Broadway Financial Corporation — 2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015, with comparisons to 2014. Broadway Financial operates Broadway Federal Bank, a community bank with three offices in the Los Angeles area. Its business centers on deposits and mortgage lending, primarily in Southern California.
Financial performance and condition
- Profit: Net income was $9.1 million ($0.31 per diluted share), versus $2.5 million ($0.11) in 2014. The 2015 result included a $4.6 million income tax benefit, primarily reflecting a partial release of the deferred-tax-asset valuation allowance, as well as a $3.7 million loan-loss provision recapture and $1.8 million gain on loan sales.
- Interest income and margins: Interest income was $15.2 million, down from $15.7 million. Net interest income before loan-loss recapture fell 5% to $11.3 million. Net interest margin declined to 3.11% from 3.62%; average loan yield fell to 4.88% from 5.43%.
- Costs: Non-interest expense was $13.4 million, broadly unchanged from 2014. Compensation expense rose $1.2 million, mainly due to a special ESOP contribution of approximately $1.2 million.
- Assets and lending: Total assets rose 15% to $402.9 million. Net loans held for investment were $304.2 million, up from $276.6 million; cash and cash equivalents increased to $67.8 million from $20.8 million. The loan mix shifted substantially: single-family loans grew to $130.9 million from $39.8 million, following $99.7 million of purchases, while multi-family loans declined to $118.6 million from $171.8 million.
- Credit quality: Non-performing assets fell to $4.6 million, or 1.14% of assets, from $10.9 million, or 3.12%. Non-accrual loans were $4.2 million, down from $8.9 million. The allowance for loan losses decreased to $4.8 million from $8.5 million, equal to 1.56% of gross loans held for investment versus 2.99% in 2014. The company reported $15.8 million of impaired loans and $15.3 million of troubled debt restructurings at year-end.
- Funding, debt, and liquidity: Deposits increased $54.7 million to $272.6 million; FHLB advances declined $14.0 million to $72.0 million. Junior subordinated debentures remained $5.1 million, bringing stated borrowings to $77.1 million. Cash and cash equivalents plus unpledged available-for-sale securities totaled approximately $81.2 million. The Bank could borrow up to a further $38.3 million from the FHLB, subject to collateral and other requirements.
- Cash flow and capital: Operating cash flow was $14.2 million, investing cash flow was negative $7.9 million, and financing cash flow was positive $40.7 million. The Bank’s year-end capital ratios included a 19.45% CET1 ratio, 20.71% total capital ratio, and 11.56% leverage ratio; it exceeded the stated “well-capitalized” thresholds.
Material changes versus 2014
- Net income increased by $6.5 million, with the tax benefit, larger provision recapture, and loan-sale gains as major contributors; underlying net interest income before recapture weakened.
- The Bank sold $164.1 million of loans during 2015, largely multi-family loans, to comply with loan concentration guidelines. It also purchased $99.7 million of single-family loans late in the year to diversify lending and offset the effect of those sales.
- Asset quality improved: non-performing assets, delinquencies, criticized assets, and REO were lower. The allowance reduction and recapture reflected management’s improved loss outlook, but remain estimates subject to review.
- The OCC terminated the Bank’s Consent Order effective November 23, 2015; the FRB terminated the Company’s order on February 5, 2016. The Bank remained subject to ordinary regulatory requirements.
Outlook, risks, and unusual items
The filing provides no specific earnings or revenue guidance. Management said liquidity was sufficient to support growth over the foreseeable future. It expected to maintain a significant customer relationship in the near term.
- Interest-rate changes may affect loan yields, deposit costs, and the value or repricing of assets and liabilities. More than 99% of mortgage loans had adjustable-rate features, although $195.5 million were still in initial fixed-rate periods or otherwise subject to rate floors.
- Credit risk remains tied to Southern California real estate and economic conditions, borrower repayment capacity, collateral values, and concentrations in mortgage lending. Church loans were $46.4 million at year-end; 76% of non-accrual loans were current on payments but remained on non-accrual for other reasons.
- Deposit concentration is notable: one long-time customer represented approximately 17% of deposits. Certificates of deposit were 67% of deposits, and $99.1 million of CDs were scheduled to mature within one year.
- The $4.6 million net deferred tax asset depends on future taxable income; a $2.5 million valuation allowance remained. The company also disclosed a California tax examination and $475,000 of unrecognized tax benefits, with a potential settlement expected to reduce that balance.
- Contractual commitments included $4.3 million to originate loans, $297,000 of unused credit lines, and $2.5 million of operating lease obligations. Management did not expect pending litigation to have a material adverse effect. Cybersecurity threats were identified as an ongoing risk, though no significant compromise or material related loss had been experienced.
- The Company had not paid regular cash dividends since 2010. The filing also notes restrictions related to TARP agreements, including restrictions affecting certain compensation and deferred-compensation payments.
The financial statements received an unqualified audit opinion. Management concluded disclosure controls and internal control over financial reporting were effective at year-end; the auditor did not provide an attestation opinion on internal control.
Important facts for investors to verify
- How much of reported earnings is repeatable without the tax benefit, provision recapture, and loan-sale gains; and whether deferred tax assets are realizable.
- Whether the lower allowance remains adequate as the portfolio mix changes, particularly given $100.0 million of purchased single-family loans reported without an assigned allowance.
- The renewal and pricing risk from the large depositor relationship and the substantial near-term CD maturities.
- Whether loan concentration limits, portfolio yields, and asset quality remain stable after the large multi-family sales and late-year single-family purchases.
- The Bank’s continuing capital and liquidity position, including access to FHLB borrowing and the terms and repayment schedule of its $5.1 million subordinated debentures.