10-K/A: Broadway Financial Restates 2024/2023 Financials, Reports Lower Net Income

Broadway Financial Corporation has restated its 2024 and 2023 financial statements due to accounting errors related to loan participation agreements, reporting a significant drop in net income and diluted EPS for 2024.

Summary

• Broadway Financial Corporation filed an Amendment No. 2 to its Annual Report on Form 10-K/A for the fiscal year ended December 31, 2024, to restate previously issued financial statements for 2024 and 2023.
• The restatement was necessary due to an error in accounting for several loan participation agreements, which were incorrectly treated as sales instead of secured borrowing arrangements.
• This correction resulted in an increase in Loans Receivable Held for Investment by $31.1 million for 2024 and $31.2 million for 2023, and a corresponding increase in Secured Borrowings (liabilities) for the same amounts.
• Net income attributable to Broadway Financial Corporation decreased to $1.9 million for 2024 from $4.3 million for 2023, and diluted earnings per common share fell to $0.04 from $0.49.
• Total assets decreased by $71.8 million to $1.3 billion at December 31, 2024, compared to $1.4 billion at December 31, 2023.
• Total liabilities decreased by $75.1 million to $1.0 billion at December 31, 2024, from $1.1 billion at December 31, 2023.
• Net interest income increased by $2.3 million (7.8%) to $31.8 million in 2024, driven by higher interest income on loans and other interest-earning deposits, partially offset by increased interest expense on deposits and borrowings.
• Non-interest income decreased by $3.8 million to $1.6 million in 2024, primarily due to a non-recurring grant income of $3.7 million recognized in 2023.
• Non-interest expenses increased by $2.5 million to $29.9 million in 2024, mainly due to higher compensation and benefits and professional fees related to internal control remediation efforts.
• The company identified material weaknesses in its internal control over financial reporting (ICFR) and disclosure controls and procedures (DCPs) as of December 31, 2024, and is implementing a remediation plan.
• Gross loans held for investment grew by $88.3 million to $1.0 billion at December 31, 2024, with multifamily and commercial real estate loans being the primary drivers.
• Non-performing loans increased to $264 thousand at December 31, 2024, from $0 at December 31, 2023, and criticized loans rose to $159.9 million from $141.9 million.
• The Community Bank Leverage Ratio (CBLR) remained strong at 13.61% at December 31, 2024, exceeding the 9% minimum for well-capitalized status.

Sentiment

Score: 3

Explanation: The restatement of financial statements for two fiscal years, coupled with the identification of material weaknesses in internal controls, signals significant operational and governance issues. The substantial decline in net income and diluted EPS for 2024, alongside an increase in non-performing and criticized loans, indicates deteriorating financial performance and asset quality. While loan growth is present, the underlying control deficiencies and reduced profitability present considerable risks to future stability and investor confidence. The Nasdaq delisting threat further compounds these concerns, making the stock a high-risk investment with negative short-to-medium term prospects.

Positives

• Net interest income increased by $2.3 million (7.8%) to $31.8 million for the year ended December 31, 2024, compared to $29.5 million for 2023.
• Loans receivable held for investment, net of allowance for credit losses, increased by $88.3 million to $1.0 billion at December 31, 2024, demonstrating portfolio growth.
• The company's Community Bank Leverage Ratio (CBLR) was 13.61% at December 31, 2024, well above the 9.00% minimum required to be considered well-capitalized.
• Deposits increased by $62.8 million to $745.4 million at December 31, 2024, primarily driven by an increase in Insured Cash Sweep (ICS) deposits.
• The Bank Term Funding Program (BTFP) borrowing of $100.0 million was fully paid off in December 2024, reducing overall borrowings.

