Broadway Financial Corporation — FY 2017 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2017, compared with 2016; it does not provide standalone fourth-quarter results. Broadway Financial operates Broadway Federal Bank, a Los Angeles-area community bank focused on deposits and real-estate lending, especially multifamily mortgages. The consolidated financial statements received an unqualified audit opinion.
Financial and operating results
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets at year-end | $413.7 million | $429.1 million |
| Total interest income | $16.3 million | $15.3 million |
| Net interest income, before loan-loss recapture | $11.9 million | $11.4 million |
| Net income | $1.9 million; $0.07 diluted EPS | $3.5 million; $0.12 diluted EPS |
| Net interest margin | 2.79% | 2.90% |
| Cash and cash equivalents at year-end | $22.2 million | $18.4 million |
| Deposits at year-end | $291.3 million | $287.4 million |
| FHLB advances at year-end | $65.0 million | $85.0 million |
- Loan-loss provision recapture was $1.1 million, versus $550,000 in 2016. The resulting net interest income after recapture was $13.0 million, versus $12.0 million.
- Non-interest income was $2.5 million, up from $1.0 million, including a $1.2 million insurance litigation settlement and a $560,000 gain on loan sales. Non-interest expense was $11.8 million, broadly unchanged.
- Net income fell despite higher pretax earnings: 2017 included $1.9 million of income tax expense, including a $519,000 deferred-tax adjustment from the federal rate reduction to 21%; 2016 included a $2.2 million tax benefit from reversing the remaining deferred-tax valuation allowance.
- Net cash used in operating activities was $10.2 million, compared with $930,000 provided in 2016, largely reflecting originations of loans held for sale. Investing activities provided $30.2 million; financing activities used $16.1 million, mainly from FHLB repayments.
- Net loans held for investment fell to $334.9 million from $379.5 million. Gross loans declined to $337.4 million from $382.3 million, primarily as multifamily loans were sold or shifted to held-for-sale. Year-end loans held for sale were $22.4 million. In February 2018, $16.9 million of these loans were reclassified to held-for-investment.
- Credit indicators improved: nonperforming assets were $2.6 million, or 0.64% of assets, versus $2.9 million, or 0.69%; nonaccrual loans were $1.8 million versus $2.9 million. The allowance for loan losses was $4.1 million, 1.20% of loans held for investment, versus $4.6 million and 1.20%. No loan charge-offs were reported in either year.
Liquidity, debt, capital and material changes
- Year-end liquid assets included $22.2 million in cash and $17.0 million in unpledged available-for-sale securities. The Bank reported capacity to borrow up to an additional $42.9 million from the FHLB, subject to collateral and other requirements.
- Total deposits increased $3.9 million. CDs declined, while money-market and other liquid deposits increased; brokered deposits were $52.8 million. One customer relationship represented about 11% of deposits.
- Total borrowings were $70.1 million: $65.0 million of FHLB advances and $5.1 million of junior subordinated debentures. The debentures bear a floating LIBOR-based rate and begin quarterly principal amortization in June 2019; maturity is March 2024.
- Bank regulatory capital exceeded well-capitalized thresholds: Tier 1 leverage ratio 11.39%, CET1 and Tier 1 risk-based ratios 18.63%, and total capital ratio 19.88%. Company stockholders’ equity was $47.7 million, or 11.54% of assets.
- Multifamily loans were 55.6% of gross loans, down from 60.1%; single-family loans rose to 32.9% from 27.4%. More than 99% of mortgage loans had adjustable-rate features, although 82% of the loan portfolio remained in initial fixed-rate periods at year-end.
Outlook, commentary, risks and unusual items
- Management said liquidity was sufficient to support growth over the foreseeable future; the filing provides no earnings or revenue guidance. Regular cash dividends have been suspended since 2010.
- Management cited continued improvement in credit quality and described the allowance as adequate, while noting actual losses could exceed estimates and regulators could require a higher allowance. The company expects adoption of the CECL expected-credit-loss standard to increase the allowance; the ultimate effect was still being evaluated.
- Key exposures include Southern California real-estate and economic conditions, multifamily and other property concentrations, interest-rate movements and funding costs, competition, and regulatory changes. The high share of adjustable-rate loans can reduce rate risk, but initial fixed periods and rate floors delay or limit repricing.
- Tax matters include the federal rate change and a California tax examination for 2009–2011. The company reported $475,000 of unrecognized tax benefits and said it expected possible reduction following settlement with state tax authorities; it did not expect the protested California adjustments to cause significant additional expense.
- The company disclosed ordinary-course litigation that management did not expect to materially affect financial position, results or cash flows. It also stated that cybersecurity threats remain significant, though no material cybersecurity loss or compromise had occurred to date.
- Management concluded disclosure controls and internal control over financial reporting were effective at year-end; the auditor did not attest to internal controls.
Important facts for investors to verify
- Whether the 2017 earnings decline is primarily a tax-comparison effect, and how recurring earnings perform excluding the litigation settlement, loan-sale gain and loan-loss recapture.
- How multifamily loan sales, the February 2018 reclassification and future originations affect loan concentration, balances and recurring interest income.
- The stability and cost of deposits, including the large customer relationship and brokered/CDARS funding, and the timing of FHLB maturities and debenture amortization.
- Credit quality trends, collateral values and the adequacy of the allowance, including the expected impact and implementation timing of CECL.
- Realization of deferred tax assets and outcomes of the California tax examination and unrecognized tax positions.