When Mirae Bank was closed by regulators June 26, it registered as little more than a blip on the national radar.
Yet the fall of the tiny Koreatown bank has shaken the tight-knit Korean-American community and now threatens to fundamentally alter the dynamics of its banking industry.
Mirae is the first local Korean-American bank to fail, upending a long-held belief in the Mid-Wilshire neighborhood that the institutions, buoyed by overseas investment, could weather any storm.
"People are freaked out that a Korean bank could fail," said Dan Park, an attorney hired by Mirae to investigate the causes of its collapse. "It's the first Korean bank to have failed in Southern California. It's almost like a soap opera unfolding."
Now, some local bankers are predicting that Mirae's disappearance could herald a long-overdue shakeout of the Korean-American banking industry. A surge in the number of local Korean banks over the last decade has hurt even the long-established institutions, bankers said.
"There needs to be consolidation," said Alex Ko, chief financial officer of Wilshire Bancorp Inc., the holding company for Wilshire State Bank, a Korean bank that acquired most of Mirae's assets in a deal with the Federal Deposit Insurance Corp. "In terms of the numbers, there are too many. The stronger banks need to acquire weaker banks."
Currently, about a dozen Korean banks are competing for a limited amount of business in the 5 square miles of Koreatown, home to an estimated 350,000 Korean-Americans. The fierce competition has sometimes led to relaxed lending standards and aggressive pricing on such instruments as certificates of deposit, according to experts.
Already, the banks, most of which have exceedingly large commercial real estate loan portfolios, have seen delinquencies rise and have collectively set aside almost $300 million to cover expected future loan losses.
Koreatown's largest institutions, including Hanmi Financial Corp., Wilshire and Nara Bancorp Inc., each have more than two-thirds of their loan portfolios tied up in commercial real estate, which can be particularly risky in a down economy. Hanmi lost more than $100 million alone in 2008.
Mirae, which had $456 million in assets when it was seized late last month, was one of the most aggressive of the new institutions, bankers said. It was brought down by losses on bad loans, and its fall will likely serve as a wake-up call to competitors, according to Joseph Gladue, an analyst with B. Riley & Co. who follows several Korean-American banks.
"There has been over the last eight or 10 years a number of startup banks in the Korean-American community," Gladue said. "Certainly some of the smaller banks fighting to gain market share (will get) bitten by some of the aggressive tactics they used."
Mirae is one of a group of Korean-American banks that started up earlier this decade to challenge long-established institutions such as Hanmi.
Uniti Bank, based in Buena Park with an office in Koreatown, was started in late 2001. It was followed by Mirae the next year and another Koreatown institution, Pacific City Bank, in 2003.
Mirae, founded by a group of Korean businessmen with little banking experience, grew modestly in its first few years. But by 2005, amid a booming economy, several board members became impatient with the bank's conservative approach, according to local bankers who asked not to be identified.
Some directors reportedly called for the resignation of then-President Wun Hak Baek and demanded the bank increase its market share. Then, in just one year beginning in mid-2005, under the direction of Chief Executive Kwang Soon Park, Mirae grew its assets nearly 150 percent to $369 million. Deposits, meanwhile, nearly tripled to $321 million.
"Simply put," the company said in its 2006 annual report, "our goal is to grow with our customer base."
That growth, however, was due largely to a lowering of underwriting standards at the direction of the board, said the bankers familiar with Mirae. The bank's loan portfolio swelled to more than $300 million, with a heavy concentration in commercial real estate.
One local Korean-American banker said it was an open secret that Mirae made risky loans in order to grow quickly.
"Some board members forced the loan department to lend money to people who otherwise would not qualify," said the banker, who asked not to be named because he maintains relationships with other local banks.
Among the unwise decisions, the bank extended an $8 million loan to Ezri Namvar, a bankrupt Brentwood businessman who is accused of running a Ponzi scheme and losing nearly $500 million of local investors' money.
On April 27, the bank received a cease-and-desist order from the FDIC that ordered Mirae to raise new capital and expressed concern over the bank's "large volume of poor quality loans."
