Broadway Financial Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are primarily with the year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. Broadway Financial operated Broadway Federal Bank, a community bank focused mainly on multifamily and other real estate lending in Southern California.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets | $483.4 million | $440.4 million |
| Net interest income before loan-loss provision | $12.2 million | $10.5 million |
| Net interest margin | 2.52% | 2.54% |
| Net loss | $642,000; loss per share $0.02 | $206,000; loss per share $0.01 |
| Cash and cash equivalents at year-end | $96.1 million | $15.6 million |
| Stockholders’ equity | $48.9 million | $48.8 million |
- Total interest income was $17.6 million and interest expense was $5.5 million. Net interest income rose $1.7 million, mainly from higher average loan balances and lower deposit funding costs. Lower yields on cash and loans partly offset the improvement.
- Noninterest income was $1.0 million, down slightly. Noninterest expense rose to $14.2 million from $12.1 million, principally because professional-services expense increased $1.2 million and compensation and benefits increased $1.0 million. Merger-related and former-stockholder legal costs were significant contributors.
- Return on average assets was (0.13%) and return on average equity was (1.30%), compared with (0.05%) and (0.42%), respectively, in 2019.
- Net loans held for investment declined to $360.1 million from $397.8 million. Multifamily loans were 75% of gross loans. More than 97% of mortgage loans had adjustable-rate features, although many remained in initial fixed-rate periods or were subject to rate floors.
- Deposits increased to $315.6 million from $297.7 million. FHLB advances rose to $110.5 million from $84.0 million; junior subordinated debentures declined to $3.3 million from $4.3 million. Two customer relationships represented approximately 13% of deposits.
- Year-end liquid assets included $96.1 million of cash and cash equivalents and $10.7 million of unpledged available-for-sale securities. The Bank reported capacity to borrow an additional $40.3 million from the FHLB, subject to collateral and other requirements.
- Operating cash flow was a $13.6 million outflow, versus an $8.5 million inflow in 2019; investing cash flow was a $50.7 million inflow and financing cash flow a $43.4 million inflow. Cash increased $80.5 million during the year.
- The allowance for loan losses was $3.2 million, or 0.88% of loans held for investment, versus 0.79% in 2019. There were no loan charge-offs or year-end delinquencies. Nonperforming assets increased to $787,000 from $424,000, while all nonaccrual loans were current in their payments.
- The Bank exceeded regulatory capital requirements and remained well-capitalized. Its year-end Tier 1 leverage ratio was 9.54%, and total capital ratio was 20.20%.
Material changes and outlook
- The net loss widened, mainly due to higher merger, legal, advisory, and compensation costs; the company reported that these were partly offset by stronger net interest income and a $273,000 California tax-settlement benefit.
- COVID-19 and the sharp decline in market rates created uncertainty around borrower repayment, collateral values, net interest income, margins, and profitability. Management increased the loan-loss allowance partly in response to pandemic-related uncertainty.
- The Company and City First shareholders approved a merger on March 17, 2021, after regulatory approvals had been obtained. Closing was expected on April 1, 2021. The Company also received approval to sell 18.474 million shares for $32.9 million in private placements, expected to close shortly after the merger. Management cautioned that integration may be difficult and expected benefits may not be realized.
- The planned private placements may trigger an ownership change under Internal Revenue Code Section 382. Management’s preliminary estimate indicated a potential deferred-tax-asset impairment allowance of approximately $2.4 million. The filing provides no broader numerical earnings or revenue guidance.
- Eight stockholder lawsuits challenged merger-related disclosures and sought, among other remedies, damages in unspecified amounts. The Company said it believed the claims were without merit and intended to defend them. The filing also notes risks tied to real-estate concentrations, interest rates, LIBOR transition, deposit funding, regulation, competition, and cybersecurity.
- The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether the City First merger and $32.9 million private placements closed as expected, and the resulting share count, ownership, capital position, and integration costs.
- Whether the private placements trigger Section 382 limits and an impairment of deferred tax assets; the estimated potential allowance was approximately $2.4 million.
- Subsequent credit quality and allowance trends, particularly for multifamily, commercial real estate, and church loans, given the local market and COVID-19 exposures.
- Liquidity and funding developments, including deposit concentration, certificate maturities, FHLB borrowing needs, and the cost of deposits and advances.
- Loan-sale disclosures: the filing reports $104.3 million of loan sales in its MD&A but also states $22.8 million in a financial-statement note; investors should reconcile the differing figures.