L.A. bank, big investor clash over approaches to serving underbanked
Broadway Financial in Los Angeles and a big investor are at an impasse over the best way to serve low- and moderate-income communities.
Executives at the $438 million-asset Broadway are content to maintain a small balance sheet and lend to real estate investors that provide affordable housing. The bank sells a large amount of originations to other lenders in need of credit under the Community Reinvestment Act.
Capital Corps, an Irvine, Calif., company founded by former Banc of California CEO Steven Sugarman, asserts that Broadway isn’t making enough mortgages and small-business loans to minorities and underserved borrowers. Capital Corps, which owns nearly 10% of Broadway’s stock, wants the bank to hold onto more loans and grow beyond $2 billion in assets.
Sugarman's group delivered a message to Broadway earlier this week that it wants the bank to change course — or be sold. Sugarman asserts that Capital Corps, which owns a mortgage company and made nearly $1.8 billion in loans to minority borrowers last year, could do a better job reaching the underserved if it bought Broadway.
At its heart, the dispute highlights divergent visions for banking the underbanked.
“We believe we could not only help the shareholders make more money, but serve the community better," said Sugarman, who also serves as general counsel for the National Diversity Coalition. "We look at this and we think there’s a real opportunity. We think they’ve got a real clean, nice platform.”
“Our business is very consistent with our mission,” Wayne-Kent Bradshaw, Broadway's CEO, said in response. “It is very sound and it is doing a good job.”
The two sides agree on one issue: Broadway's board and management team did a great job rescuing the bank from the brink of failure during the financial crisis.
With help from outside investors and $15 million from the Troubled Asset Relief Program, Bradshaw and his team addressed credit issues, largely tied to church loans, that contributed to nearly $19 million in losses between 2009 and 2011. Broadway has been profitable every year since 2014.
But after peaking at $9.1 million in 2015, earnings at Broadway have been steadily declining. Its assets have increased by $88 million in the last five years.
“Broadway is once again at a crossroads and shareholders are at risk,” Capital Corps wrote in a Feb. 10 letter to Bradshaw and Virgil Roberts, the bank’s chairman.
Capital Corps, which bought its Broadway shares in May from the Treasury Department as part of the unwinding of TARP, is interested in buying more stock. The investor expressed frustration in its letter that a shareholder rights plan adopted in September makes doing so more complicated.
Sugarman's group, which includes former Los Angeles Mayor Antonio Villaraigosa, claimed in its letter that the poison pill is designed to benefit Gapstow Capital Partners by giving Broadway's biggest shareholder the ability to block certain stock purchases.
Gapstow did not respond to calls seeking comment.
Bradshaw defended the rights plan, stating in a Feb. 12 letter to Capital Corps that it protects Broadway from investors acquiring control by purchasing stock at prices that are “not reflective of Broadway’s true value.”
“We’re concerned this possibility persists in today’s market and therefore do not believe it would be appropriate to approve any individual exceptions to the limits of the plan,” Bradshaw added.
Bradshaw, in an interview, said Broadway is reluctant to increase its direct lending to low- and moderate-income individuals out of a fear of the Consumer Financial Protection Bureau.
"We have a very small operation and we don’t want to make any unintended mistakes,” Bradshaw said.
A call to the CFPB was not immediately returned.
Three-fourths of the real estate loans Broadways makes are in low- to moderate-income neighborhoods, with 90% taking place in minority communities, Bradshaw said. The bank has sold $400 million in multifamily originations in the past four years to lenders that needed CRA credit.
While Capital Corps said it wants Broadway sold to a buyer that will preserve its status as a CDFI and a minority depository institution, that could be a challenge. Broadway is the only black-owned or black-operated bank based on the West Coast. (Hope Bancorp, an Asian-American bank, had a 6.6% stake in Broadway when it filed its proxy last spring.)
That helps explain why Sugarman wants to discuss buying Broadway.
"We’re happy to stand by and provide anyone an exit who wants it,” Sugarman said of Broadway's other investors.
“We’ll take them all out, if they want out," he added. "We’re happy to so long as it keeps Broadway a minority depository institution that serves the local community and is locally managed. We know the community. We know how to serve them. We can do that."
Sugarman, who led the 2010 recapitalization of First PacTrust Bancorp before bulding it into the $10 billion-asset Banc of California, said Capital Corps hasn’t hired an investment bank and hopes to avoid a proxy battle.
“We haven’t been trying to agitate but to inspire,” he said.
“We’ve heard from other investors over the last couple of months. I think they’ll be pretty responsive,” Sugarman added. “I think we’ll probably be able to demonstrate to Broadway the principles we laid out have a majority support of all the voting investors. I don’t think we would have written that letter if we didn’t believe that.”
Bradshaw, for his part, said Broadway is willing to listen under the right circumstances.
“If you have a specific acquisition proposal you wish to make, I will be pleased to put you in touch with our financial advisor," Bradshaw said in his letter to Capital Corps. "We will give your proposal our prompt attention."