Implications of UCBH's Failure for Tarp Takers

UCBH Holdings Inc. in San Francisco, among the initial group of banking companies approved for an infusion under the Capital Purchase Program last November, is the first of the government's investments to be wiped out by a bank failure.

The seizure of its $13 billion-asset United Commercial Bank on Friday suggests that even institutions the Treasury Department had the most confidence in a year ago are not all going to be winners in this down cycle — or, for that matter, survivors.

Some industry observers expressed surprise because, though other facets of the Troubled Asset Relief Program had been crafted as outright bailouts, CPP had been meant only for healthy banking companies. UCBH got $298 million.

Andy Laperriere, the managing director of International Strategy and Investment Group Inc.'s policy research team, said "it was a matter of time" before a bank that got a government infusion would be taken over.

But the significance of United Commercial's failure depends on whether other Tarp recipients collapse, he said.

"The question is: Does this portend a trend where we're going to see a lot more banks that received Tarp money fail? If this is a relatively isolated occurrence, I don't think it's that significant of a marker," Laperriere said.

At least 33 Tarp recipients deferred their August dividend payments, and earnings and capital pressure are piling up for some, according to data from Foresight Analytics LLC in Oakland, Calif.

Matthew Anderson, a partner at Foresight Analytics, said that, initially, he had not expected any Tarp recipient to fail but that the economy has been stressed.

"I think some of the banks may have also received or been the subject of enforcement actions from one or more regulators," he said. "When you combine that with missed Tarp payments and negative earnings, that adds up to an indication that there is more to come in terms of failures."

Others agreed that a few failures in the group are inevitable.

"The Tarp investments are like any other kind of investment. Some are not going to work out, and the Treasury is going to prove that in spades," said Jeff Davis, an analyst at First Horizon National Corp.'s FTN Equity Capital Markets Corp.

But industry observers offered conflicting perspectives on the broader implications for other banking companies.

One widespread notion had been that the government would take additional steps to prevent the failure of Tarp recipients, but Brett Rabatin, an analyst at Sterne, Agee & Leach Inc., said that UCBH proves otherwise.

"This does not bode well for other Tarp banks that need capital," Rabatin said. "The thoughts before today were that the government would protect its investment and convert Tarp to common, or double down and issue capital."

But Mike Alley, the chairman and chief executive of the $3.3 billion-asset Integra Bank Corp. in Evansville, Ind., said in an interview that he does not expect the failure to result in any additional Treasury scrutiny of struggling recipients.

Integra, which received $86.3 million, suspended its dividend payments to the government this quarter, after its loan trouble worsened.

"We don't have any preconceived notion as to anything they might do," Alley said. "We are doing this as a preemptive action to preserve capital, and the terms of Tarp allow for that without penalty or negative reaction. Our expectation is that Treasury will live up to that."

But after any company defers the dividends for six quarters, the terms of the investment allow the Treasury to add two members to the board of directors, Alley said.

Though the United Commercial failure was the first collapse of a depository that had received CPP money, Frank Bonaventure Jr., a principal of the Ober Kaler law firm in Baltimore, said CIT Group Inc.'s bust had greater implications for assessing the success of the government intervention in the banking system.

CIT, which declared bankruptcy last week, got $2.3 billion from the government in December after converting to a bank holding company so it could qualify. (Its Salt Lake City subsidiary, CIT Bank, is still open, and several observers said the bank appears likely to survive.)

Because the government's sizable investment in CIT appears worthless, "I think it's certainly more significant," Bonaventure said.

But others saw a more lasting impact from United Commercial's failure.

Kevin Jacques, the chairman of finance at Baldwin-Wallace College in Cleveland and a former Treasury economist, said officials may worry that the failure of an institution receiving CPP will cause the public to question the progress of the recovery.

"What the regulators desperately want is the public to view this as just another bank failure," Jacques said.

He said the Treasury sent the message that companies excluded from getting CPP funds were not expected to stay afloat even with the infusion.

The failure of a bank that had been expected to survive could raise a red flag, he said.

"This is a bank they put money into, and … there were still large enough problems so as to cause this bank to fail," Jacques said.

"The question becomes: If that's the case, how do the financial markets interpret that? Do they interpret that as: 'Oh, my God, there's another banking wave or crisis that's going to come here. That's the thing the regulators don't want the market believing."

Davis said that the Treasury is unlikely to give any Tarp recipients more help through programs such as the Capital Assistance Program.

The Treasury introduced CAP in February to allow struggling companies to increase their government stake to 5% and convert existing preferred shares into common ones.

But no investments under that program have been made yet, and the application deadline was Monday.

The $3.5 billion-asset Midwest Banc Holdings Inc. in Melrose Park, Ill., is one of only a few companies to publicly disclose that it has applied for CAP.

The majority of the $84.8 million it received under Tarp went toward plugging a $64.5 million hole caused by writedowns on investments made in Fannie Mae and Freddie Mac. So it had little capital cushion to absorb the heavy loan trouble it had this year.

Though its bank unit remains well capitalized, the company was undercapitalized at Sept. 30.

"If Midwest could raise money, they would have. I don't see the Treasury investing more in them," Davis said.

But not all those under stress are in severe trouble.

The $385 million-asset Citizens Bank of Northern California in Nevada City, Calif., said it deferred Tarp payments in August to preserve capital. Its total risk-based capital ratio has fallen just below the minimum needed for well-capitalized status lately, but Phil Campbell, its general counsel, said that it expects the ratio to rise by the end of this quarter and plans to resume the dividend payments then.

"We're not even under a regulatory order," he said.