UCBH Holdings Inc. Q1 2009 Earnings Call Transcript

Apr.24.09 | About: UCBH Holdings (UCBH)

UCBH Holdings Inc. (UCBH) Q1 2009 Earnings Call April 24, 2009 11:00 AM ET

Executives

Thomas S. Wu – President and Chief Executive Officer

Craig S. On – Chief Financial Officer

Doug Mitchell – Director of Investor Relations and Capital Management

Doug Sherk – EVC Group, Inc., Investor Relations

Analysts

Aaron Deer – Sandler O'Neill & Partners

Erika Penala - Bank of America Securities Merrill Lynch

[John Heck] JMP Securities

Jason Goldberg - Barclays Capital

Lana Chan – BMO Capital Markets

James Abbott – FBR Capital Markets

Julianna Balicka – KBW

Joe Morford – RBC Capital Markets

Operator

Welcome to the UCBH Holding Incorporated first quarter 2009 earnings conference call. (Operator Instructions) This conference is being recorded today, Friday, April 24, 2009. Now, I would like to turn the conference over to Mr. Doug Sherk of EVC Group.

Doug Sherk

Before we begin, the company's release announcing in the first quarter 2009 results was distributed yesterday after the market closed. If for some reason you haven't seen a copy of the release and would like one, please feel free to call our office at 415-896-6820 and we'll get you a copy immediately.

There will be a seven-day replay of this call beginning approximately one hour after we finish this morning. The replay number is 800-405-2236 or for international participants 303-590-3000. Both numbers require the pass code of 11130176 followed by the pound sign.

Additionally, this call is being broadcast with a slide presentation over the Internet and can be accessed by the company's website at www.ucbh.com. I'd like to remind you that this conference call contains forward-looking statements regarding future events or the future financial performance of the company. Such forward looking statements involve risk and uncertainties and other factors that may cause the actual results of performance or achievements of the company to be materially different from future results, performance, or achievements expressed or implied by such forward looking statements.

Such factors include, among other things, general economic and business conditions in the areas in which the company operates, demographic changes, competition, fluctuation in market interest rates, changes in business strategies, changes in credit quality, and other risk detailed in the document that the company files from time to time with the SEC. We wish to caution you that such statements are just predictions and actual results may differ materially. We refer you specifically to the company's latest Form 10-K and 10-Q, which have been filed with the SEC.

Now, I would like to turn the call over to Mr. Tommy Wu, Chairman, President, and Chief Executive Officer of UCBH.

Thomas S. Wu

We appreciate you joining us this morning for the review of our first quarter financial results. On the call with me today is Craig On our Chief Financial Officer, and Doug Mitchell Director of Investor Relations and Capital Management.

In today's call, we will begin with an overview of our quarterly financial results. We will then review some of our key credit quality metrics and finally we will provide updates on additional financial and business activities. We will conclude with our thoughts on current industry conditions and provide an update on our general outlook for 2009. We encourage you to follow our presentation with the slides provided on our webcast, which is available on www.ucbh.com. At the conclusion of our formal remarks, we will take your questions.

Before I turn the call over to Craig and Doug, I would like to review some of our key high level results and make a few comments on the extremely challenging economic environment we continue to face and how we are managing our business during this difficult period.

We reported a $93.7 million net loss available to common shareholders or $0.78 per share for the first quarter 2009. That net loss that we reported in our first quarter results was primarily attributable to a $178.5 million loan loss provision that reflected our aggressive efforts to sell $93.7 million in non-performing assets during the quarter, our increased level of charge-offs, and residential construction credit migration.

During our fourth quarter 2008 earnings call, we observed indications of credit weakness in areas contiguous to the most distressed markets in California and we specifically noted Los Angeles and San Diego condominiums as an area of concern.

During the first quarter of 2009, we observed that credit migration in the distressed residential construction market, including such areas as Inland Empire and the Central Valley were no longer driving increases in our long performing loans. Rather, news on performing loans were coming from condominium-related construction projects located primarily in and around Los Angeles and San Diego.

