Troubled Lender Charts New Direction
A lot is riding on efforts to help the Los Angeles Community Development Bank rebound from its troubled past. And much of the hope for a turnaround rests with a driven man with a ready laugh who left his native Hong Kong alone at age 16 to become a banker.
William H. Chu took charge of the Community Development Bank last week, becoming the first chief executive with commercial lending experience to head the federally funded institution since it was launched four years ago.
Chu, a former top executive at San Marino-based East West Bank, brings the disciplined eye of a regulated banker to the loan fund, which has struggled with troubled deals and inconsistent management practices and fallen short on its core job-creation mandate.
He also brings a passion for community lending and intimate knowledge of industries that dominate the empowerment zone--the federally designated area the bank aims to serve. The garment sector is one such industry.
The bank currently funds only one or two of every 10 deals that come through its doors, Chu said. He hopes to bring that closer to the 80% to 90% success rate of East West by better defining the bank’s niche, then aggressively marketing to the right businesses.
“When we talk about knowing your customer, the loan pipeline is one thing, but more important is to know what’s going on in the community in terms of industry,” Chu said, his office adorned with a welcome bouquet of flowers from a former borrower. “Businesses in the community can share a lot of insight, even if they aren’t your borrowers. I have my ear to the ground. That’s what I can bring to the bank. . . . I’ll be pounding the pavement.”
Chu served as CEO of Los Angeles-based United Pacific Bank in the early 1990s, helping to turn that troubled institution around before joining East West Bank and overseeing the growth of its commercial loan division from zero to $1 billion in less than three years.
In addition to the garment industry, Chu plans to focus on import businesses that could benefit from warehouse space in the empowerment zone and to emphasize the bank’s micro-loan program--which has a very low default rate--instead of the big, volatile deals favored in the bank’s early years.
A Rolodex full of contacts at small- and mid-sized commercial banks could also help forge co-lending relationships that are critical if the bank is to outlast its initial $430-million funding from the U.S. Department of Housing and Urban Development.
The bank’s mandate requires that borrowers must first have been rejected by a commercial lender. But rather than lend to high-risk businesses, Chu said, the bank should target solid job-creating borrowers that fall just below the radar of conventional lenders because they seek a smaller down payment or longer loan term than a commercial bank is willing to offer. Those deals are also most likely to lead to co-lending arrangements.
Chu’s tenure comes at a pivotal juncture for the institution. A third of its portfolio is in default after a single deal ballooned beyond the bank’s own size limits, then soured. Until recently, the bank had trouble finding viable deals that met its mandate. Borrowers faced delays and inconsistent treatment. And the bank struggled to carve out a competitive niche in an economy where conventional lenders are reaching down to fund deals they would have shunned earlier this decade.
But the last six months have brought notable changes that have laid the groundwork for Chu. Handing over the reins is interim CEO Linda Griego, who implemented controls to protect the portfolio and ensure accountability from management, and improved relations with the city--which oversees the bulk of bank funding.
A new chairman of the bank’s board of directors--Lehman Bros. Senior Vice President Peter Taylor--took over this month and has pledged to make consistency and quality “a high priority.” He is also pushing to fill five board vacancies with bankers, accountants and attorneys--areas of weakness on the nonprofit board since its creation.
Furthermore, long-awaited federal tax incentives for businesses located in the empowerment zone went into effect this month, giving the bank another tool to lure job-creating enterprises to its target areas in East Los Angeles, Pacoima, Central and South-Central Los Angeles.
Into this environment steps the 44-year-old Chu, a husband and a father of two with a penchant for ice hockey and a reputation as a no-nonsense decision-maker. Chu and his wife, Agnes, are active in the Chinese Chamber of Commerce and other Chinese community causes, and Chu has served on the board of Chinese Americans United for Self Empowerment (CAUSE).
Dominic Ng, East West Bank’s president and CEO and Chu’s former boss, said that what the Community Development Bank needs right now “is to have a solid banker who really understands credit risks, and on top of that, has some passion to understand that the bank’s primary goal is to help folks in the empowerment zone. [Chu] has the resources, the knowledge and the experience.”
The bank, created in 1996 in response to the 1992 riots, was initially slow to make loans. Then, under political pressure to move money, the bank placed bets on a string of risky deals that soured. Griego said many of the early deals are tied up in litigation as the bank attempts to collect. Several borrowers have sued the bank, claiming fraud and breach of contract, and one case is currently in trial.
Bank of America, Wells Fargo and Union Bank initially pledged to co-lend several hundred million dollars, but found bank management disorganized and proposing deals too risky for their underwriting standards. Now, they are hopeful that things are changing.
“Linda deserves a lot of credit for significantly improving their management systems and processes,” said Liam McGee, president of Bank of America’s Southern California region. “It’s a better-run business today. That’s a great foundation for a new CEO.”
Key to success, say board members and others, is a firm management style to ensure consistent credit analysis and accountability when deals stall. In helping to build East West’s commercial bank division, Chu--a certified public accountant with strong computer skills--designed software to track the health of loans and the progress of loan officers.
“He was able to . . . create a system of incentives,” said Marina Wang, CEO of Monterey Park-based Trust Bank and a former top executive at East West Bank.
Taylor, the board chairman at the Community Development Bank, was a director for several years and said early credit evaluations of borrowers during the tenure of CEO Robert C. Kemp were often of poor quality and relied too heavily on borrowers’ pronouncements. Kemp retired last year for health reasons.
Chu has vowed to review every deal before it goes before the loan committee and to implement policies to track progress so prospective borrowers are not left hanging. In his first week on the job, he rolled up his sleeves to work through several problematic deals. He plans to fill two new positions with bankers possessing strong credit skills. He is implementing regular weekly meetings of top management and hopes to boost morale.
“He’s definitely a banker, number one, so we can relate with him, and he’s not afraid to be involved in credit decisions,” said one cautiously optimistic employee. “He’s trying to streamline [our paperwork requirements], something that Kemp never did control. He’s looking at every area to identify the delay or the problem or the issue that needs to be corrected.”
Chu’s career path was inspired by his father, who fled to Hong Kong from China during World War II with three years of formal education but rose to become a bank branch manager. At 16, Chu left for Winnipeg, Canada, with the goal of following in his father’s footsteps. He rented a room from a local family, finished high school, married at age 20, got his bachelor’s degree in economics and became an accountant.
When he learned of a banking job in the United States, he jumped at the opportunity. Chu began as a bank teller in Little Rock, Ark., working his way up the chain before coming to Los Angeles to open an office for Lippobank, which was owned by the same entity.
When an Indonesian conglomerate purchased United Pacific Bank, he was recruited as chief operating officer. There, he monitored all day-to-day functions of the $80-million institution, lending to an array of small enterprises, including restaurants, garment contractors and import companies. When the recession hit and the bank got into trouble, Chu was named CEO to turn it around, restoring profitability in a year.
Meanwhile, the same conglomerate purchased East West Bank with Ng at the helm, and in 1994 Chu joined him, managing the newly formed commercial lending division. Last summer, he became director of retail banking, managing the bank’s network of 22 branches and supervising a staff of 200.
“William is a person who always likes new challenges,” Ng said. “This is a [bank] that’s going to make some great impact on the community if it’s run right. He’s going to have to execute. Only he can make it happen, but if he does, he’s going to make a major mark in the history of Los Angeles.”
