Broadway Financial Corporation — FY 2016 Form 10-K
Business context and reporting period. This annual filing covers the year ended December 31, 2016, with comparison to 2015. Broadway Financial operates Broadway Federal Bank, a Los Angeles-area community bank funded mainly by deposits and focused on mortgage lending, particularly multifamily real estate.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Net income | $3.5 million; $0.12 diluted EPS | $9.1 million; $0.31 diluted EPS |
| Net interest income before loan-loss recapture | $11.4 million | $11.3 million |
| Net interest margin | 2.90% | 3.11% |
| Net interest rate spread | 2.78% | 2.99% |
| Operating cash flow | $0.9 million | $14.2 million |
- Total assets rose 6% to $429.1 million. Net loans increased to $379.5 million; deposits were $287.4 million.
- Cash and cash equivalents fell to $18.4 million from $67.8 million. The Bank also held $12.6 million of unpledged available-for-sale securities and reported $39.0 million of additional FHLB borrowing capacity.
- Borrowings included $85.0 million of FHLB advances and $5.1 million of junior subordinated debentures. Stockholders’ equity was $45.5 million, or 10.61% of assets.
- Loan-loss allowance was $4.6 million, or 1.20% of loans held for investment. Nonperforming assets declined to $2.9 million, 0.69% of assets, from $4.6 million, 1.14%; there were no charge-offs in 2016.
- Bank regulatory capital ratios exceeded the “well capitalized” thresholds: Tier 1 leverage 10.60%, CET1 15.36%, and total capital 16.62%.
Material changes versus 2015
- Net income fell $5.6 million. The 2016 result included a $2.2 million income-tax benefit and $550,000 loan-loss provision recapture; 2015 included a $4.6 million tax benefit, $3.7 million recapture, and $1.8 million gain on loan sales. No loans were sold in 2016.
- Loan yields declined to 4.24% from 4.88%, offsetting much of the benefit from higher average loan balances. Multifamily loans grew to $229.6 million and about 60% of gross loans, from $118.6 million and 39% a year earlier; single-family loans decreased to $104.8 million from $130.9 million.
- Deposits increased $14.8 million and FHLB advances increased $13.0 million. Net loans grew $75.3 million, with the increase funded in part by a $49.4 million reduction in cash and cash equivalents.
- The Company repurchased 2.5 million voting shares for $4.0 million and issued $1.2 million of non-voting shares. Treasury ownership of voting shares declined from 47.40% to 29.35%. A further $1.2 million Company loan funded part of the ESOP’s separate share purchase.
Outlook, risks and unusual items
- Management said liquidity was sufficient to support growth over the foreseeable future; the filing provides no quantified earnings or growth guidance.
- Risks include Southern California real-estate and economic conditions, borrower repayment and collateral values, competition, and interest-rate changes. Although more than 99% of mortgage loans had adjustable-rate features, $293.6 million, or 77% of the loan portfolio, remained in initial fixed-rate periods at year-end.
- Funding and maturity risks merit attention: $160.3 million of certificates of deposit were scheduled to mature in 2017, and $49.5 million of FHLB advances were due that year. One customer relationship represented approximately 11% of deposits. CDARS deposits were $28.6 million at year-end.
- Management’s estimate of the loan-loss allowance is judgmental and may be revised by economic changes or regulators. The expected-credit-loss standard then scheduled for adoption in 2020 could increase the allowance; the Company had not quantified the impact.
- Subsequent event: under a March 13, 2017 settlement agreement concerning the Paul Ryan case, Columbia Casualty agreed to pay the Bank $2.0 million, subject to the agreement’s terms. Management said pending or threatened legal matters were not expected to have a material adverse effect.
- The regular cash dividend policy had been suspended since 2010. The Federal Reserve terminated its prior order restricting capital distributions in February 2016, but Bank dividend capacity remained subject to normal regulatory limits.
Important facts for investors to verify
- Whether multifamily loan growth, lower loan yields, and the pronounced shift in portfolio mix affect future net interest margin and credit concentration.
- Whether the $4.6 million allowance adequately reflects credit risk, especially in church and multifamily exposures, and how the new expected-credit-loss standard may change reserves.
- How the 2017 certificate and FHLB maturities are funded, and whether the large depositor relationship and CDARS funding remain stable.
- Whether the $2.0 million settlement payment was received and whether any related matters remain outstanding.
- The sustainability of reported earnings excluding tax benefits, loan-loss recaptures, and the prior-year loan-sale gain. The 2016 statements received an unqualified audit opinion; management reported effective disclosure controls and internal control over financial reporting.