We have been focused on these areas and the projects that move to a non-performing status since early 2008. However, continued competitions from single-family homes and slow absorption rates have continued to constrain condominium liquidity. We are continuing our strategies of working out projects through converting projects into apartments for rental financing when and where appropriate, and are continuing with loan collateral and [locked] sales.

As part of our broader strategy to reduce our level of non-performing assets, we plan to continue our aggressive sales efforts throughout the remainder of 2009. We will work to strike an appropriate balance between price and sales volume and expect future quarter sales volume to be at a minimum consistent with first quarter levels.

Additionally, we were required to recognize further other than temporary impairments. These impairments total $5.2 million and were comprised of approximately $844,000 on our remaining holdings of Fanny Mae and Freddie Mac preferred stock and $4.1 million on the residual change of our internal CMBS authorization.

Our net interest margin decreased nine basis points from the prior quarter to 2.35%. The decline reflects a full quarter impact on our prime-based loans of fair fund rate cuts that occurred at the end of the fourth quarter 2008. Increased decreases in our average loan balances as well as impact of reversals of interest on non-accrued loans in the first quarter.

The affect on interest reversal represented an approximately 17 basis point decline in net interest margins for the quarter. Excluding the effect of the interest income reversals, our net interest margin would have been 2.52%. Net interest margin expansion should begin in the second quarter as we experience the impact of full pricing that we have established in our CNI portfolio and the re-pricing of CD portfolio.

Our allowance for loan losses increased to 3.3% of loans healthy in portfolio at the end of first quarter, an increase over 2.66% in the fourth quarter of 2008. Additionally, total reserves to loans have in portfolio, which includes both the allowance for loan losses and the reserves for unfunded commitment and exclude cash secured loans rose to 3.47% from 2.79% at the end of fourth quarter 2008.

Net charge-offs for the quarter totaled $141.7 million compared with $43.6 million in the fourth quarter and non-performing loans increased to $672 million in the first quarter from $503 million in the fourth quarter. Craig and Doug will discuss these items in greater details in a few minutes. Our net loan to deposit ratio was 90.5% and remained well under our 100% target range, while our total deposits remained effectively flat when compared to their prior quarter.

The core deposit growth during the quarter offset the high cost CD [write-offs] in our portfolio as a result of our diligent efforts to increase core deposits. As a result, our cost of deposits came down nicely at the end of the quarter at 2.14%. Our capital ratios remain strong on both the Tier 1 capital ratio and the total risk space capital ratio well above the regulatory minimums. These ratios were 12.18% and 14.73% respectively.

Now, I would like to turn the call over to Craig, who will provide more detailed discussion of our financial performance.

Craig S. On

Interest income decreased by 6.5% and 17% in the first quarter of 2009 compared with the fourth quarter of 2008 and the first quarter of 2008 respectively. This decrease is due to the lower level of the overall interest rate environment throughout 2008. The full quarter impact on our prime-based loans of the Fed funded rate cut that occurred in December 2008 and decreases in our average loan balances. Despite the current weak economic environment, fee income, including commercial banking and service fee income, was effectively stable at $5.1 million in the first quarter of 2009 versus $5.2 million in the first quarter of 2008.

First quarter security gains totaled $9.5 million and, as previously mentioned, we were required to recognize further other than temporary impairments. These impairments totaled $5.2 million and were comprised of approximately $844,000 on our remaining holdings of Fannie Mae and Freddie Mac GSE preferred stock and $4.1 million on the residual tranche of our internal CMBS securitization.

The new ending book value for the combined GSE preferred stocks is now approximately $407,000 and the ending book value for the CMBS residual tranche is now $5 million or $0.33 on the dollar. The 16% decline in year-over-year net interest income captures the impact of lower overall interest rates for both loans and deposits. While the last Federal Reserve interest rate drop of 125 basis points, which occurred on December 16, 2008, the first quarter 2009 interest income reflects a full quarter of income at these lower rates.

Additionally, the CD portfolio, which has a five to six-month average life, has begun to re-price, together with the core deposit growth contributing to the reduction in interest expense during the quarter. However, the largest effect of the CD portfolio re-pricing will be reflected in the second and third quarter of 2009.

