Broadway Financial Corporation — 2019 Form 10-K
Business context and reporting period. This annual filing covers the year ended December 31, 2019, with comparative 2018 figures. Broadway Financial operates Broadway Federal Bank, a Los Angeles-area community bank focused on mortgage lending, particularly multifamily and commercial real estate, funded mainly by deposits and borrowings.
Key financial results and position
- Assets and loans: Total assets rose 7.6% to $440.4 million. Net loans held for investment increased to $397.8 million, about 90% of assets; multifamily loans were 72% of gross loans.
- Earnings: The company reported a net loss of $206,000, or $0.01 per share, versus net income of $815,000, or $0.03 per share, in 2018. Pretax results shifted to a $551,000 loss from $871,000 of income; a $345,000 income tax benefit reduced the reported loss.
- Interest income, costs and margins: Net interest income before loan-loss recapture increased to $10.46 million from $10.31 million. Average net interest margin declined to 2.54% from 2.57%, while net interest spread fell to 2.36% from 2.43%. Deposit interest expense rose $1.2 million, reflecting higher average deposit costs and balances.
- Credit costs and asset quality: The year included a net loan-loss provision recapture of just $7,000, compared with a $1.25 million recapture in 2018. The allowance for loan losses increased to $3.18 million, or 0.79% of loans held for investment, from $2.93 million, or 0.82%. Nonperforming assets declined to $424,000 from $1.74 million; there were no loan charge-offs in either year.
- Cash flow: Operating activities provided $8.5 million, investing activities used $39.1 million, and financing activities provided $29.5 million. Cash and cash equivalents fell by $1.1 million to $15.6 million.
- Funding, debt and liquidity: Deposits increased to $297.7 million from $281.4 million. FHLB advances rose to $84.0 million from $70.0 million; junior subordinated debentures declined to $4.34 million from $5.10 million. Management reported $15.6 million of cash and cash equivalents and $11.0 million of unpledged available-for-sale securities, and stated that the Bank had sufficient liquidity for foreseeable growth. It also cited $39.7 million of additional FHLB borrowing capacity, subject to collateral availability.
- Capital: Stockholders’ equity was $48.8 million, or 11.09% of assets. The Bank exceeded regulatory minimums and qualified as well capitalized; its total capital ratio was 18.29% and leverage ratio 11.56%.
Material changes versus 2018
- Net results moved from profit to loss, principally as the prior-year $1.25 million loan-loss recapture largely disappeared and deposit interest expense increased. Higher non-interest expense also contributed.
- Non-interest expense rose $515,000 to $12.1 million, including increased professional services and compensation costs. Management said $315,000 of the professional-services increase related to non-recurring matters.
- Net loans held for investment grew $42.3 million; multifamily balances increased to $287.4 million from $231.9 million. Single-family loans declined to $72.9 million from $91.8 million.
- Deposits and FHLB advances increased, while liquid assets—cash plus unpledged securities—declined to $26.6 million from $31.4 million.
- Nonperforming assets, classified assets and delinquency levels improved; the Bank sold its remaining real estate owned during 2019.
Outlook, risks and notable items
- COVID-19: The pandemic arose after year-end. Management said its full impact on 2020 results could not be reasonably estimated; potential effects include borrower payment stress, higher credit losses or reserves, operational disruption, and weaker loan and deposit demand. Management noted that sharp Federal Reserve rate cuts could pressure net interest income, margins and profitability.
- Credit and concentration: The loan book is heavily weighted to Southern California real estate and multifamily lending. More than 99.9% of mortgage loans have adjustable-rate features, but 85% of gross loans were still in initial fixed-rate periods at year-end. The Bank increased its multifamily concentration limit to 600% of Tier 1 capital plus the allowance, subject to OCC monitoring.
- Funding and rate risks: Certificates of deposit totaled $190.2 million, including $168.4 million scheduled to mature in 2020. One customer relationship represented approximately 10% of deposits. The company also identified LIBOR discontinuation as a risk; its floating-rate debentures were LIBOR-linked.
- Other items: The Bank recognized an operating lease right-of-use asset and liability on adopting lease accounting in 2019. Management reported effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion on the consolidated financial statements; it did not audit internal control effectiveness.
- Guidance: The filing provides no numerical earnings or revenue forecast.
Important facts for investors to verify
- How COVID-19 affected borrower performance, collateral values, loan-loss reserves and local economic conditions after the filing date.
- Whether multifamily concentration growth and the fixed-rate reset profile are consistent with the Bank’s risk limits and capital cushion.
- Deposit retention and repricing around the 2020 certificate maturities, including the large customer relationship and CDARS funding.
- Actual available borrowing capacity and liquidity under collateral and FHLB requirements.
- The earnings effect of funding-cost changes, lower interest rates, and the transition away from LIBOR; management expected CECL adoption in 2023 but had not estimated its financial impact.