The financial turmoil hit two L.A. banks hard last week.

In particular, Hanmi Financial Corp., which operates the largest ethnic Korean bank in Los Angeles, said it has been directed by regulators to take dramatic steps to shore up its capital levels.

In the face of mounting losses, Hanmi has entered into a supervisory agreement with the Federal Reserve Bank of San Francisco and the California Department of Financial
Institutions to address roughly a dozen separate concerns related to liquidity, management oversight, underwriting standards and other issues, according to an Oct. 14 filing with the Securities and Exchange Commission.

The institution has adopted "a consolidated capital plan" under the agreement and is now restricted from paying dividends, acquiring stock or hiring new executives without regulatory approval.

Hanmi, with $3.85 billion in assets and 26 branches mostly in Southern California, was not the only local bank to run into trouble with regulators last week.

The Federal Reserve Board said it has entered into a similar agreement with the smaller Alliance Bancshares California. The Culver City-based company, which has $1.1 billion in assets and operates six Alliance Bank branches, is required to submit a capital maintenance plan. Additional details were not immediately available and Alliance executives could not be reached for comment last week.

Hanmi said it has been working with regulators since concerns were first raised in March. Among the steps taken were several key management appointments and a round of layoffs.

"In August, we had organizational restructuring, reducing our head count by about 10 percent," said Stephanie Yoon, an investor relations representative. "A lot of the items are already addressed."

The bank, which offers a variety of banking products and services to consumers and businesses, has struggled this year with management issues and the souring performance of its commercial real estate loan portfolio.

Former Chief Executive Sung Won Sohn stepped down last December and it took until the summer for the board to hire a permanent successor, Jay S. Yoo. The bank also appointed a new chief credit officer, another position that had gone unfilled for months.

"Regulators are not pleased with the way the bank has been managed," said Chris Stulpin, an analyst with D.A. Davidson & Co.

Hanmi posted a second quarter net loss of $106 million in July. At the same time, the company increased its loan-loss provision to $19.2 million, up 540 percent from the same quarter last year.

After release of the earnings, Yoo said that "the bank's capital levels and liquidity position remain adequate" but he also noted that "we have not been immune to the pervasive and adverse effects of tighter credit and a slowing economy."

The company decided in late August to suspend its quarterly dividend payment to conserve cash.

Commercial real estate loans, which account for more than a third of the bank's $3.3 billion loan portfolio, are weighing heavily on Hanmi's books. In the second quarter, the bank had $112 million in non-performing loans, up 26 percent from the previous quarter and a whopping 370 percent jump from the second quarter of 2007.

At the same time, amid increasing competition for customer accounts, Hanmi saw its deposits in the second quarter drop 2.2 percent while advances from the Federal Home Loan Banks jumped more than 20 percent.

In a client note in August, James Abbott, an analyst with Friedman Billings Ramsey & Co., pointed out that the bank was only $23 million over the threshold deemed "well-capitalized."

Regulators said the bank's dwindling capital ratios were part of the impetus to enter into this recent arrangement. As of June 30, Hanmi's capital levels which form the financial backbone of any bank were lagging behind its neighbors, according to FDIC records.

Its equity capital equaled 8.81 percent of its assets, well below the 12.64 percent average of all commercial banks in Los Angeles County. Its core capital was 8.6 percent, lower than the 10.55 percent average of county banks.

The bank took another hit as the financial industry turmoil hit crisis levels last month. Hanmi said it has a roughly $4 million exposure to Lehman Brothers Holdings Inc., which filed for bankruptcy Sept. 15.

Investors have punished the publicly traded company, reducing its shares from $15.62 a year ago to $4 on Oct. 16, down almost 75 percent. The market cap last week stood at $184 million.

Third quarter earnings are scheduled to be released this week.

Expansion strategy

The institution has been a player in the Los Angeles banking community since the early 1980s, but the bank dramatically increased its profile in 2003 when it acquired Pacific Union Bank. Hanmi also brought in Sohn, a high-profile economist, to serve as chief executive.

Hailing from Wells Fargo & Co., Sohn was well-regarded within the banking industry; one Piper Jaffray & Co. analyst in 2005 called him "the Korean version of Alan Greenspan."

Sohn oversaw an aggressive expansion of the bank, including branching out to mainstream customers and pushing the "cross-selling" of new products to customers. He also expanded the types of loans offered by the bank, including industrial and small commercial loans.

"He came to Hanmi and really tried to orchestrate a pretty dramatic cultural shift and turn Hanmi in many ways into a smaller Wells Fargo," said Sean Ryan, an analyst with Sterne Agee & Leach Inc. "That resulted in them clearly extending larger credits than would be wise for a bank of their size."

Sohn, who stepped down in December and is now an economist at California State University Channel Islands, could not be reached for comment.

Whatever the cause, Ryan said he was taken aback by the extent of the complaints brought up by regulators.

"The striking thing about it is how comprehensive it is. This was a laundry list," he said. "It suggests a significant level of concern on the part of the regulators."

Company spokeswoman Yoo said Hanmi is "considering different options" to raise capital.

The problem for Hanmi, however, is that the capital markets have tightened to the point that it is difficult for institutions to sell securities or otherwise raise money. Banks as diverse as PFF Bancorp in Rancho Cucamonga and giant Bank of America Corp. have had trouble raising fresh capital. But Hanmi could benefit from the federal government's efforts to provide funding to the nation's struggling banks.

It is not entirely clear which of the country's 8,400 banks will be able to participate in the U.S. Treasury's $250 billion plan to take equity stakes in financial institutions, but based on the government's criteria, Hanmi could apply for as much as $107 million, Ryan said.

"It's a difficult environment to raise private capital, but it seems pretty clear that they should be able to raise a pretty meaningful amount of capital through the Treasury program," he said.

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