It’s been a rapid slide for Wilshire Bancorp Inc., which last year was considered the leading financial institution in Koreatown and one of the soundest.

The bank holding company last week commenced a highly dilutive $100 million stock offering to bolster its depleted capital base and comply with a previously undisclosed enforcement order issued by regulators.

The move was the latest in a series of troubling revelations for the institution.

In the past few months, Wilshire has uncovered material weaknesses in its loan underwriting procedures that have resulted in an ongoing inquiry by the Securities and Exchange Commission and a class-action lawsuit. It also adjusted its fourth quarter earnings to reflect a greater loss, and reported a larger than expected $52 million first quarter loss.

The recent disclosures also shed light on the abrupt departure of its former chief executive, Joanne Kim, who was pushed out in February for allegedly failing to manage the growing underwriting problems.

As recently as last summer, Wilshire was the largest Korean-American bank and was considered a prime candidate to acquire other institutions. But since then, it has been overtaken by Nara Bancorp Inc. Wilshire’s stock price has plummeted to its lowest levels in more than eight years. It closed May 12 at $3.19 – down more than 70 percent from one year earlier.

The extent of its troubles has taken some analysts aback.

“Those are fairly substantial,” said Bert Ely, a bank consultant in Alexandria, Va. “They’re not teetering at the edge, but … there may be more problems that come to the surface. The big uncertainty is, have they recognized all the problems?”

The institution is representative of the troubles that have plagued many Korean-American banks, including Hanmi Financial Corp. and Center Financial Corp.: namely, too much growth too quickly and an over-reliance on riskier loans such as commercial real estate, which lost substantial value during the recession.

Alex Ko, Wilshire’s chief financial officer, characterized the bank’s difficulties as “isolated instances” and noted that Jae Whan Yoo, the veteran Korean-American banker who took over as chief executive in February, has been quick to address the deficiencies, including making executive appointments and restructuring the lending division.

“Under new management, we are aggressively dealing with the problems we faced,” Ko said. “We are fairly comfortable that the steps we have taken are appropriate. We believe (our troubles are) behind us.”

Industry analysts, however, aren’t so sure.

Ely said the bank appears to be making the necessary adjustments to fix its finances, but that is only the first step in the process.

“The second stage of the turnaround is rebuilding yourself in the marketplace,” he said. “One thing that happens to a bank that is in troubled condition is it loses customers – not necessarily depositors, but borrowers.”

‘Substantial dilution’

Last week, Wilshire offered 36.3 million shares of its stock for $2.75 apiece, a 10 percent discount to its closing price at the time. Underwriters, including JPMorgan Securities, have the option until this week to purchase an additional 5.5 million shares.

While the pricing was below expectations, Ko noted that the $100 million gross proceeds were “much more than the regulators requested.”

“We want to have a cushion for growth and uncertainty,” he said.

Though necessary to boost capital levels, the offering results in “substantial dilution” to shareholders, reducing future earnings per share by about half, said Sandler O’Neill & Partners LP analyst Aaron Deer in a client note. In the first quarter, the bank reported a loss of $1.77 per share.

Deer recently lowered his target price for the stock to $4 from $6, but maintained a “hold” rating on the stock, and he noted that there are several factors in Wilshire’s favor, including healthy loss reserves.

Investors, though, are less encouraged: Shares last week fell below $3 for the first time since 2002.

The offering comes on the heels of a May 6 memorandum of understanding Wilshire entered into with its regulators, which was revealed in regulatory filings last week.

The informal agreement, which is not typically made public, resulted from regulators’ concerns arising from an examination of the bank in January. Among the various requirements in the agreement, Wilshire must raise capital, reduce problem assets, ensure that it has qualified management and implement other measures to improve loan underwriting.

After the regulatory examination, the bank conducted “an internal investigation in connection with the activities of its former senior marketing officer,” the bank said in a recent regulatory filing. The investigation uncovered “a significant deficiency” in the employee’s lending practices and faulted then-Chief Executive Kim for failing to provide adequate oversight.

“Our former chief executive officer, who was responsible for overseeing these matters, resigned following the reporting of these activities to our board of directors,” the bank said. Yoo was appointed the same day.

In announcing the succession, the board did not provide a reason for the departure of Kim, who had headed the bank since 2008. Reached by e-mail last week, Kim, who has since been appointed chief executive of Commonwealth Business Bank, another L.A. Korean-American bank, declined to comment.

Wilshire also restated its fourth quarter earnings in March after the investigation, upping its loan loss provision by $18 million and widening its net loss from $30 million to $40.3 million.

“They were running better than a number of the other Korean-American banks, but it turns out that they had some pretty poor underwriting standards,” said one analyst, who asked not to be named.

The restatement led to a lawsuit filed March 29 in U.S. District Court in Los Angeles against the bank and current and former officers. It seeks class-action status but has not been certified as such.

Additionally, Wilshire revealed that the SEC has made “an informal inquiry” regarding the findings of the investigation, and that executives are “providing this information and cooperating fully” with the inquiry.

The SEC’s website lists “informal inquiry” as the first stage in a process that can lead to a formal investigation, which could result in civil or administrative actions against the bank or its officers. An SEC spokeswoman declined to comment on whether it is looking at Wilshire.

Taking steps

Wilshire has undertaken a number of steps in response to its problems. Bank leaders restructured the lending department to separate loan production and underwriting responsibilities, established a risk management division, eliminated the chief lending officer position and created the position of deputy chief credit officer.

Management also plans to improve asset quality through steps that include reducing exposure to risky commercial real estate loans. Specifically, the bank wants to reduce its concentration of the loans from 78 percent of its portfolio to 72 percent.

Many Korean-American banks built sizable commercial real estate loan portfolios – in some cases in excess of 80 percent of their portfolios – which has led to considerable losses industrywide after the real estate market weakened.

Wilshire also has shifted its focus away from growth, which had for years been a guiding principal at the bank. Between 2004 and 2009, the bank more than tripled its assets to $3.4 billion. As recently as last year, Wilshire was cited by several analysts as the most likely candidate to acquire weak competitors in the notoriously bloated Korean-American banking sector.

But efforts to sell bad assets – it unloaded $130 million in loans last year – and slowing loan production have halted the growth. In just the past two quarters, assets have shrunk by nearly a half-billion dollars to $2.8 billion.

“Although I’ve been here just a short time, I have sent a very clear message to the organization that our focus is now squarely on asset quality rather than loan production,” Yoo said in an April 26 conference call with analysts.

Yoo, who was not made available for comment for this story, acknowledged in the call that “our standing in the community has suffered a bit,” but said he expects that to turn around once Wilshire becomes profitable again, which management anticipates before the end of the year.

However, Ely said that shifting the emphasis away from growth creates other risks, including hindering future profitability. Banks rely on new loans to generate income.

“If there has been a sufficient recognition of problems, then that’s a good sign,” he said. “The problem then becomes, where does our new loan business come from?”