A deadline is approaching for another L.A. bank.
Saehan Bank, a Koreatown stalwart for most of the past two decades, is struggling with dangerously low capital levels after enduring substantial loan losses. The bank, the subsidiary of Saehan Bancorp, has until March 8 to raise new capital or it could face consequences up to and including closure by federal regulators.
Saehan executives insist that they are making headway in discussions with potential investors, and the bank has already received commitments for new capital.
But more is needed, and even though raising capital is a bit easier, it’s still a tough environment.
“It’s pretty much consensus that (Saehan) is the next one that’s in big trouble,” said Dan Park, a partner with L.A. law firm Lurie & Park LLP.
The Korean-American banking industry, populated by about a dozen institutions mostly headquartered within a few blocks of one another in Koreatown, has fallen on hard times of late. The banks each have large concentrations of commercial real estate and construction loans, which have gone south along with the Koreatown economy.
In June, regulators seized Mirae Bank, which is believed to be the first Korean-American bank ever to fail.
Park, who was hired to investigate the causes of Mirae’s collapse, said the failure shook the Mid-Wilshire community to its core, erasing a long-held belief that no Korean-American bank would ever fail. Now, residents and industry observers have come to grips with the notion that some of the struggling institutions may not find their white knight.
“After Mirae failed, now it’s swung the other way where there’s a lot of people that almost assume that other banks will fail,” he said.
Saehan, which received a consent order in December directing it to raise capital, is working overtime to ensure that it does not meet the same fate as Mirae.
The bank has a number of factors in its favor. The capital markets are loosening, which gives Saehan opportunities perhaps not available to banks a year ago. Also, regulators often try to work with banks and extend deadlines if they are making progress in raising capital.
The bank received a boost in January when it announced the signing of commitment letters from “various accredited investors” for $30.9 million. To receive the capital, the bank must receive total commitments for $60 million.
Through a spokesman, Chief Financial Officer Daniel Kim said, “Things are progressing” in the bank’s effort to raise capital. He declined to comment further as the bank is in talks with potential investors.
Founded in 1990, Saehan was a small one-branch bank for several years.
The institution hit a growth spurt after 2000, opening locations across Los Angeles, as well as in Seattle, Dallas and New York. Saehan now counts more than a dozen branches and loan offices.
Saehan, which briefly had assets approaching $1 billion last summer, is L.A.’s 20th largest bank. As of Dec. 31, the bank counted assets of $829 million.
But the bottom line has taken a hit given the number of loans that are going bad. Currently, more than 10 percent of loans are nonperforming. Last year, the bank set aside nearly $51 million to cover expected losses on those loans, contributing to a $56 million annual loss. As a result, capital levels also have fallen.
In its fourth quarter earnings announcement, the bank said it is “significantly undercapitalized,” according to regulatory guidelines, with a total risk-based capital ratio of 5.7 percent. Banks must maintain a ratio of at least 10 percent to be considered “well-capitalized.”
“There are a number of Korean banks that are suffering very thin capital levels,” said Joseph Gladue, an analyst with West L.A.’s B. Riley & Co. who tracks several Korean-American institutions.
Gladue cited both Saehan and Hanmi Financial Corp., the largest Korean-American bank, which is also seeking additional capital. However, Hanmi, which is rumored to be discussing a capital infusion with a large financial firm in South Korea, has until July to raise the money.
Unlike the much larger Hanmi, Saehan has limited connections in Korea, Park noted, which could hurt its ability to find investors.
“Saehan is mostly local,” he said.
Capital has been difficult to come by as the number of struggling banks grows. Last week, the Federal Deposit Insurance Corp. announced that there were 702 banks on its problem list, the highest number since 1993. The agency does not name the institutions on the list.
On the other hand, the picture may be changing.
Richard Levenson, president of Western Financial Corp., a San Diego investment banking firm that helps community banks raise capital, said the markets have been loosening up and some banks are finding creative ways to raise capital.
“The market is getting better for those banks that have an interesting story or have upside potential to them,” he said. “There’s an opportunity to raise capital.”
Whereas common stock offerings used to be the primary means of raising capital for small banks, Levenson said an increasing number are trying their hands at preferred or convertible offerings. He also cited Pacific City Financial Corp., a small Koreatown institution that recently sold itself to a South Korean special-purpose acquisition company for more than $50 million.
“There seems to be capital coming from outside sources,” he said, “including overseas.”
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