Broadway Financial (BYFC) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL STATEMENTS Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements for Broadway Financial Corporation as of September 30, 2023, and for the three and nine-month periods then ended Consolidated Statements of Financial Condition The company's total assets increased to $1.238 billion as of September 30, 2023, from $1.184 billion at year-end 2022 Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $1,237,795 | $1,184,293 | | Cash and cash equivalents | $11,487 | $16,105 | | Loans receivable, net | $835,356 | $768,046 | | Securities available-for-sale | $316,429 | $328,749 | | Total Liabilities | $962,638 | $904,641 | | Deposits | $671,469 | $686,916 | | FHLB advances | $187,721 | $128,344 | | Total Stockholders' Equity | $274,967 | $279,482 | Consolidated Statements of Operations and Comprehensive Income (Loss) For the nine months ended September 30, 2023, net income was $1.9 million, a significant decrease from $4.1 million in the prior-year period Statement of Operations Summary (in thousands) | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net Interest Income | $22,315 | $23,818 | | Provision for Credit Losses | $808 | $592 | | Non-interest Income | $880 | $907 | | Non-interest Expense | $19,654 | $18,298 | | Net Income | $1,927 | $4,181 | | EPS (diluted) | $0.21 | $0.45 | Q3 Statement of Operations Summary (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net Interest Income | $6,773 | $8,608 | | (Recapture of) Provision for Credit Losses | ($2) | $1,021 | | Net Income | $86 | $1,346 | | EPS (diluted) | $0.01 | $0.14 | Notes to Unaudited Consolidated Financial Statements The notes detail the basis of presentation and significant accounting policies, including the adoption of the Current Expected Credit Losses (CECL) methodology under ASC 326 effective January 1, 2023 - Effective January 1, 2023, the company adopted ASC 326 (CECL), which requires estimating lifetime expected credit losses for loans and securities. The adoption resulted in a cumulative effect adjustment that decreased retained earnings by $1.3 million[109][153][155] - On October 31, 2023, the company executed a 1-for-8 reverse stock split for all classes of its common stock. All share and per-share amounts in the report have been retroactively adjusted to reflect this split[125][96] - The company identified and recorded immaterial out-of-period adjustments totaling $8 thousand (net of tax) during the preparation of the Q3 2023 financial statements. These adjustments were deemed immaterial to both current and prior periods[124][95] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting a $53.5 million increase in total assets to $1.2 billion by September 30, 2023, driven by $67.3 million in net loan growth Financial Condition As of September 30, 2023, total assets grew to $1.2 billion, up $53.5 million from year-end 2022, mainly from a $67.3 million increase in net loans held for investment Balance Sheet Changes (Sep 30, 2023 vs. Dec 31, 2022) | Account | Change (in millions) | Reason | | :--- | :--- | :--- | | Total Assets | +$53.5 | Loan growth offset by lower securities and cash | | Net Loans | +$67.3 | Primarily from $112.2 million in new originations | | Deposits | -$15.4 | Customers seeking higher rates elsewhere | | Total Borrowings | +$71.7 | Increased FHLB advances and repurchase agreements | - The Allowance for Credit Losses (ACL) increased to $6.9 million at September 30, 2023, from $4.4 million at December 31, 2022. The increase was primarily driven by a $1.8 million adjustment upon adopting the CECL methodology and an additional $808 thousand provision due to loan growth[10][63][220] - Loan delinquencies greater than 30 days but less than 90 days increased to $1.2 million at September 30, 2023, from zero at year-end 2022. However, there were no non-accrual loans as of September 30, 2023[11][274] Results of Operations For the nine months ended September 30, 2023, net interest income decreased by 6.3% to $22.3 million year-over-year, as a 332 basis point increase in the average cost of funds outpaced an 87 basis point rise in the yield on earning assets Net Interest Income and Margin (Nine Months Ended Sep 30) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $22.3M | $23.8M | -6.3% | | Net Interest Margin | 2.60% | 2.93% | -33 bps | | Avg. Cost of Funds | 2.00% | 0.29% | +171 bps | - The provision for credit losses for the nine months ended September 30, 2023, was $808 thousand, an increase from $592 thousand in the same period of 2022. This was due to an increase in loans rated as 'watch' and 'special mention'[245] - Non-interest expense for the first nine months of 2023 increased by $1.4 million (7.4%) to $19.7 million, primarily due to a $1.5 million increase in compensation and benefits from hiring additional staff to support strategic growth[276][246] Liquidity and Capital Resources The company maintains liquidity through deposits, FHLB advances, and cash flows from its loan and securities portfolios - The Bank has significant available liquidity, including the ability to borrow an additional $154.3 million from the FHLB and access to $10.0 million in other credit lines as of September 30, 2023[265][304] - The Bank is subject to concentration risk, with five customers accounting for 21% of total deposits and one customer accounting for 77% of securities sold under agreements to repurchase as of September 30, 2023[292][230] Regulatory Capital Ratios | Ratio | Sep 30, 2023 | Minimum to be Well Capitalized | | :--- | :--- | :--- | | Community Bank Leverage Ratio | 15.13% | 9.00% | Controls and Procedures Management concluded that as of September 30, 2023, the company's disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting - Management identified material weaknesses in internal control over financial reporting, rendering disclosure controls and procedures ineffective as of September 30, 2023[295][36] - The identified weaknesses relate to the control environment, risk assessment, control activities (including account reconciliations), and monitoring, which led to a delay in filing the Form 10-Q[33][269][308] - A remediation plan is underway, involving hiring experienced personnel, engaging a third-party firm to assist with reconciliations, and implementing enhanced review processes for general ledger accounts[296][34] PART II. OTHER INFORMATION Risk Factors This section introduces a new risk factor related to the material weakness in internal control over financial reporting - A new risk factor has been added concerning the identified material weakness in internal control over financial reporting[298][36] - Failure to remediate the material weakness could adversely affect the company's ability to prepare financial statements, harm its reputation, and negatively impact investor confidence[310][36]