Description

Broadway Financial Corporation (ticker: BYFC) is the $43 market cap parent company of City First Broadway, an ECIP recipient bank based in Washington, D.C. and Southern California.

As a result of their ECIP funds, they are extremely overcapitalized with a 20.5% E/A ratio. They also have no non-accrual loans in their loan book of $926M. Excluding ECIP shares, tangible book value per share as of March 31^st was $11.49 for 44.4% P/TBV. Multi-family residential makes up 65% of their loan portfolio.

City First is a Minority Depository Institution (MDI) and Community Development Financial Institution (CDFI). It is one of two publicly traded public benefit corporations in the financial services industry. Two weeks ago (5/20^th) they belatedly filed their Q3, Q4 and FY2023 10-Q and 10-K, and followed it up a few days later (5/24^th) with their first quarter 10-Q.

This week it belatedly announced results for Q4 and full year 2023, bringing it back into Nasdaq reporting compliance.

Reading through the summary of issues regarding internal financial controls, it appears that the bank was understaffed and did not have thorough reporting and reconciliation processes in place. They have hired four additions to senior management, which includes a replacement CFO, and the net resulting financial charge from the controls was an increase in net income for Q3 of eight thousand dollars.

Being non-compliant with their reporting for Q3 and Q4, plus needing a 1-for-8 reverse split to bring their shares above $5 has kept BYFC off the radar for many investors.

BYFC is a recipient of $150M in ECIP funds. Given the makeup of the ECIP program, an adjustment to book value can be made. If the ECIP funding was haircut to twenty cents on the dollar, then TBV would easily double and adjusted P/TBV would be in the high teens.

Honestly, an investor in BYFC needs that discount to TBV given the banks historical record for return on equity and assets:

Time and a shifting mix of the balance sheet on both the asset and liability sides should help improve the ROA. Meanwhile, using our adjusted TBV suggests that a comparably adjusted ROE would approach the high single digits, making the wait for improvement much less painful.

One of the concerns with any bank that effectively doubles its capital is how reckless it might get with expansion. Fortunately, BYFC has recent experience with its 2021 merger of equals with CFBanc. In April 2021, Broadway (formed in 1946 to provide home loans to minority consumers in south Los Angeles) merged with CFBanc (formed in 1998 to address systematic disinvestment and discrimination in minority communities in Washington, D.C.).

While still significantly overcapitalized, BYFC has grew its loan book by 14.6% over the two years 2023-2024. This is the period that follows its merger and the June 2022 receipt of $150M in ECIP capital.

It appears that they are getting gradually right sized towards their capital while simultaneously “being prudent in the management of our securities portfolio as we have steadily shortened the average duration of the portfolio from 4.4 years at the beginning of 2022 to 2.5 years at the end of 2023.”

In 2023, BYFC reported consolidated net earnings of $4.5M, or $0.51 per diluted share.

In Q1 of 2024, BYFC reported ($0.02) per diluted share.

Much of its income appears to come from grants. In Q4 of 2023, BYFC recognized two grants from the Community Development Financial Institution (“CDFI”) Fund of the U.S. Treasury: $3.7 million from the CDFI’s Equitable Recovery Program and $437 thousand from a Bank Enterprise Award.

AN ADDENDUM ABOUT ECIP FUNDING

At the risk of repeating myself from my 2022 writeup of CBOBA (which is now in the process of being acquired), here are the key elements of the ECIP funding program:

There has been some discussion on how the ECIP equity infusion should be regarded. Some banks have listed it on their balance sheet as preferred equity while elsewhere it has been included as paid-in capital. I intend to make the case that it should be regarded as nearly-free equity capital.

Let’s begin with the nature of the ECIP (Emergency Capital Investment Program) and what these awards from the U.S. Treasury mean. Let’s go straight to CBOBA’s own announcements:

In summary, under the interim final rule, MDI and CDFI banks in good standing were eligible to apply for an ECIP investment of up to 15% of Total Assets as of June 30, 2021.  Treasury’s investment will be in the form of Perpetual Preferred Stock with favorable terms, including a maximum dividend rate of 2.00%, that will be waived in the first two years and then may be “bought down” to 0.50% through additional impact lending and activities similar to what we have always done as a mission-driven institution.  Importantly, this preferred stock investment will not include the operating constraints or carry the negative stigma associated with Treasury’s TARP investments during the financial crisis. (2021 Annual Report)

Essentially, what would you call a non-cumulative perpetual preferred stock with 0% interest for the first two years, and then what will likely turn out to be 0.5% interest after that (given CBOBA’s typical impact lending activities)? In the worst case, it will be 2.0% interest.

In addition to that, the Treasury provides the recipient institutions a right of first refusal for buying back this ECIP capital. However, instead of being bought back at par, it will be bought back via auction. What would you pay for a 0.5% interest non-cumulative perpetual preferred? Maybe ten cents on the dollar?

Perhaps eventually, if the Treasury ever decides to get it off their balance sheet, this equity will fully reveal itself as nearly free capital when the recipients buy it back at such a bargain discount.

In the meantime, which of course, might well be forever, how should an investor think about these ECIP funds? I’d suggest that they should be regarded as essentially a shareholders’ equity increase with barely a whiff of offsetting dilution. Technically, in the case of a bank like CBOBA, let’s say it is twenty years from now and the Treasury wants to wind up the program. CBOBA buys it back for $0.15 on the dollar. Now let’s present value that back to today. What type of hit would you give the balance sheet for the current NPV of retiring this obligation?

A FINAL WORD:

“In addition, there has already been some activity by which ECIP recipients have acquired other ECIP recipients. This all makes for a fascinating area to watch over the coming years.”

CBOBA worked out fortunately, and I originally wrote it up rather than BYFC because of its much more compelling ROE and ROA history. Broadway falls short there and is probably more likely to be an acquirer than to be acquired. Hopefully, if it does make an acquisition, it will seek out a partner that brings with its healthy ROE’s.

Catalyst

Recent publication of updated financials.

Further acquisitions among ECIP recipients might highlight the general attractiveness of these banks.