processes, and account reconciliations; some reconciliations had unidentified or stale items. Remediation includes additional finance personnel, enhanced reconciliation review procedures, and further testing. Management said remediation was not yet complete.
- Concentrations: Two customers accounted for approximately 12% of deposits, and one customer represented 86% of repurchase-agreement borrowings. Uninsured deposits were approximately 38% of total deposits.
- Listing risk: The filing describes a Nasdaq Staff Delisting Determination dated May 14, 2024, after the quarter-end, and discusses potential adverse effects of delisting on share liquidity, price, and access to capital. The disclosure also refers to a May 20, 2023 compliance letter, which appears inconsistent with the surrounding chronology.
- Other: The company disclosed a $449,000 deferred-tax valuation allowance related to Section 382 limits on certain tax attributes. No legal proceedings were reported, and the filing states there were no material changes to previously disclosed risk factors other than the Nasdaq listing risk.
Most important facts for investors to verify
- Reconcile the filing’s different loss figures: the financial statements report consolidated net loss of $183,000 and parent-attributable loss of $164,000, while MD&A states a net loss of $162,000.
- Confirm Nasdaq’s determination, the company’s listing status and the dates of the cited Nasdaq correspondence; the filing’s May 20, 2023 reference appears chronologically inconsistent.
- Track progress and independent testing of the remediation plan for material weaknesses in financial reporting controls.
- Assess funding and liquidity needs around the BTFP maturity in December 2024, short FHLB advance maturities, and the decline in cash and unpledged securities.
- Monitor the performance and risk grades of multifamily and construction loans, the nonaccrual loan, deposit concentration, and dependence on a single repurchase-agreement counterparty.