Bottom of the Barrel: Banking on UCBH Holdings

San Francisco-based UCBH Holdings (UCBH Quote) is a study in successful -- and profitable -- niche marketing.

It's the parent of United Commercial Bank, the leading U.S. bank serving the Chinese community. With more than $2.93 billion in assets and 30 offices throughout California, including San Francisco, Sacramento, Stockton, Los Angeles and Orange County, United Commercial provides both consumer and commercial deposit and lending services to its target market.

Founded in 1974 as a federal savings and loan catering to a growing Chinese market in Northern California, the company converted its charter to a commercial bank and began trading publicly in 1998. Since then, the company has posted 14 consecutive quarters of better-than-expected earnings.

A Profitable Niche

At a Glance UCBH Holdings (UCBH:Nasdaq)
Recent Price	$35.30
52-Week Range	$20.81-$36.55
Price-to-Earnings Ratio*	19.3
Market Cap	$680.9 million
Avg. Daily Volume	134,409
Inst. Ownership	88%
Dividend Yield	0.57%
Beta	0.04
Company Web site	www.ibankunited.com
*Based on 2002 Estimates Source: Market Guide, FirstCall, Company Reports

UCBH Holdings' focus on the Chinese market should remain profitable. "With almost 1 million new Chinese immigrants entering the U.S. by 2010, the majority [more than 60%] will likely settle in California," notes Mark Agah, RBC Capital Markets banking analyst. "This provides UCBH with the vibrant footprint it needs to continue the rapid pace of balance sheet growth we have become accustomed to in the last two years." Agah rates UCBH outperform with a $38 price target. His firm has not provided investment banking services to the company.

Growth rates have been impressive, with earnings and revenue growing by more than 20% last year, and that pattern could continue for the next two years. UCBH's growth is fueled by its loan portfolio, which should grow around 15% this year with strong net-interest margins of nearly 4%.

The company's recent moves toward higher-margin business, commercial real estate lending and Southern California expansion will help UCBH meet those targets, as will lower deposit costs. "We find that this strong level of growth is possible, given the company's focus on the large and underserved ethnic Chinese market," says Campbell Chaney, banking analyst at Sanders Morris Harris.

More important, that growth isn't expected to have a major impact on the quality of UCBH's loan portfolio. The bank currently classifies only 0.3% of its assets as nonperforming and has a very healthy 1.5% loan-loss reserve ratio.

"UCBH only closes approximately 50% of its pipeline, shunning any and all loans that do not pass its rigorous credit standards," says RBC's Agah. "As a result, all of its asset-quality metrics are favorable, including solid reserve levels, personal guarantees on virtually every commercial credit and a relatively granular portfolio. These factors all contribute to the company's low nonperforming loan levels and minimal loan-loss history."

New International Business Opportunities

In January, UCBH announced it was expanding its international offerings through an office in Hong Kong. That initiative is intended to strengthen the international trade finance capabilities that the bank offers to California-based customers who conduct business with companies in China and other Asian countries. The new office will also position UCBH to provide a superior level of personalized service to high-net-worth Asia banking clients doing business across the Pacific Rim.

A Look at the Numbers United Commercial's niche approach is paying off
Year	Operating Revenue (in millions)	Earnings per Share
2000	$88.6	$1.24
2001	105.4	1.53
2002*	124.3	1.81
2003*	139.6	2.14
*Estimates Source: FirstCall, RBC Capital Markets, Company Reports, TSC Research

The new Hong Kong office follows the company's successful launch of an international trade finance business in 2001, which many analysts and investors think might be a significant growth catalyst in the years ahead.

"The establishment of an international banking division last year and the opening of a representative office in Hong Kong in January were well-timed," says John Kline, analyst at Sandler O'Neill. "While Chinese manufacturing is humming, the banking system is not on the strongest footing. Therefore, Chinese businesses could seek to establish stronger banking relationships in Taiwan and Hong Kong. This, coupled with continued export of goods, should benefit UCBH."

Kline rates UCBH buy with a $41 price target. His firm has provided banking services for the company.

Risk Assessment

Although UCBH's growth story is solid, it has some execution risk. Remember, only four years ago, this was a sleepy savings and loan that got by on deposits and retail lending. Management has done an exceptional job of transforming the loan portfolio and positioning the bank for growth, but it must maintain the momentum.

Commercial lending and international trade finance are a far cry from making personal loans and mortgage lending. While UCBH management is up to the task, any unexpected rise in nonperforming assets and loan-loss reserves would likely send investors to the exits.

