The lights are going dim on Broadway.
Under pressure from regulators to address the growing problems in its real estate loan portfolio, Broadway Federal Bank announced last week that it will close two of its five branches as a cost-cutting measure.
The drastic step comes amid a broader effort by the federal savings bank, which lost $1.7 million in the last quarter, to raise as much as $10 million in capital.
“The trends don’t seem to be going in their favor,” said Dennis Santiago, chief executive of Institutional Risk Analytics, a banking industry research firm in Torrance.
As the economy flirts with another recession, Broadway already is dealing with a bloated portfolio of foreclosed properties, a rising level of troubled assets and declining deposits.
While the issues are not unique to Broadway, Santiago noted that the thrift’s heavy exposure to L.A. real estate, which constitutes more than 90 percent of its loans, makes the institution especially susceptible to the ups and downs of the local economy. In particular, Broadway’s troubles are concentrated in a $100 million portfolio of real estate loans to South L.A.’s numerous churches, which have been hurt by a decline in tithing in the down economy.
Broadway was founded in South Los Angeles in 1946 to serve the area’s low- to moderate-income African-American residents, a group that has been decimated by continued high unemployment since the recession.
Paul Hudson, chief executive of Broadway Financial Corp., the institution’s holding company, acknowledged that roughly 20 percent of its church portfolio is struggling, “which is a high percentage in any one sector.”
The bank is working with borrowers to modify loan terms, but regulators are growing impatient.
Last September, Broadway’s primary regulator, the Office of Thrift Supervision, issued a cease-and-desist order demanding that it reduce its problem assets and raise capital. Broadway has been talking with private-equity firms and major financial institutions about investing capital through a private placement of stock, and Hudson said the talks have gone well.
“We have some commitments already from some private-equity firms and additional ones are looking at our offering now,” he said. “We expect by the end of September to have firm commitments for the $5 million to $10 million that we’re trying to raise.”
Still, the broader investment landscape has opened up to the point that many investors have an abundance of opportunities and aren’t interested in taking a chance on a distressed bank, said Richard Levenson, president of Western Financial Corp., a San Diego firm helping community banks raise capital.
“It’s a difficult environment,” he said, noting that Broadway’s success will depend upon the “pricing and perception of upside potential.”
Cost-Cutting
To raise that upside potential, Hudson is moving aggressively to cut overhead. Broadway last week announced plans to close branches at 4800 Wilshire Blvd. and in Leimert Park on Nov. 7, while leaving its Midtown, Inglewood and Exposition Park locations open.
Hudson said the closures are strategic moves to trim unnecessary costs. The Wilshire office was primarily a wholesale operation that could be handled by other branches, while the Leimert Park location is small and unprofitable, accounting for only about $10 million of the thrift’s $342 million in deposits.
“We’re closing those two branches to realize the economies of scale,” said Hudson, adding that as much as 5 percent of Broadway’s work force could be laid off as a result. “We’re going to keep the deposits and consolidate them in our remaining three branches.”
News of the closures sent Broadway’s already struggling stock down further. Shares closed Aug. 24 at $1.54, down 15 percent for the week and off by more than half from October, when shares hit $3.77.
But Broadway’s moves could prove savvy in the long term. According to the thrift’s 2010 annual report, it spent about $1.4 million last year operating the five branches.
Santiago estimated that the closures will save Broadway about $400,000 a year. Closing branches will not solve the institution’s underlying asset-quality issues, but he noted that it would help.
“It extends the time they have to work out the rest of their problems,” he said. “What they have to do is figure out a way to stabilize whatever remaining quality is in their lending base.”
Over the past three years, many local community banks have faced major challenges addressing troubled assets. Santiago said Broadway will continue to be stressed for some time, but he is encouraged by the institution’s aggressive stance on reducing reliance on volatile brokered deposits, modifying loans and replacing the assets with higher-quality loans.
“These guys are working their tail off,” he said.
