Banking on a Bailout

involves volume production that’s securitized and then sold on the secondary market, and Broadway had neither the production volume of single-family loans to support the loan pricing necessary to compete, nor the internal operations or staff experience to efficiently deliver the loans to the secondary market. Moreover, Hudson adds, the loans didn’t make sense from a credit or interest rate risk perspective. “We don’t believe that we should put consumers in loans they cannot afford,” he says, “or originate loans without verifying income.”

Hudson’s team realized the bank needed additional capital at the beginning of 2008. So management contacted Broadway’s primary regulator and expressed interest in participating in the Treasury’s Capital Purchase Program, in which the bank would sell certain securities to the federal government. A two-page application was filed with the bank’s primary regulator; then it was reviewed and forwarded to the Treasury for final approval, a process that took less than 30 days. All told, the Treasury acquired preferred stock in Broadway Financial, the parent company, as well as a warrant to purchase about 183,000 shares of the company’s common stock. The common stock underlying these warrants represents less than 11% of the parent company’s outstanding common shares as of Sept. 30, 2008.

Hudson asserts that the bank is on solid financial footing. “The bank did not need financial assistance because of problem assets or negative earnings,” he says, although the bank’s stock was trading in the $5 range in early January, down about 44% from a year ago primarily because of a lack of investor confidence in the financial industry. “Bank profits were strong and credit quality was healthy. What we needed was capital to continue to grow assets.” Broadway also sought the Treasury investment because regulators have been advising banks to keep more capital on hand to protect against future loan losses. Broadway issued preferred shares and a warrant to purchase common stock to the Treasury in exchange for the investment.

Buddy Howard, president and banking analyst at Equity Research Services Inc. in Raleigh, North Carolina, says the Treasury’s investment in Broadway affirms its belief that the bank is likely to survive and use the increased capital to make new loans. But even with an investment from the Treasury, banks in general may continue to face challenges that include maintaining good asset quality, good expense control, and balance sheet growth. “They’ve got to maintain profitability, because if they start losing money they will burn through that capital,” Howard says.

BANKING ON GROWTH
With the added capital, Hudson’s goal is to make $90 million in total loans in 2009. He plans to fund loan growth with new deposits, loan repayments from borrowers, and money borrowed from the Federal Home Loan Bank of San Francisco. He concedes there is no magic solution or single strategy to deposit acquisition. “We plan to continue the hard work of reaching out to consumers and organizations, marketing our products and services, and providing outstanding customer service.”

Hard work, yes, but these are hard times. In December, the

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