Broadway Financial (BYFC) - 2022 Q4 - Annual Report

PART I Business Overview Broadway Financial Corporation, a Black-led Minority Depository Institution, focuses on attracting deposits and originating real estate loans, serving historically excluded communities - The company completed its merger with CFBanc Corporation on April 1, 2021, forming City First Bank, National Association[15] - The company operates as a Delaware public benefit corporation, focusing on equitable economic development in historically excluded communities[21] - The principal business involves attracting deposits and originating loans, primarily for multi-family properties and commercial real estate[25] - In June 2022, the company received a $150.0 million investment from the U.S. Treasury's Emergency Capital Investment Program through Series C Preferred Stock issuance[22][49] Lending Activities Lending focuses on mortgage loans, primarily multi-family residential properties, with gross loans increasing to $771.7 million in 2022 Gross Loan Portfolio Composition (2022 vs. 2021) | Loan Type | 2022 Amount ($ thousands) | 2022 Percent of Total | 2021 Amount ($ thousands) | 2021 Percent of Total | | :--- | :--- | :--- | :--- | :--- | | Multi-family | 502,141 | 65.08% | 393,704 | 60.36% | | Commercial real estate | 114,574 | 14.85% | 93,193 | 14.29% | | Commercial | 64,841 | 8.40% | 46,539 | 7.13% | | Construction | 40,703 | 5.27% | 32,072 | 4.92% | | Single family | 30,038 | 3.89% | 45,372 | 6.96% | | Church | 15,780 | 2.04% | 22,503 | 3.45% | | SBA Loans | 3,601 | 0.47% | 18,837 | 2.89% | | Gross Loans Total | 771,689 | 100.00% | 652,220 | 100.00% | Loan Origination Summary (2022 vs. 2021) | Origination Type | 2022 ($ thousands) | 2021 ($ thousands) | | :--- | :--- | :--- | | Multi-family | 141,625 | 167,097 | | Commercial real estate | 75,302 | 43,567 | | Construction | 29,628 | 24,884 | | Commercial | 26,877 | 4,942 | | Total Loans Originated | 273,432 | 266,987 | - The net loan portfolio totaled $768.0 million, representing 64.9% of total assets at December 31, 2022[31] Asset Quality Asset quality improved in 2022, with non-performing assets decreasing to $144 thousand and the allowance for loan losses increasing Non-Performing Assets (NPAs) | Metric | Dec 31, 2022 ($ thousands) | Dec 31, 2021 ($ thousands) | | :--- | :--- | :--- | | Total non-accrual loans | 144 | 684 | | Real estate owned | 0 | 0 | | Total NPAs | 144 | 684 | | NPAs as % of total assets | 0.01% | 0.06% | Allowance for Loan Losses (ALLL) Activity | Metric | 2022 ($ thousands) | 2021 ($ thousands) | | :--- | :--- | :--- | | Beginning Balance | 3,391 | 3,215 | | Loan Loss Provision | 997 | 176 | | Charge-offs / Recoveries | 0 | 0 | | Ending Balance | 4,388 | 3,391 | | ALLL as % of gross loans | 0.57% | 0.52% | - Criticized loans (Watch and Special Mention) increased to $47.8 million from $16.0 million, primarily because the bank classifies all newly originated construction loans as 'Watch' until a performance history is established[107][137] Investment Activities The available-for-sale securities portfolio grew to $328.7 million in 2022, driven by ECIP program proceeds Available-for-Sale Securities Portfolio (Fair Value) | Security Type | Dec 31, 2022 ($ thousands) | Dec 31, 2021 ($ thousands) | | :--- | :--- | :--- | | U.S. Treasuries | 160,589 | 17,951 | | Federal agency mortgage-backed securities | 74,169 | 70,030 | | Federal agency debt | 51,425 | 37,988 | | Federal agency CMO | 26,100 | 9,287 | | SBA pools | 12,269 | 16,225 | | Municipal bonds | 4,197 | 4,915 | | Total | 328,749 | 156,396 | - The securities portfolio totaled $328.7 million, representing 27.76% of total assets at December 31, 2022[144] - All investment securities are classified as available-for-sale; none are classified as held-to-maturity[116][145] Sources of Funds Deposits are the primary funding source, supplemented by FHLB advances, which increased to $128.3 million in 2022 - Uninsured deposits totaled approximately $212.9 million at December 31, 2022, down from $265.8 million at the end of 2021[124] FHLB Advances Summary | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Balance outstanding at year-end | $128.3M | $86.0M | | Weighted average interest rate at year-end | 3.74% | 1.85% | - The company utilizes the Certificate of Deposit Account Registry Service (CDARS) for reciprocal deposits, which totaled $74.6 million at year-end 2022 and are not considered