Cautionary saga of a failed San Francisco bank
by Kathleen Pender
Sunday, November 29, 2009
United Commercial Bank of San Francisco liked to boast that it was the first U.S. bank to buy a bank in China. Instead it will go down in history as the first U.S. depository institution to fail after its parent company took money from the Treasury's Troubled Asset Relief Program.
As investigators seek to uncover the exact causes of the bank's death, some big questions remain:
-- Should the government have done more due diligence before investing $300 million worth of taxpayer money in parent company UCBH Holdings?
-- Would it have made any difference if the Federal Reserve had allowed China Minsheng Bank to acquire a controlling interest in UCBH?
-- What role did fraud play?
When regulators shut down United Commercial Bank on Nov. 6 , "it was like deja vu," says Richard Newsom, a retired West Coast bank and thrift regulator.
United Commercial Bank grew from the ashes of United Bank, a San Francisco thrift that failed in the mid-1980s as a result of "reckless construction lending," Newsom says.
Likewise, the FDIC cited commercial real estate and construction loans as a cause of United Commercial Bank's failure, along with "alleged fraud."
That may have surprised people who still saw it as a conservative bank catering to Chinese Americans in San Francisco, Los Angeles and a few other cities with large Asian communities.
"It was a great franchise for a while," says James Ellman, president of hedge fund Seacliff Capital. "It took in deposits from primarily Chinese Americans and made very conservative loans to the same ethnic group." But the bank "had a mismatch: its original depositor base was growing rapidly, but its ability to make loans to that depositor base was difficult. Heavy savers tend not to be big borrowers."
Like other smaller banks, it also faced growing competition from Fannie Mae and Freddie Mac in home mortgages, from the large credit card companies in consumer loans and from the automakers' finance arms for car loans.
That left United Commercial increasingly dependent on riskier commercial real estate and construction loans.
"This bank, more than others, had its life or death tied to the health of the commercial real estate market, particularly in California," says Ellman. "As the health of commercial real estate weakened, so did this bank."
The China focus
Julianna Balicka, an analyst with Keefe, Bruyette & Woods who followed UCBH until last week, says "the real problem started" when the company wanted to buy a bank in China but needed $10 billion in assets to do so. "Management got greedy about growth," she says.
Between the third and fourth quarters of 2006, its assets surged from $8.3 billion to $10.3 billion.
"It was one of the worst times to push growth given what happened in the housing and credit cycles," Balicka says.
In March 2007, United Commercial announced it was buying the Business Development Bank of Shanghai, becoming the first U.S. bank to wholly own a bank in China.
By the end of 2008, the company had $13.5 billion in assets.
"They got aggressive on lending," Balicka says. They "priced loans too low" for their risk and "got sloppy on underwriting." Senior management "was so focused on solidifying the China opportunity," they didn't pay enough attention to lending.
Although United Commercial was hardly the only bank to make risky loans at the peak of the market, it was slow to recognize losses, which contributed to its undoing.
TARP investment
In November 2008, UCBH got a $300 million investment from the TARP-funded Capital Purchase Program. Then-Treasury Secretary Henry Paulson stressed that this was a program only for "healthy" banks, but UCBH had already posted a small loss for the third quarter that ended in September 2008.
Although companies had to be recommended for the program by their primary regulators, ultimately it was up to the Treasury to approve or disapprove TARP investments.
"I would say the Treasury did not do enough due diligence," Balicka says. "They will say, for every 100 banks you're going to have 99 winners and one failure."
At the time of the TARP injection, UCBH "was already exhibiting levels of stress that were higher than the banking industry averages. They hadn't fallen off the table, but they were heading in that direction," says Christopher Whalen of Institutional Risk Analysts.
By the end of the fourth quarter, stress levels had skyrocketed and so had its losses - to $83 million after preferred dividends. It lost an additional $94 million in the first quarter of 2009.
When it filed its 10-K for 2008 in March 2009, UCBH disclosed that "the company's internal control over financial reporting was ineffective," and there was a "material weakness" in assessing credit in the loan portfolio.
"That's a pretty good indicator that there may have been fraud involved or negligence," says Whalen.
In May, the company reported that it would have to restate its 2008 financials, in part because loan losses recognized in the first quarter of 2009 should have been taken in the previous quarter. The company estimated that its 2008 pretax profit could shrink by $55 million, but it never reissued the corrected financials.
On Sept. 8, the company announced it had agreed to a cease-and-desist order with regulators and would take steps to enhance its strength and stability. It also announced the resignation of Thomas Wu, its chairman, president and chief executive officer, and Ebrahim Shabudi, its chief operating officer. Wu did not return phone calls.
