Bank’s Survival A Private Matter

0

After being written off as all but a lost cause by analysts, investors and even many of its peers, Saehan Bank managed to pull itself back from the brink last week.

The bank secured desperately needed capital, and it did so in an unorthodox manner that is being heralded by some analysts as a breakthrough for troubled banks struggling to raise money.

The subsidiary of Koreatown’s Saehan Bancorp completed a $60.6 million stock sale by privately approaching individual investors in the local Korean-American community without the help of investment bankers.

“Many institutions that have been in that distressed state have not been able to raise capital and therefore have gone out the hard way,” said Richard Levenson, president of Western Financial Corp., a San Diego investment banking firm that helps community banks raise capital. “I’m very encouraged by the fact that (Saehan was) able to raise the capital.”

The bank, L.A.’s 20th largest with $829 million in assets, recently reported that it lost $56 million in 2009 amid rising losses on souring construction and commercial real estate loans. The losses drained its capital reserves, leaving the bank “significantly undercapitalized,” according to regulatory guidelines.

Regulators had given the bank until March 8 to find new capital or face potentially severe consequences. Last week, one day after its regulatory deadline, the bank announced the consummation of the stock sale with “accredited investors.”

Two of L.A.’s largest depository institutions – California National Bank and First Federal Bank of California – missed similar regulatory deadlines in the past several months and were subsequently seized by regulators.

However, Saehan may not be out of the woods yet. Regulators have not lifted a consent order issued in December that also required the bank to retain qualified management and submit a capital maintenance plan to regulators.

And the bank admitted that additional capital could be needed. But investors clearly believe the latest move is promising.

News of Saehan’s unexpected capital raise sent its stock up sharply. Shares, which had been trading well under $1 recently, hit a high of $1.72 after the announcement, up nearly 500 percent from the previous week’s low. Shares closed March 11 at $1.25.

“Nobody thought we had a chance – (but) it’s all done,” said Daniel Kim, the bank’s chief financial officer.

Rising concerns

The problems began about a year ago, when it became clear to management that many of the bank’s loans would be going bad as the tightening residential and commercial real estate markets left many borrowers unable to keep up with loan payments.

By summer, the bank began seeking mergers with other local Korean-American banks, and on two occasions began due diligence on possible transactions. But the transactions fell apart late last year for unspecified reasons.

In December, Saehan received a consent order from the California Department of Financial Institutions and the Federal Deposit Insurance Corp. directing it to boost its Tier 1 capital leverage ratio to at least 10 percent. According to the bank, that meant it needed to raise at least $42 million.

Practically overnight, potential investors abandoned Saehan and its stock price fell by half.

The bank then turned to investment bankers in the hope of raising capital through a common stock offering. The talks did not go well.

“They told us, ‘You don’t have any chance, so why waste our time and your time?’” Kim recalled. All the money on Wall Street, the investment bankers told Saehan, was going to healthy banks.

The bank then began looking overseas, seeking investors in South Korea. Again, they found no takers.

Executives at competing institutions as well as analysts began privately discussing among one another and even to reporters about the possibility that Saehan would be closed by regulators.

As recently as last week, BankRate.com, which assesses the safety and soundness of financial institutions, gave Saehan one star out of five, its lowest rating. BauerFinancial, which has a similar scale, gave the bank zero stars, a rating reserved for institutions “facing considerable challenges.”

So, with few options left, Saehan’s management decided to go an unusual route. Rather than pursue formal capital raising strategies, executives, without the help of investment banking professionals, simply asked around Koreatown and tried to generate interest among individual investors. They mostly sought wealthy individuals and successful businessmen in the Korean-American community.

“We just went out (and) talked to a lot of local investors,” Kim said. “We were being aggressive and proactive.”

Still, to reassure potential investors that the money would not be going to a failing institution, Saehan promised it would not take any capital unless it could get pledges of $60 million.

That was $18 million more than the $42 million required by regulators, but Kim said internal stress testing of problem loans suggested $60 million could virtually ensure the bank’s survival.

“It pretty much guaranteed that you’ll get your money back or that you’re investing in a healthy bank,” he said.

Mission accomplished

The bootstrap effort paid dividends almost immediately.

In January, the bank announced that it had received commitments for $30.9 million, more than half of its target. Last week, the bank completed the effort and the capital has already been “downstreamed” in the bank, Kim said.

He would not identify the investors, but did confirm that they are primarily local individuals and a small contingent of Korean companies.

Sources said William Park, a wealthy wholesale mortgage company executive in Los Angeles, was among the investors.

None of the investors, Kim said, took more than a 9.9 percent stake, which would have required regulatory approval.

Regulators do not typically comment on active institutions, and the FDIC could not be reached for comment.

The DFI declined to comment on Saehan, but a spokeswoman said raising capital is an important step for banks out of compliance with regulatory capital ratios.

It is also an important step for the industry, analysts said.

Previously, many investors were wary of putting their money in a distressed institution for fear that it would fail and the money would disappear, and with good reason: Last year, struggling Mirae Bank in Koreatown garnered last-minute investments, but even that could not prevent it from shuttering.

Analysts said Saehan had a particular advantage with its strategy because it was able to tap L.A.’s large, tightly knit Korean-American community – something unavailable to non-Korean banks. If Saehan can survive, they said, it could lead to additional equity investments in distressed banks.

“There’s been hundreds of millions of dollars out there in the space looking for investment opportunities,” said Levenson of Western Financial. “If there’s a sense that we’re at the bottom and we’re going through this recovery period, now is the time to start committing more (capital). I think the money’s going to come in quickly.”

No posts to display