Broadway Financial Corporation (BYFC) — FY2021 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2021; it is an annual report, not a standalone fourth-quarter report. Broadway Financial operates City First Bank, a community development bank serving Southern California and the Washington, D.C. area. On April 1, 2021, it completed its merger with CFBanc and combined its bank subsidiary with City First Bank of D.C. The merger substantially changes year-over-year comparisons because the acquired business is included only from the merger date.
Financial results and condition
- Earnings: Net loss attributable to Broadway Financial was $4.05 million, or $0.07 per share, versus a $642,000 loss, or $0.02 per share, in 2020. Net interest income before loan-loss provision rose to $21.0 million from $12.2 million; noninterest income was $3.2 million. Noninterest expense increased to $28.9 million from $14.2 million, including $5.6 million of merger costs and $2.4 million of data-processing conversion costs.
- Margins: Net interest margin was 2.42%, down from 2.52%. Average cost of deposits fell to 0.26% from 0.99%, while average loan yield increased to 4.24% from 4.06%.
- Assets and loans: Total assets were $1.094 billion at year-end, up from $483.4 million, primarily reflecting the merger. Net loans held for investment were $648.5 million, up from $360.1 million. The portfolio remained concentrated in multifamily lending, which represented 60.36% of gross loans.
- Credit quality: Nonperforming assets declined to $684,000, or 0.06% of assets, from $787,000, or 0.16%. The allowance for loan losses was $3.4 million, or 0.52% of gross loans, compared with $3.2 million, or 0.88%. No loan charge-offs were recorded in 2021. Criticized loans rose to $16.0 million from $2.1 million, primarily because newly originated construction loans are initially classified as Watch.
- Cash flow and liquidity: Operating cash flow was $566,000; investing cash flow was $25.0 million and financing cash flow was $109.8 million. Cash and cash equivalents ended at $231.5 million. Management also reported $52.4 million of unpledged available-for-sale securities and $11.0 million of additional lines of credit. It believes liquidity is sufficient for foreseeable growth.
- Funding, debt, and capital: Deposits totaled $788.1 million, compared with $315.6 million. Year-end funding included $86.0 million of FHLB advances, $52.0 million of repurchase agreements, and $14.0 million of notes payable; junior subordinated debentures were redeemed in September. Company stockholders’ equity was $141.0 million. The Bank’s Community Bank Leverage Ratio was 9.32% at year-end; the filing says the Bank met applicable capital requirements and was well capitalized.
Material changes and unusual items
- The merger added $471.0 million of CFBanc assets at acquisition, including $225.9 million of loans and $353.7 million of deposits. Broadway Financial recorded $26.0 million of goodwill and a $3.3 million core deposit intangible.
- The Company issued merger consideration and raised $30.8 million net through a post-merger private placement. The larger combined operation increased interest income and deposits, but also raised operating costs; merger-related and system-conversion costs materially affected the loss.
- Income-tax benefit was $937,000. The Company recorded a $369,000 valuation allowance related to deferred tax assets, including California net operating loss benefits affected by limitations triggered by post-merger stock issuances.
- The audited financial statements received an unqualified opinion. The auditor identified the allowance for loan losses and valuation of acquired loans as critical audit matters. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an ICFR attestation.
Outlook, commentary, and risks
The filing provides no quantified earnings or revenue guidance. Management expects liquidity to support growth, but notes that further capital may be needed to support growth and maintain the Bank’s well-capitalized status. CECL adoption is scheduled for 2023, and its financial impact had not been determined. The filing identifies COVID-19 and economic uncertainty, inflation and rising rates, real-estate and construction credit exposure, competition, deposit and funding concentration, regulatory requirements, cybersecurity, and the Company’s public-benefit-corporation obligations as risks.
Five customer relationships represented approximately 22% of deposits; two customer relationships represented 84% of repurchase-agreement balances. A stockholder lawsuit concerning merger proxy disclosures was dismissed on March 29, 2022, with leave to amend; any amended complaint was due by April 29, 2022. The Company said it was defending the claims and considered them without merit.
Important facts for investors to verify
- How post-merger expense levels and integration costs develop, and whether the combined business can return to profitability.
- Credit performance of the expanded multifamily, commercial real estate, construction, and acquired loan portfolios; also monitor the allowance as CECL approaches.
- Whether the Bank’s 9.32% year-end leverage ratio provides adequate room above the 9% CBLR level effective January 1, 2022.
- Stability and pricing of concentrated deposits and repurchase-agreement funding, and availability of pledged-collateral borrowing capacity.
- Goodwill impairment risk, the deferred-tax-asset valuation, and any developments in the stockholder lawsuit or other contingencies.