Negatives

• Net income attributable to Broadway Financial Corporation significantly decreased to $1.9 million for the year ended December 31, 2024, from $4.3 million for 2023.
• Diluted earnings per common share dropped substantially to $0.04 for 2024, compared to $0.49 for 2023.
• The company identified material weaknesses in its internal control over financial reporting and disclosure controls and procedures as of December 31, 2024, leading to the restatement of financial statements.
• Non-interest income decreased by $3.8 million in 2024, primarily due to the absence of a non-recurring $3.7 million grant received in 2023.
• Non-interest expenses increased by $2.5 million in 2024, partly due to professional fees incurred for remediation efforts related to internal control weaknesses.
• Non-performing loans increased to $264 thousand at December 31, 2024, from $0 at December 31, 2023.
• Criticized loans (Watch and Special Mention) increased to $159.9 million at December 31, 2024, from $141.9 million at December 31, 2023, with substandard loans rising to $68.5 million from $25.6 million.
• The net interest margin decreased to 2.34% for 2024 from 2.48% for 2023, primarily due to a higher average cost of funds.
• Approximately $268.8 million (32%) of total deposits were not insured by FDIC insurance at December 31, 2024, representing a significant concentration of uninsured deposits.

Risks

• The macroeconomic environment, including inflation, rising interest rates, supply chain disruptions, and geopolitical uncertainties, could adversely affect financial condition and results of operations.
• Intense competition in the Washington, D.C. and Los Angeles metropolitan areas from larger, more established financial institutions could impair growth and client retention.
• A downturn in the real estate market could seriously impair the loan portfolio and operating results, leading to increased delinquencies, defaults, and losses.
• The allowance for credit losses may not be adequate to cover actual loan losses, especially if economic conditions change or management's estimates prove inaccurate.
• Changes in interest rates can adversely affect profitability by impacting the spread between interest earned on assets and interest paid on liabilities.
• Changes in governmental regulation, including new laws, regulations, or interpretations by regulatory authorities, could materially adversely impact operations or restrict growth.
• Negative public opinion or failure to maintain reputation in the communities served could adversely affect business and growth.
• Inability to retain key employees could adversely affect business activities and divert management's attention.
• Ineffective internal control over financial reporting could affect the ability to record, process, and report financial information accurately, negatively affecting investor confidence and causing reputational harm.
• Failure to meet Nasdaq continued listing requirements, such as the $1.00 minimum closing bid price or timely financial reporting, could result in delisting, negatively impacting stock price and liquidity.
• The market price of common stock is volatile and may fluctuate significantly due to various factors, including operating results, market expectations, and regulatory actions.
• The company has not paid cash dividends on common stock since 2010 and may not do so for the foreseeable future.
• Stock sales or other dilution of equity could adversely affect the market price of common stock.
• Anti-takeover provisions in corporate documents and a stockholder rights plan may limit the ability of another party to acquire the company, potentially depressing stock price.
• Investment in common stock is not insured by the FDIC or any other government agency, meaning stockholders could lose their entire investment.
• Loss of Community Development Financial Institution (CDFI) status could result in the inability to obtain grants and awards, adversely affecting financial condition and business.
• Systems failures, interruptions, and cybersecurity breaches in information technology and telecommunications systems, or those of third-party service providers, could have a material adverse effect.
• Rapid technological change in the financial services industry may lead to competitive disadvantages if the company cannot effectively implement new technology.
• Markets susceptible to natural disasters (earthquakes, fires, flooding) could disrupt operations and increase loan losses.

Future Outlook

The company's future success is subject to various risks, including general economic conditions, market interest rate levels, credit losses, regulatory changes, competition, and real estate market trends. Management believes it has sufficient liquidity to support growth over the foreseeable future. The company will continue to monitor events that could influence its goodwill impairment conclusions.

Management Comments

• Management, with oversight of the Audit Committee, concluded that previously filed financial statements for 2024 and 2023 should no longer be relied upon due to an error related to certain loan participation agreements.
• Management has reassessed the effectiveness of disclosure controls and procedures and internal control over financial reporting, concluding they were not effective as of December 31, 2024, due to identified material weaknesses.
• Management is actively engaged in planning for and implementing remediation efforts to address the material weaknesses in internal control over financial reporting.
• Management believes that the Allowance for Credit Losses (ACL) has been established and maintained at adequate levels, but future adjustments may be necessary.
• Management believes that the Bank has sufficient liquidity to support growth over the foreseeable future.

