Broadway Financial Corporation — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018, compared with 2017. The company operates Broadway Federal Bank, a Los Angeles-area community bank focused on real-estate lending and deposits.
Business context and financial performance
The Bank attracts deposits and invests primarily in Southern California mortgage loans. Multi-family loans were 65% of gross loans at year-end; net loans held for investment were $355.6 million, or about 87% of total assets. More than 99% of mortgage loans had adjustable-rate features, although 83% of the loan portfolio remained in initial fixed-rate periods.
| Metric | 2018 | 2017 |
|---|---|---|
| Total assets | $409.4 million | $413.7 million |
| Net interest income before loan-loss recapture | $10.3 million | $11.9 million |
| Net interest margin | 2.57% | 2.79% |
| Loan-loss provision recapture | $1.3 million | $1.1 million |
| Non-interest income | $0.9 million | $2.5 million |
| Non-interest expense | $11.6 million | $11.8 million |
| Net income / diluted EPS | $815,000 / $0.03 | $1.9 million / $0.07 |
| Operating cash flow | $234,000 | $(10.2) million |
At December 31, 2018, deposits were $281.4 million, FHLB advances were $70.0 million, and junior subordinated debentures were $5.1 million. Cash and cash equivalents were $16.7 million; management reported a further $14.7 million of unpledged available-for-sale securities and $54.6 million of additional FHLB borrowing capacity. Stockholders’ equity was $48.4 million. The Bank’s capital ratios exceeded the stated well-capitalized thresholds, including a 12.03% leverage ratio and 20.48% total capital ratio.
Material changes versus 2017
- Net income fell to $815,000 from $1.9 million. Net interest income declined $1.6 million, reflecting lower average loan balances and yields and higher deposit costs; non-interest income fell $1.7 million.
- The non-interest-income comparison included a $1.2 million insurance-litigation settlement received in 2017 and lower loan-sale gains in 2018 ($70,000 versus $560,000).
- Income-tax expense decreased to $56,000 from $1.9 million. The 2017 tax expense included a $519,000 deferred-tax adjustment associated with the federal tax-rate reduction.
- Net loans held for investment increased $20.7 million, while loans held for sale declined $16.1 million. The Bank originated $99.0 million of loans, including $96.0 million of multi-family loans, and sold $19.3 million of loans.
- Deposits declined $9.9 million; FHLB advances increased $5.0 million. Average deposit cost rose to 1.10% from 0.82%, while year-end FHLB advance cost rose to 2.51% from 1.86%.
Asset quality, outlook, risks and unusual items
- Non-performing assets decreased to $1.7 million (0.43% of assets) from $2.6 million (0.64%). Non-accrual loans fell to $911,000; management said these loans were current on payments but remained non-accrual largely for non-payment-related documentation deficiencies. Delinquencies totaled $35,000, and there were no loan charge-offs in 2018.
- The allowance for loan losses declined to $2.9 million, or 0.82% of loans held for investment, from $4.1 million, or 1.20%. Management attributed the reduction and $1.3 million recapture to improved credit conditions and portfolio metrics; actual losses could exceed estimates, and regulators may require additional reserves.
- Credit risk is concentrated geographically in Southern California and by loan type in multi-family real estate. The Bank’s single largest depositor represented about 11% of deposits. Rising rates, real-estate weakness, borrower cash flows, competition, regulation, and the ability of the holding company to obtain cash are identified risks.
- The OCC issued non-objection letters in 2018 allowing higher multi-family and other commercial-real-estate concentration limits. Management said liquidity was sufficient to support foreseeable growth. No formal earnings guidance was provided.
- The company expected adoption of the new lease standard in 2019 to add about $1.0 million of lease liability and a corresponding right-of-use asset. It expected CECL adoption to increase the allowance; the filing did not quantify the impact.
- The $5.1 million floating-rate debentures mature in 2024; scheduled principal payments begin in June 2019. The Bank had $10.9 million of loan-origination commitments and $1.5 million of unused credit lines at year-end. Management did not expect pending or threatened legal matters to have a material financial effect.
- The company suspended regular cash dividends in 2010. The independent auditor gave an unqualified opinion on the financial statements; management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Whether asset-quality improvement is durable and supports the reduced allowance, particularly given $6.4 million of impaired loans and $6.4 million of total troubled debt restructurings.
- How multi-family concentration, the OCC-approved concentration limits, and local property-market conditions affect future credit risk and loan growth.
- Whether deposit pricing and funding mix continue to pressure net interest margin, and whether the large depositor relationship remains stable.
- The actual effects of CECL adoption, the lease liability recognition, and scheduled debenture principal repayments on earnings, capital, and liquidity.
- Whether operating cash generation and the holding company’s liquidity remain adequate; consolidated cash declined by $5.6 million during 2018.