Rumors began to swirl in Koreatown about Mirae's possible closure. Toward the end, said Wilshire's Ko, "Mirae was known as a problematic bank."
The board's heavy-handed involvement in the bank's day-to-day operations has historically been a problem among many Korean-American banks, according to observers. Hanmi Bank received an informal order from its regulators in late 2008 directing both the bank and its holding company to overhaul their boards.
However, Park, who was hired by Mirae to look into the collapse, said there are fundamental differences between Korean and American business practices that could have contributed to Mirae's problems. In the Korean-American community, he said, "there's a lot more of a trust factor" guiding business decisions and, in some cases, lending practices.
"There has to be a consideration of the cultural aspect of running a Korean bank," said Park, a partner with Lurie & Park LLP in Los Angeles. "I don't think you can apply U.S. standards and the notion of U.S. fiduciary duty 100 percent to Korean banks."
As a result, he said, he anticipates "a ton of lawsuits" from shareholders over the next few months against Mirae's former directors and officers.
"Certain agencies and shareholders have publicly indicated that there will be claims (related to) certain practices and acts conducted by various management individuals that may have contributed to the collapse of the bank," Park said.
The collapse of Mirae has sent shock waves through Koreatown, where it was long held that Korean-American banks would never fail.
Julianna Balicka, an analyst with Keefe Bruyette & Woods who covers several Korean-American banks, said the notion stems from the days when the "big four" banks Hanmi, Wilshire, Nara and Center Financial Corp. were the only game in town. The big four, each started in the 1980s, have been pillars of strength in Koreatown and it was generally assumed that investors from South Korea or elsewhere would rescue the banks if they ever ran into trouble.
Indeed, Hanmi, which has struggled recently with loan losses, recently announced that it will receive a capital infusion from a South Korean investment firm. But the proliferation of de novo banks in Koreatown has upended the industry and the community has reluctantly come to accept that some Korean-American banks will not find a white knight.
"Some of the smaller banks may realize that this whole 'Korean bank will never fail' doctrine is only limited to the big four," said Balicka, who added the failure could spark a consolidation in the local industry.
Few banks, however, are likely to buy small rivals outright.
Since the FDIC has offered attractive terms to purchasers of failed banks, many institutions eyeing a weaker rival will likely wait for the institution to fail and broker a better deal with regulators.
In the case of Mirae, Wilshire entered into a loss-sharing agreement that will mitigate many of the future losses on Mirae's souring loans. According to the terms, the FDIC will cover 80 percent of the first $83 million in losses on Mirae's portfolio and 95 percent of all additional losses.
"We minimized the uncertainty," said Ko.
At the same time, he added, "we expanded our customer base to recognize the benefit of the economies of scale."
Wilshire acquired all of Mirae's deposits and its five branches. What's more, Wilshire acquired $408 million of Mirae's assets at a $36 million discount, vaulting the institution into second place in terms of asset size among the largest Korean-American banks. With assets now in excess of $3 billion, Wilshire has passed Nara and trails only Hanmi, which had $3.9 billion in assets at the end of the first quarter.
Ko said the bank will continue to look for acquisition opportunities, but "will be very cautious because growth is not our priority."
The transition of Mirae's assets was relatively smooth. Some customers pulled deposits in the days leading up to the closure as rumors began to spread, but depositors generally accepted the transition without much alarm.
Last week, Wilshire fired 20 former Mirae employees, including several top executives, but the bank said it will try to retain as many branch employees as possible.
Michael Kon, an analyst with Morningstar Inc., said Wilshire, which has had relatively high capital levels and low losses, has generally held up better than many of its peers through the economic downturn.
This acquisition, he said, could further strengthen the bank because the synergy in customer bases will allow a smooth integration, and the loss-sharing agreement with the FDIC limits the downside.
"There is low integration risk in this transaction," he said. "It's attractive because Wilshire is gaining assets within a footprint they know very well."
Contributing reporter Myoung Hoon Suh contributed to this article
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