Industry Context

Broadway Financial Corporation operates as a Community Development Financial Institution (CDFI) and a certified B Corp, focusing on equitable economic development and strengthening historically excluded communities in Southern California and Washington, D.C. The banking markets in these areas are highly competitive, with the company facing competition from larger financial institutions. The company's mission-driven approach aligns its business model with creating social, economic, and environmental value for underserved communities, which is a growing trend in the financial sector, but also subjects it to specific regulatory and performance criteria related to its CDFI status.

Comparison to Industry Standards

• The company's Community Bank Leverage Ratio (CBLR) of 13.61% at December 31, 2024, exceeds the 9% minimum required for 'well-capitalized' status under Prompt Corrective Action provisions, indicating strong capital adequacy relative to regulatory benchmarks.
• The increase in criticized loans to $159.9 million and substandard loans to $68.5 million in 2024, along with the emergence of non-performing loans, suggests a potential deterioration in asset quality that warrants close monitoring, especially when compared to industry averages for similar community banks.
• The significant drop in net income and diluted EPS for 2024, coupled with material weaknesses in internal controls, indicates performance and operational challenges that may lag behind more stable and efficiently managed peer institutions in the community banking sector.

Corporate Governance

Legal Proceedings

• In the ordinary course of business, the company is defendants in various litigation matters from time to time. Management believes the disposition of any currently pending or threatened litigation and other legal and regulatory matters would not have a material adverse effect on its financial position, results of operations, or cash flows.

Related Party Transactions

• Deposits from principal officers, directors, and their affiliates totaled $24.2 million at December 31, 2024, and $21.3 million at December 31, 2023.
• CFC 45, a partnership involved in New Market Tax Credit activities, includes CFNMA and City First New Markets Fund II, LLC as members. A $14.0 million non-recourse loan from Merrill Lynch to CFC 45 was paid off in January 2024.

Stakeholder Impact

• Shareholders: Negative impact due to financial restatement, significant decline in net income and EPS, identified material weaknesses in internal controls, and potential Nasdaq delisting risk. The common stock is not insured, and no cash dividends have been paid since 2010.
• Employees: Increased compensation and benefits expenses reflect investment in additional executives and staff to support growth and strengthen controls, potentially positive for employee development and retention.
• Customers: The company's mission-driven focus as a Community Development Financial Institution (CDFI) aims to provide financial services to underserved communities. Operational and financial challenges could indirectly affect service quality or lending capacity.
• Regulators: Increased scrutiny and oversight are expected due to the financial restatement and identified material weaknesses in internal controls. The company is actively engaged in remediation efforts to address these issues.

Next Steps

• Management is actively engaged in planning for and implementing remediation efforts to address the material weaknesses in internal control over financial reporting.
• The company will continue to submit Quarterly Supplemental Reports to the U.S. Department of the Treasury in accordance with the ECIP Securities Purchase Option Agreement.
• The company will comply with all requirements set forth in the ECIP Interim Final Rule through the end of the ECIP Period.
• The earliest possible date for the company to meet a Threshold Condition to exercise the repurchase option for Series C Preferred Stock under the ECIP agreement is June 30, 2028.

Key Dates

Recommendation

The restatement of financial statements for two fiscal years, coupled with the identification of material weaknesses in internal controls, signals significant operational and governance issues. The substantial decline in net income and diluted EPS for 2024, alongside an increase in non-performing and criticized loans, indicates deteriorating financial performance and asset quality. While loan growth is present, the underlying control deficiencies and reduced profitability present considerable risks to future stability and investor confidence. The Nasdaq delisting threat further compounds these concerns, making the stock a high-risk investment with negative short-to-medium term prospects.

Keywords

Broadway Financial, BYFC, SEC Filing, 10-K/A, Financial Restatement, Loan Participation, Secured Borrowing, Internal Controls, Financial Performance, Net Income, EPS, Banking, Community Development Financial Institution, CDFI, Nasdaq, Risk Factors, Corporate Governance, Asset Quality, Loan Growth, Capital Adequacy