Finally, it disclosed that an investigation by the board's audit subcommittee had found "deliberate and improper actions and omissions by certain bank officers" including "inappropriate modification of loan terms" driven "by an apparent desire to downplay deteriorating financial conditions." The officers responsible were never identified.
Within days, class-action lawyers started filing lawsuits alleging that the company had hidden losses from UCBH shareholders.
The Minsheng factor
In early October, Bloomberg reported that China Minsheng Bank wanted to increase its stake in UCBH above 50 percent. No details were revealed, and the deal never happened.
The Federal Reserve has never allowed a Chinese bank to take a controlling interest in a U.S. bank. Most Chinese banks are government owned. Although Minsheng is not, allowing it to take control of UCBH would have set a precedent.
A Federal Reserve spokeswoman would say only that "Chinese authorities are working hard to meet the standards that would permit them to buy banks in the United States, but these things can take time. We've been working with them as they seek to implement standards for consolidated supervision, and they're making real progress."
Other troubled banks that received TARP money survived because they were able to raise new capital, says analyst Joe Morford of RBC Capital.
UCBH's inability to produce new, audited financial statements prevented it from raising capital, and this, more than anything, caused its failure, he says.
It's not clear how much capital, if any, Minsheng would have put into UCBH, but Morford says it could not have been enough, by itself, to save the company.
"It might have helped them buy more time to do a public offering, but that's a lot of speculation," Morford says. "Allowing Minsheng to take their ownership up to 50 percent would not have necessarily prevented what happened."
The end
On Nov. 6, the FDIC and the California Department of Financial Institutions shut down United Commercial and sold its assets, loans and 63 branches to East West Bank of Pasadena. The FDIC will bear the majority of losses on United Commercial's loans. It estimates that the losses to the FDIC insurance fund will be $1.4 billion.
UCBH stock is now trading around 40 cents per share. Taxpayers will probably get nothing from their $300 million TARP investment.
When I asked the FDIC why it didn't spot United Commercial's problems before it got TARP money, spokesman David Barr pointed me to the FDIC's Nov. 6 statement, which said, "Earlier identification of problem loans may have been impeded through alleged fraud exercised by former senior management, currently under investigation by the relevant authorities."
The deal will give East West, which also targets Asian communities, about $19 billion in combined assets, making it the second largest independent bank based in California after Wells Fargo.
East West has also had problems with its loan portfolio, but has been much quicker to recognize losses. "If we smell a loan is going bad, we write it down right away," says Emily Wang, marketing director for East West.
East West's parent company also received about $300 million in TARP money, but it was able to raise $500 million in new capital when it took over United Commercial's operations.
East West will have "no problem" repaying its TARP money, Balicka predicts.
United Commercial Bank
1986: Established as United Savings Bank. Acquired United Bank, a failed San Francisco thrift, in a government-assisted transaction.
1990-92: Acquired Global Savings Bank and Golden Coin Savings and Loan of San Francisco.
1998: Management team led by Thomas Wu and large investors acquired United Savings from its owners, converted it into a bank, changed its name to United Commercial Bank, and took it public.
2002-06: Acquired San Francisco's Bank of Canton of California and banks in Rosemead (Los Angeles County), Boston, Atlanta and Bellevue, Wash.
2007: Acquired a bank in New York and Business Development Bank of Shanghai. Separately, China Minsheng Banking Corp. of Shanghai bought 9.9 percent of parent company UCBH.
November 2008: U.S. Treasury invested $300 million in UCBH.
March 2009: UCBH disclosed that financial-reporting controls were "ineffective."
May: UCBH said 2008 financial statements must be restated; loan losses reported in first quarter 2009 should have been in fourth quarter 2008.
September: UCBH entered cease-and-desist agreement with regulators. Two top officers including Wu resign. Audit subcommittee finds "deliberate and improper actions and omissions" by certain unnamed bank officers. Class-action suits begin.
October: Bloomberg reports that Minsheng Banking might increase its UCBH stake to more than 50 percent. The deal fails to get regulatory approval.
Nov. 6: Closed by regulators. East West Bank of Pasadena takes over deposits, loans and branches and the bank in China and enters loss-sharing agreement with the FDIC.
E-mail Kathleen Pender at kpender@sfchronicle.com.
http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/11/29/BUHI1AQ1Q7.DTL
This article appeared on page D - 1 of the San Francisco Chronicle
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