Saehan Bank in Los Angeles is a beacon for banks struggling to meet regulators' demands for more capital.
The $667 million-asset bank, in danger of failing with more than 10% of its assets not performing, was under orders from the Federal Deposit Insurance Corp. to more than double its leverage ratio by early February and then take it up another notch by March 8.
But the agency gave the Korean-focused subsidiary of Saehan Bancorp more time, and after several false starts, the bank raised $60.5 million.
"We barely survived," Daniel Kim, the company's chief financial officer, said in an interview this week. "If we hadn't gotten the extension then we would have failed in early February."
Industry watchers said Saehan's success should give hope to other community banks on the brink, but they also said it was support from the bank's community that made the difference.
"It's just phenomenal that they got it," said Richard Levenson, the president of Western Financial Corp., an investment bank in San Diego that was not involved in the capital raise.
"I think it is outstanding. If there is that kind of capital available in the community and it is willing to invest in the bank that has sustained that kind of loss, it says something has possibly changed in the way investors see bank stocks. There are a lot of banks still raising capital and the environment is still very difficult."
For Saehan, Kim said the climb out of the "significantly undercapitalized" hole was anything but smooth.
About a year ago, the company realized it had serious problems and started looking for another Korean bank as a merger partner.
It got as far as due diligence with one before that company's board of directors decided to stop talks and focus on acquiring failed banks.
Saehan then tried to hire a Wall Street investment bank, but was turned down and told it had no hope of raising the required capital. Saehan next looked to investment banks in Korea, and while they agreed to take on the task, Kim said they could not raise the money.
That's when Saehan turned to its local community. Rolodexes were pulled out and phones started ringing.
"It wasn't just the management, but the board, the community, the media," Kim said. "We were taking full advantage of being a community bank. We were able to raise most of the money from our community. We are very grateful the whole community was involved and we got regulators' support."
No analysts follow Saehan, but those familiar with Korean-American banks said these banks' ethnicity gives them an edge. But Saehan "is a little more distinct," said Joe Gladue, an analyst with B. Riley & Co. Inc. "Some of the other ethnic banks have that ability too, the Chinese banks. It is probably easier for a bank like that than your average community bank."
To be sure, other banks less than "well-capitalized" have managed to find capital. For example, PremierWest Bancorp in Medford, Ore., said Wednesday that it raised $18.7 million at 44 cents a share. PremierWest's subsidiary bank was considered "adequately capitalized."
Still, what makes Saehan's capital raise significant is few banks so close to failure have managed to find capital.
Saehan was operating under a regulatory order that required the bank to increase its leverage ratio to 8% by Feb. 8 and then to 10% by March 8. At Dec. 31 its leverage ratio was 3.46%.
Kim said Saehan had raised roughly $30 million by Feb. 8, but could not tap into it until it raised the full amount. And while the FDIC order only required Saehan to raise $42 million, the bank was aiming for $60 million so it would not have to return to investors for more.
"We didn't want to just meet the minimum requirements and have to raise more capital later," Kim said. "We told ourselves how much we need to deal with problem loans and survive through this. We set up $60 million as the target."
If Saehan had the new capital at Dec. 31, its leverage ratio would have been above 13%, Kim said.
Now that Saehan is not in danger of failing, Kim said the bank will turn its attention to its loan portfolio. It said its nonperforming assets totaled $67.6 million at yearend, up 45% from a year earlier, and that they were 10.1% of total assets.
"We are going to clean house first, and then we will pursue other opportunities," Kim said. "We have a very strong rapport with regulators because we were able to raise the capital ourselves. Once we reduce the amount of problem assets, then we could easily raise additional capital to do other stuff. Basically, we have a whole lot more options than we did before."
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Corrected March 18, 2010 at 12:27PM: This story failed to note the California Department of Financial Institution's role in Saehan Bank's rehabilitation. It was the state agency that granted Saehan an extension on a deadline to raise capital.