United Commercial Bank Pays Price for Breakneck Growth

Under pressure from financial regulators, ailing UCBH Holdings, a California banking company that caters to Chinese-Americans and U.S. businesses doing business in China, is cleaning house. The $13.4 billion-asset company's top two executives are leaving. UCBH also promised the FDIC and local banking authorities that it would take a series of steps to shore up its business. But that will be a very tall order, and the company's best hope may be to find a buyer.

What sunk 11-year-old UCBH, whose shares traded for more than $20 in 2004 but which have since sunk to $1.14, was its aggressive ramp-up in commercial lending over the last decade. The company boosted its domestic commercial loans from less than $100 million in 2000 to $2.4 billion in 2008. Commercial mortgage loans tripled over the period, to $3.7 billion. Constructions loans rose 15-fold, to nearly $2 billion. UCBH also stretched its resources by rapidly expanding in the U.S. and in Asia, where the company pushed its business in Hong Kong and on mainland China.

It's a recurring theme among today's swelling ranks of troubled banks: fast growth, high risk. In its 2005 annual report to shareholders, for instance, UCBH touted its goal of doubling in size over five years, underlining its "spectacular" growth in commercial lending. In banking, such shoot-for-the-stars targets are a classic danger sign.

UCBH is now paying the price, particularly in its residential construction portfolio. Loan charge-offs are way up, net interest income is way down. The company is scrambling to boost its provisions to offset for rising losses, chewing up earnings -- a familiar script for anyone who follows the banking sector.

Graph courtesty of Capital IQ