Trading at 19.5 times 2002 earnings estimates, the stock is near fair value, although it should appreciate as banks begin to focus on 2003 in the coming months. "UCBH remains one of the fastest-growing community banks in the country," notes Agah. "We believe the company's shares deserve a significant premium to regular community banks due to its potential EPS [earnings-per-share] growth rate, its management team and its excellent asset quality."

I agree, yet I'm holding back a half-barrel because of its price. I give UCBH a strong 2.5 barrels.

For an explanation of our barrel rating system, see our recent description.

The Goods on Goody's

It was a pretty good week for the Bottom of the Barrel portfolio. Last week's entry, Laclede Group (LG Quote), was up about 2% for the week and still sports a 5.7% yield, nice for equity investors looking for income.

The medical technology companies in the portfolio -- Endocare (ENDO Quote) and SurModics (SRDX Quote) -- added to gains from last week. Though I still like both companies, they may begin to consolidate at these levels before another meaningful move higher. While the momentum has been impressive, patience is likely to reward you with a modestly better entry point in the coming weeks.

Is Goody's Too Good? The retailer's been running too fast
Current Rating	Company/Ticker	Date of Mention	Current Price	Mention Price*	% Change From Mention	% Change Weekly
Positive Outlook
	Cost Plus World Markets (CPWM:Nasdaq)	March 6, 2002	$27.30	$25.83	5.69%	-3.19%
	Rare Hospitality (RARE:Nasdaq)	Feb. 20, 2002	24.75	25.72	-3.77	-5.68
	Endocare (ENDO:Nasdaq)	Jan. 23, 2002	20.00	18.21	9.83	12.11
	SurModics (SRDX:Nasdaq)	Dec. 19, 2001	46.10	34.60	33.24	3.34
	VitalWorks (VWKS:Nasdaq)	Nov. 21, 2001	5.68	4.30	32.09	6.17
	FPIC Insurance (FPIC:Nasdaq)	Nov. 14, 2001	12.36	12.83	-3.66	-0.96
	Witness Systems (WITS:Nasdaq)	Oct. 31, 2001	14.21	8.06	76.30	5.03
Market Outlook
	NetBank (NTBK:Nasdaq)	Feb. 6, 2002	16.88	13.45	25.50	-0.82
	Coastal Bancorp (CBSA:Nasdaq)	Dec. 12, 2001	32.60	27.84	17.10	-0.76
	Coinstar (CSTR:Nasdaq)	Nov. 7, 2001	31.25	19.96	56.56	0.64
	Hibbett Sporting Goods (HIBB:Nasdaq)**	Oct. 24, 2001	23.50	20.04	17.27	-1.88
	Quixote (QUIX:Nasdaq)	Oct. 3, 2001	17.50	21.44	-18.38	-2.78
Special Situation
	Luby's (LUB:NYSE)	Feb. 27, 2002	6.69	6.22	7.56	-2.05
	Quanta Systems (PWR:NYSE)	Jan. 9, 2002	16.70	16.05	4.05	-1.18
Avoid
	Actrade (ACRT:Nasdaq)	Jan. 30, 2002	16.58	20.65	-19.71	7.94
	Goody's Family Clothing (GDYS:Nasdaq)	Nov. 28, 2001	7.10	4.50	57.78	14.70
	Bridgford Foods (BRID:Nasdaq)	Oct. 10, 2001	10.72	13.18	-18.66	-0.65
Income Portfolio
	Laclede Group (LG:NYSE)	March 20, 2002	23.90	23.64	1.10	1.92
	Empire District Electric (EDE:NYSE)	Jan. 16, 2002	21.60	21.23	1.74	0.98
	Met-Pro (MPR:NYSE)	Oct. 17, 2001	14.10	11.16	26.34	-0.56
	Integra Bancorp (IBNK:Nasdaq)	Jan. 2, 2002	19.76	20.75	-4.77	0.82
	Alexandria Real Estate (ARE:NYSE)	Feb. 13, 2002	44.15	40.25	9.69	1.45
Source: TSC Research *Average price on date of mention. **Prices adjusted for 3:2 split on Feb. 20, 2002.

Goody's Family Clothing (GDYS Quote) has been an upside surprise after announcing earnings last week. I suggested that shorts cover when the stock was below $4, but I missed a trade by not being more positive ahead of earnings.

However, my long-term focus still makes this a name to avoid because its recent price assumes a near-perfect operating environment and little impact from growing competition. There are simply better retail names to consider.

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Do you have candidates for Bottom of the Barrel? If so, shoot me an email with the company's name, why you think it qualifies, and your full name and hometown. If I profile your suggestion, I'll send you a TSC gift to commemorate your pick.