Broadway Financial in L.A. Strikes Deal with Treasury on TARP

The Treasury Department has agreed to take a haircut on its equity in Broadway Financial Corp. in Los Angeles to help the company bring in new capital.

The Treasury agreed to convert its $15 million preferred shares held in the community development lender to common equity at a 50% discount. That move, announced Tuesday, would not bolster Broadway's capital ratios, but it would simplify the capital structure and free the $422 million-asset company from accumulating additional dividends. The Treasury also agreed to convert the accumulated, unpaid dividends on the preferred stock for common stock.

Broadway received $9 million from the Troubled Asset Relief Program in 2008 and another $6 million in 2009 when the Treasury gave small banks the opportunity to receive additional funds.

The Treasury's conversion is contingent on other preferred shareholders agreeing to convert to common shareholders at the same discount and the company securing $5 million of new equity. The Treasury has struck several similar agreements with struggling companies, including Sterling Financial Corp. in Spokane, Wash., and Pacific Capital Corp. in Santa Barbara, Calif., in an attempt to help the companies find new equity partners. The argument for such pacts, observers have said, is that the Treasury, as a preferred shareholder, makes recapitalizations tougher because new investors do not like senior classes of stock. Without new investors, however, the bank could fail and the government would be wiped out.

"The execution of this definitive agreement represents a significant step in our process to recapitalize the company, raise additional capital, enhance our common equity base and strengthen our operations," said Wayne-Kent Bradshaw, president and chief executive, in a press release.

The company's thrift unit was well capitalized at the end of 2011, but is dealing with a high level of nonperforming assets.

Broadway said in a December filing with the Securities and Exchange Commission that it was also negotiating with an unnamed bank to convert a $5 million line of credit currently in default into common stock for 100% of its value, while forgiving the accrued interest.