Business context and reporting period
Broadway Financial Corporation’s Form 10-K covers the fiscal year ended December 31, 2022. The company operates City First Bank, a community development bank serving Southern California and the Washington, D.C. area. Lending is concentrated in multifamily and commercial real estate. The company is a public benefit corporation and certified CDFI.
Financial performance and position
| Metric | 2022 | 2021 |
|---|---|---|
| Net interest income | $32.9 million | $21.0 million |
| Net income (loss) attributable to Broadway Financial | $5.6 million | ($4.1 million) |
| Diluted earnings (loss) per share | $0.08 | ($0.07) |
| Net interest margin | 3.05% | 2.42% |
| Return on average assets | 0.52% | (0.54%) |
| Return on average equity | 2.19% | (4.46%) |
| Net cash from operating activities | $6.3 million | $0.6 million |
- Total assets were $1.184 billion, up $90.8 million. Net loans were $768.0 million, up $119.5 million; gross loans were $771.7 million.
- Interest income rose to $36.3 million from $24.8 million; interest expense declined to $3.4 million from $3.7 million. The average yield on interest-earning assets increased to 3.36% from 2.86%.
- Non-interest income fell to $1.2 million from $3.2 million, principally because 2021 included a $2.0 million CDFI grant. Non-interest expense declined to $24.9 million from $28.9 million, mainly as merger and data-conversion costs subsided.
- The loan-loss provision was $1.0 million versus $0.2 million. The allowance for loan losses rose to $4.4 million, or 0.57% of loans, from $3.4 million, or 0.52%. There were no loan charge-offs or recoveries in either year.
- Cash and cash equivalents were $16.1 million, down from $231.5 million. Available-for-sale securities were $328.7 million, with $24.6 million of gross unrealized losses and a $16.9 million after-tax loss recorded in other comprehensive income. The portfolio was entirely available-for-sale; the company reported no held-to-maturity securities.
- Deposits fell $101.1 million to $686.9 million, including a $73.1 million withdrawal by one customer. Approximately $212.9 million, or 31%, of deposits were uninsured; five customer relationships accounted for about 27% of deposits.
- FHLB advances were $128.3 million, repurchase-agreement borrowings $63.5 million, and notes payable $14.0 million. Total liabilities were $904.6 million. The bank’s Community Bank Leverage Ratio was 15.75%, versus 9.32% in 2021, and it met applicable capital requirements.
- Stockholders’ equity was $279.5 million. The company received $150 million from the Treasury’s Emergency Capital Investment Program in Series C preferred stock and downstreamed $75 million to the bank. The preferred stock has no dividend requirement for its first two years after issuance.
- Cash used in investing activities was $324.0 million, chiefly reflecting securities purchases and net loan growth; financing activities provided $102.2 million. Management said company cash, cash equivalents and marketable securities should meet liquidity and capital expenditure needs for at least 12 months.
Material changes, outlook and risks
- Compared with 2021, earnings improved as net interest income rose and merger-related costs declined; 2021 results also included the CDFI grant. The comparisons are affected by the April 2021 merger, so 2021 included only the acquired bank’s post-merger results.
- The Federal Reserve raised short-term rates seven times during 2022. Management reported that the loan portfolio grew 18.7% in the second half of the year, while deposit competition contributed to outflows. The securities portfolio duration decreased to 3.2 years from 4.4 years.
- At year-end, no loans were more than 30 days delinquent; nonperforming loans were $144,000, or 0.02% of gross loans, compared with $684,000 a year earlier. Criticized loans nevertheless increased to $47.8 million from $16.0 million, largely because newly originated construction loans are generally classified as Watch during development.
- Management cited adequate liquidity and additional borrowing capacity. At December 31, 2022, it reported $70.6 million of additional FHLB capacity based on pledged collateral and a $10 million line with other financial institutions. After year-end, as of March 23, 2023, it reported $150 million of FHLB capacity and $228 million of Federal Reserve borrowing capacity based on collateral.
- Management described interest-rate risk as increased but moderate, and said it had no crypto exposure. Key risks include deposit concentration and uninsured deposits, rising funding costs, unrealized securities losses, real-estate and construction credit exposure, recession risk, and competition. Management also warned actual credit losses could exceed estimates.
- The company was finalizing adoption of CECL for January 1, 2023; the filing does not provide a clear quantified estimate of the adoption impact. No formal earnings or financial guidance is provided.
- Management stated that pending or threatened litigation was not expected to have a material adverse effect. The financial statements received an unqualified audit opinion; the auditor identified loan risk ratings and economic-factor estimates in the allowance as critical audit matters. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
Most important facts for investors to verify
- Deposit stability, the effect of uninsured balances and large customer relationships, and the cost and availability of replacement funding.
- Current liquidity and collateral-based borrowing capacity, including the status and terms of FHLB and Federal Reserve facilities.
- Interest-rate sensitivity and the potential effect of securities marks, deposit repricing and borrowing costs on future earnings and capital.
- Credit quality in multifamily, commercial real estate and construction lending, including the increase in Watch loans and CECL’s eventual effect on reserves.
- The terms, future dividend rate and capital treatment of the $150 million Series C preferred stock, and the company’s ability to maintain bank capital as assets grow.