Banking on a Bailout

Armed with an additional $9 million in capital from the U.S. Treasury Department’s $700 billion “bailout” of the country’s financial institutions, Paul C. Hudson, chairman and CEO of Broadway Financial Corp. (No. 4 on the be banks list with $356.8 million in assets), is ready to put that money to good use.

Credit deterioration and securities write-downs have hobbled even large, long-established lending institutions, both in the U.S. and abroad, causing many to severely curtail lending. According to Bloomberg, the finance and information services media company, banks have reported more than $745 billion in write-downs and losses globally since the credit crisis began. With the bailout, the Treasury encourages banks to increase lending by purchasing certain assets, thereby providing capital. When lending occurs and money circulates, it stimulates the economy. “It does not benefit the Treasury or the economy to have a lot of failing banks,” Hudson says.

Also chairman and CEO of Broadway Federal Bank, the wholly owned subsidiary of Broadway Financial Corp., Hudson plans to use the investment to make new loans, weather difficult economic times, and sustain the bank’s growth. Over the past five years, deposits at the bank have risen nearly 64%, to $295 million as of late September. So far, $4.5 million of the $9 million has been used to increase bank capital, increasing Broadway’s total risk-based capital ratio to 11.99%; it was previously 10.23%. To be classified as well capitalized, the regulatory capital requirement for risk-based capital is 10%. Bank capital, also known as equity, is the cushion that covers creditors if a bank’s assets are liquidated. It’s also considered a key measure of a bank’s soundness.

Banks that fall below the 10% requirement are typically ordered by their regulator to take corrective action. “The Treasury investment allowed the bank to continue to lend in our market,” Hudson says. “We did not have the capital to support the bank’s loan growth, and in this economic environment it would have been very difficult to raise additional capital.” The remaining $4.5 million will support future loan growth. Hudson projects he’ll need to invest up to another $2 million in the bank later in the year to support projected loan growth.

According to William Cunningham, senior investment adviser with Washington, D.C.-based Creative Investment Research Inc., which specializes in minority banking, Broadway Federal became the first black-owned bank to receive funding from the Treasury’s Troubled Asset Relief Program. With tight credit markets, capital–the lifeblood of the banking business–is in short supply. This is especially true of smaller, black-owned banks that are often cornerstones in their neighborhoods and are more likely to provide necessary business and housing loans within their communities.

Broadway has remained profitable in part because, like other black-owned banks, it avoided the subprime debacle. Broadway earned $1.9 million in the first nine months of 2008, up from $1 million for the same period in 2007. Its relatively small size kept the bank out of  trouble since unethical subprime lending