brokered deposits[148] Human Capital The company employed 83 full-time and one part-time employees, focusing on diversity, talent, and competitive compensation - As of December 31, 2022, the company had 83 full-time and one part-time employees[132] - The company's workforce is diverse, with over 80% of employees self-identifying as minority and approximately 64% as women[186] - The company provides competitive compensation and benefits, including base salary, incentive plans, restricted stock awards, a 401(k) with employer match, and an employee stock ownership plan (ESOP)[157] Regulation The company and its bank subsidiary are comprehensively regulated, with the bank 'well capitalized' and rated 'outstanding' for CRA Community Bank Leverage Ratio (CBLR) | Date | Actual Ratio | Minimum to be Well Capitalized | | :--- | :--- | :--- | | Dec 31, 2022 | 15.75% | 9.00% | | Dec 31, 2021 | 9.32% | 8.50% | - The company's most recent Community Reinvestment Act (CRA) performance was rated "outstanding" by the OCC in 2022[229] - The bank's deposits are insured by the FDIC up to the statutory limit, which is currently $250,000 per depositor[195] Item 1A. Risk Factors The company faces macroeconomic, real estate concentration, and operational risks, compounded by challenges from its public benefit corporation status Risks Relating to Our Business Business risks include macroeconomic impacts, real estate market downturns, inadequate loan loss allowance, intense competition, and technology system failures - The macroeconomic environment, including inflation and rising interest rates, poses significant challenges to the company and its clients[1][213] - A downturn in the real estate market in Southern California and Washington, D.C. could seriously impair the loan portfolio, as most loans are secured by properties in these areas[216] - The allowance for loan losses may not be adequate to cover actual losses, and the determination of the allowance is a subjective process subject to regulatory review[241][218] - The company is dependent on its information technology systems and those of third-party providers, making it vulnerable to failures, interruptions, and cybersecurity breaches[222][267] Risks Relating to the Company Being a Public Benefit Corporation As a public benefit corporation, balancing stockholder and public benefit interests may impact short-term value and increase litigation risk - The company's focus on specific public benefit purposes could negatively impact financial performance, as directors must balance stockholder interests with those of other stakeholders[4][270] - Directors have a fiduciary duty to consider the company's public benefit purposes, and in a conflict, there is no guarantee that a resolution would be in favor of stockholders' interests[271] - Stockholders of a Delaware public benefit corporation have specific rights to file lawsuits claiming directors failed to balance stockholder and public benefit interests, potentially increasing litigation risk[251] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[316] Item 2. Properties The company operates through two administrative offices and three branch offices in Washington, D.C. and Southern California, deemed adequate for current needs - The company has three branch offices: one in Washington, D.C., one in Los Angeles, and one in Inglewood, California[255] Property Details | Location | Type | Status | | :--- | :--- | :--- | | 1432 U Street NW, Washington, D.C. | Admin & Branch | Owned | | 4601 Wilshire Blvd, Los Angeles, CA | Admin/Loan Center | Leased | | 170 N. Market Street, Inglewood, CA | Branch/Loan Service | Owned | | 4001 South Figueroa Street, Los Angeles, CA | Branch Office | Owned | Item 3. Legal Proceedings The company does not believe any currently pending or threatened legal matters would have a material adverse effect on its financial position or operations - In management's opinion, the disposition of any currently pending or threatened litigation would not have a material adverse effect on the company's financial position or results of operations[276] Item 4. Mine Safety Disclosures This item is not applicable to the company's business - Not Applicable[277] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under 'BYFC', with no cash dividends paid since May 2010 or equity repurchases during the period - The company's common stock trades on the Nasdaq Capital Market under the symbol "BYFC"[257] - The company suspended its regular cash dividend policy in May 2010 and has not paid cash dividends on its common stock since[257][325] - There were no repurchases of equity securities during the period[327] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The company reported $5.6 million net income in 2022, a turnaround from a $4.1 million loss in 2021, driven by increased net interest income and lower non-interest expenses Key Performance Metrics | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Income (Loss) | $5.6 million | ($4.1 million) | | Earnings (Loss) Per Share | $0.08 | ($0.07) | | Net Interest Income | $32.9 million | $21.0 million | | Return on Average Assets | 0.52% | (0.54)% | | Return on Average Equity | 2.19% | (4.46)% | Comparison of Operating Results for the Years Ended December 31, 2022 and 2021 Operating results improved in 2022, with net interest income increasing by $11.9 million to $32.9 million, and non-interest expenses decreasing by $4.0 million - Net interest income before provision for loan losses increased by $11.9 million, or 56.5%, to $32.9 million in 2022[6] - The net interest margin increased to 3.05% in 2022 from 2.42% in 2021, due to higher yields on assets and a lower cost of funds[53][306] - Non-interest expenses decreased by $4.0 million, primarily due to decreases in compensation, information services, and professional services, which had included one-time Merger-related costs in 2021[295] - Non-interest income decreased by $2.0 million, mainly due to a non-recurring $1.8 million CDFI grant recognized in 2021[294] Comparison of Financial Condition at December 31, 2022 and 2021 Total assets increased by $90.8 million to $1.2 billion, driven by investments and loans, while deposits decreased and equity rose from preferred stock issuance - Total assets increased by $90.8 million to $1.2 billion[411] - Net loans receivable increased by $119.5 million to $768.0 million, driven by $273.4 million in new originations[388] - Deposits decreased by $101.1 million to $686.9 million, partly due to a $73.1 million withdrawal by a single large customer and depositors seeking higher rates[423] - Stockholders' equity increased to $279.5 million from $141.0 million, primarily due to the $150 million preferred stock sale to the U.S. Treasury[447] Liquidity and Capital Resources The company maintains strong liquidity and capital, with substantial cash, unpledged securities, and FHLB borrowing capacity, remaining 'well capitalized' - The bank is approved to borrow up to 25% of total assets from the FHLB and had an additional borrowing capacity of $70.6 million at year-end 2022[430] - The bank must comply with capital standards established by the OCC and is considered "well capitalized"[403] Book Value Per Common Share (Dec 31, 2022) | Metric | Per Share Amount | | :--- | :--- | | Common book value | $1.76 | | Tangible book value (non-GAAP) | $1.38 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the company is not required to provide the information requested by this item - As a smaller reporting company, the company is not required to provide the information requested by this item pursuant to Item 305(e) of Regulation S-K[438] Item 8. Financial Statements and Supplementary Data This section refers to the Index to Consolidated Financial Statements of Broadway Financial Corporation and Subsidiaries included later in the report - Refers to the Index to Consolidated Financial Statements of Broadway Financial Corporation and Subsidiaries[439] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[440] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[458] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022[442] Item 9B. Other Information The company reports no other information for this item - None[464] PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement - The required information is incorporated by reference from the Company's Proxy Statement[486] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the 2023 Proxy Statement - The required information is incorporated by reference from the Company's Proxy Statement[444][467] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership by beneficial owners and management is incorporated by reference from the 2023 Proxy Statement - The required information is incorporated by reference from the Company's Proxy Statement[487] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related party transactions, and director independence is incorporated by reference from the 2023 Proxy Statement - The required information is incorporated by reference from the Company's Proxy Statement[444][487] Item 14. Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from the 2023 Proxy Statement - The required information is incorporated by reference from the Company's Proxy Statement[444][467] PART IV Item 15. Exhibits and Financial Statement Schedules This section provides an index to Consolidated Financial Statements and a list of all exhibits filed, with schedules omitted as not applicable - This item lists all exhibits filed with the annual report, including organizational documents, material contracts, and certifications[469][446][470] - Financial Statement Schedules have been omitted because they are not applicable or the required information is already present in the Consolidated Financial Statements or Notes[445] Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm The auditor issued an unqualified opinion on the financial statements, identifying the allowance for loan losses as a critical audit matter - The auditor issued an unqualified opinion, stating the financial statements are presented fairly in accordance with U.S. GAAP[498] - The allowance for loan losses was identified as a critical audit matter due to the significant management judgment required[513][479] Consolidated Financial Statements The consolidated financial statements present the company's financial position, results of operations, and cash flows for 2022 and 2021 Consolidated Balance Sheet Highlights (As of Dec 31, 2022) | Account | Amount ($ thousands) | | :--- | :--- | | Total Assets | 1,184,293 | | Net Loans Receivable | 768,046 | | Total Deposits | 686,916 | | Total Liabilities | 904,641 | | Total Stockholders' Equity | 279,482 | Consolidated Income Statement Highlights (For Year Ended Dec 31, 2022) | Account | Amount ($ thousands) | | :--- | :--- | | Net Interest Income | 32,860 | | Provision for Loan Losses | 997 | | Non-interest Income | 1,195 | | Non-interest Expense | 24,939 | | Net Income | 5,706 | Notes to Consolidated Financial Statements The notes provide detailed disclosure of significant accounting policies and further information on financial statement balances and activities Note 1 – Summary of Significant Accounting Policies This note outlines principal accounting policies, including consolidation, estimates, and accounting for cash, investment securities, and loans receivable - The company uses the incurred loss methodology for its allowance for loan losses and will adopt the Current Expected Credit Loss (CECL) standard in the first quarter of 2023[575] - All debt securities are classified as available-for-sale and carried at fair value, with unrealized gains and losses reported in other comprehensive income[372] Note 2 – Business Combination This note details the April 1, 2021 merger with CFBanc Corporation, including total consideration, goodwill, and intangible asset recognition - The merger with CFBanc on April 1, 2021, involved total consideration of approximately $66.3 million[588] - The company recognized $26.0 million of goodwill and a $3.3 million core deposit intangible asset as a result of the merger[589][421] Note 5 – Loans Receivable Held for Investment This note provides a detailed breakdown of the loan portfolio and credit quality, including gross loans, allowance for loan losses, and non-accrual loans Loan Portfolio by Type (Dec 31, 2022) | Loan Type | Gross Amount ($ thousands) | | :--- | :--- | | Multi-family | 502,141 | | Commercial real estate | 114,574 | | Commercial – other | 64,841 | | Construction | 40,703 | | Single family | 30,038 | | Total Gross Loans | 771,689 | - Total non-accrual loans were $144 thousand at December 31, 2022, compared to $684 thousand at year-end 2021[630] - As of December 31, 2022, loans classified as troubled debt restructurings (TDRs) totaled $1.7 million[632] Note 18 – Regulatory Matters This note discusses capital adequacy requirements, with the bank's CBLR at 15.75% exceeding the 9.00% minimum to be 'well capitalized' Community Bank Leverage Ratio (CBLR) | Date | Actual Ratio | Minimum to be Well Capitalized | | :--- | :--- | :--- | | Dec 31, 2022 | 15.75% | 9.00% | | Dec 31, 2021 | 9.32% | 8.50% | - The bank was "well capitalized" under the regulatory framework for prompt corrective action as of December 31, 2022[713]