Bank Deal Splits GBC Directors
GBC Bancorp, parent of L.A.-based General Bank and one of the area's most prominent Chinese-American financial institutions, is weighing acquisition offers from at least two larger banks.
However, GBC's board and its top executives are divided on whether to sell now or try to manage the company through some recent missteps, according to sources familiar with the situation.
These disagreements, as well as questions about the extent of asset-quality problems at General Bank, could complicate a potential sale.
The bidders are said to be HSBC Bank USA, the U.S. unit of global banking giant HSBC Holdings PLC, and San Francisco-based UCBH Holdings Inc., the parent of United Commercial Bank, which already has a strong Southern California presence.
Spokespersons for both companies declined to discuss any specific negotiations, citing company policy.
General Bank has encountered bad-loan problems in expanding beyond its traditional niche serving an ethnically Chinese clientele. As a result, its stock has missed a recent run-up benefiting other regional California banks and made it a ripe target for outside banks trying to strengthen their hands in L.A.'s lucrative ethnic banking market.
"The other three publicly traded Chinese-American focused banks are trading at significantly higher multiples," said Steven Didion, president of investment banker Hoeffer & Arnett Inc. "I believe 100 percent of that is due to GBC's history of volatile asset quality."
GBC's two top executives are at odds on whether to proceed with the offers.
Company Chairman Li-Pei Wu, who is credited with building the bank but also blamed for some of its recent problems, is said to be lobbying for a sale of GBC before his employment contract runs out at year's end. (Wu's employment contract calls for a stock-option windfall worth over $6 million if such a deal occurs while he is an employee.)
Chief Executive Peter Wu, a member of the family that controls about 13 percent of the outstanding stock, is said to believe that the bank can become more valuable if he is given some time to improve its performance.
Li-Pei Wu, 67, stepped aside as chief executive in December 2000 to make way for Peter Wu, who is 53. The two Wus are not related.
Eight of the board's 13 members are said to be aligned with Li-Pei Wu, while the five relatives of Peter Wu who are on the board have sided with him, sources said.
Phone calls seeking comment from Li-Pei Wu and Peter Wu were not returned. But details of the proposals and the internal disagreements at GBC have made their way out to a small circle of investors who closely follow the company.
David Harvey, president of Lake Tahoe, Nev.-based hedge fund Hot Creek Capital LLC, placed enough credence in the rumors to write two letters to the board urging it to consider any significant purchase offers.
"We have 99 percent confidence in this idea that there's a split board some want to do it some don't and that there are one or two highly interested parties," Harvey said. Hot Creek, a $55 million fund that invests exclusively in banks, owns about 127,000 GBC shares, representing about a $3.5 million stake.
Problem loans at GBC, with assets of $2.5 billion, have played a role in hindering progress toward a possible deal.
According to sources familiar with the talks, discussions with HSBC and UCBH reached the price-wrangling stage in mid-April. GBC's stock was then trading in the $32-$34 range, and prices being discussed at that time were in the mid-$40s.
However, those talks were thrown off-course due to GBC's April 11 announcement that it stood to lose up to $27 million it lent as part of a bank syndicate to a New Jersey metals-trading firm that turned out to be a Ponzi scheme. It is not clear what prices have been discussed more recently, but speculation puts a likely price just above $40 a share. Last week, GBC's stock was trading around $28.
"Based on my understanding of the progress of discussions, it would be natural that things would be firming up right now," Harvey said last week. "If no deal is announced in the next 30 days we can assume there is no deal."
HSBC, now based in London, has its roots in Hong Kong, where its flagship, Hongkong and Shanghai Banking Corp., was established in 1865.
Its U.S. chief executive, Youssf Nasr, has said HSBC is "underweight" in the United States and is seeking to expand here, with a particular eye for California as a bridge to Asia. The bank has offices in Beverly Hills, Encino, San Francisco and a newly opened branch in Oakland catering to ethnic Chinese customers.
"We find the California market attractive and we find other markets attractive, and if the right opportunity comes along, we will consider it," said Pamela Plehn, vice president of group public affairs for HSBC Bank USA.
UCBH, meanwhile, is one of the stars of the California ethnic-bank lineup, trading at a price/earnings ratio of 23, high for a banking stock. UCBH's Chairman and Chief Executive, Thomas Wu, was traveling out of the country last week.
"We look at all opportunities to enhance shareholder value when they present themselves," said Christopher Katis, an outside spokesman for UCBH.
Li-Pei Wu is given credit as a risk-taker who built GBC into an ethnic-banking powerhouse.
In the past, Wu's risks have paid off. After property values fell in the early 1990s, for example, banking regulators urged GBC to sell off at a discount many of its commercial loans used to finance strip malls in the L.A. area. The loans were current, but the assets weren't worth the loan amounts outstanding. Wu opted to retain the loans instead, and write down their value on the bank's books. When the economy improved, and property values rose, the writedowns were reversed.
Recently, however, GBC ran into trouble when it stepped beyond its Chinese ethnic customer base. Besides the metal-trading scam, GBC has had to write down some loans related to an aircraft finance trust.
For the first quarter ended March 31, GBC reported a loss of $2.9 million, including an $18.5 million provision for credit losses, compared with net income of $7.3 million for the like period a year earlier.
In a statement, Peter Wu called the provision "unacceptably high," and said management is setting limits on syndicated or participated loans outside of the bank's normal lending base. Wu also said GBC would hire an outside consultant to review all of the bank's significant credits.
On May 15, GBC announced that it would record an additional provision of $13.5 million in the current second quarter, providing for the likely loss of the remainder of the $27 million metals-trading loan.
Investors also are concerned about loans that GBC has made to some Indian casinos, where the perfecting claims on assets that reside on reservations could become a thorny legal issue, and loans made to Koreatown textile manufacturers who Harvey thinks may not be first-grade borrowers.
"In the last four years or so, as they got bigger and aspire to greater things, they got sucked into wanting to be J.P. Morgan," Harvey said. "In some regards, (Li-Pei Wu) is not playing to his core competency anymore."
For reprint and licensing requests for this article, CLICK HERE.
Stories You May Also Be Interested In
- Shareholders Push for Sale of Ethnic Chinese Bank
- Chairman's Exit Douses Sale Talk At GBC Bancorp
- Judge Finds Bank Covered Up Bad Loan Prior to Sale
- CORPORATE FOCUS GBC Bancorp
- Cathay Poised for Expansion in Markets With Demographic Fit
- If Chinese Banks Make It There, They'll Make It Anywhere
- OVERVIEW---Asian Powerhouses of Banking