The loan loss provision totaled $178.5 million, reflecting higher charge-offs, credit migration, and further reserve building. The loan lost provision resulted in an increase in our allowance for loan losses. The balance at December 31, 2008 increased from $230.4 million to $276.5 million at March 31, 2009.

Non-interest expense in the first quarter of 2009 increased over the prior year and totaled $68.6 million. This increase included a $1.9 million increase in FDIC premiums associated with previously announced insurance premium hikes. In addition, professional fees increased approximately $3.5 million and represent audit and accounting expenses associated with the 2008 year end close, professional fees related to loan reviews, and legal fees associated with problem loans and other real estate owned workout arrangements.

Further, we incurred additional impairment write-downs in operating expenses associated with our other real estate owned portfolio which amounted to $12.6 million. Personnel expense was stable year-over-year, as drops in bonus and incentive compensation offset increases in salary expense and severance pay associated with certain headcount reductions. Included in the first quarter of 2009, personnel expense is approximately $900,000 in severance expense.

The reduction in personnel expense of approximately $5 million for the year will be recognized during the remainder of 2009. In addition, I would also like to mention that UCBH has instituted a salary freeze and no year end bonuses in any form, cash, incentive compensation, or stock options were made to executive management for 2008 performance.

During our previous earnings call, we had indicated an expense run rate for 2009 of between $55 million to $58 million per quarter. Excluding the other real estate owned write-downs and expenses, as well as the severance expense reflected in personnel expense, our pro forma non-interest expense run rate would have been approximately $54 million.

We recognized an $83.9 million income tax benefit in the first quarter of 2009. This compares to a $58.8 million income tax benefit in the fourth quarter of 2008. The income tax benefit is caused primarily by the components, as well as the magnitude of our pre-tax loss for the quarter. We have determined the realizability of the resulting deferred tax assets by analyzing both the carry-back and the ability to generate sufficient taxable income in the foreseeable future, to absorb the losses and expenses associated with the deferred tax assets.

We are in the process of evaluating the goodwill associated with our domestic and international reporting units. However, at this time, we do not expect any goodwill impairment as of March 31, 2009. Also, subsequent to our earnings announcement in January and before we finalized our fourth quarter 2008 financial statements, we revised our fourth quarter 2008 results to include an increase in non-performing assets, a higher loan loss provision and as a result, a larger net loss.

The changes were the result of information the management team identified on a discrete number of loans in our portfolio that we determined was applicable to facts and circumstances that were in existence as of year end 2008. These loans included two commercial real estate loans in Nevada, a construction loan in San Francisco, and 12 smaller construction loans located primarily in the Inland Empire.

Given the timing in identifying this information and considering materiality levels as of year end, UCBH management concluded that there were control weaknesses in some of the bank's credit management processes and that these weaknesses should be characterized as a material weakness.

We are actively working to address these issues. We have a remediation team in place that is responsible for determining the appropriate steps required to bolster these credit process control weaknesses that contributed to the control weakness. We have moved very quickly and will continue to move quickly to execute our plan. We believe that these actions will result in our ability to quickly and effectively remediate the material weakness.

At this point, I'd like to turn to Doug Mitchell to provide a review of some key credit metrics.

Doug Mitchell

Total non-performing loans in the first quarter increased to $672 million or 8.01% of total loans, compared with $503.1 million or 5.8% of total loans in the fourth quarter of 2008. Construction non-performing loans increased in the first quarter to $467.7 million or 24.5% of the construction portfolio.

Historically, construction non-performing loans have come from our designated distressed markets. As a reminder, these markets include Nevada, Arizona, and certain part of California, including the Greater Sacramento Area, the Inland Empire and Central Valley, Imperial County, and the high desert region of Los Angeles County.

During our fourth quarter 2008 earnings call, we observed indications of credit weakness in areas contiguous to the most distressed markets in California, and we specifically noted L.A. and San Diego condominiums as an area of concern. The residential construction loan migration to non-performing status in the first quarter of 2009, came primarily from these markets and were either condominium construction or Condo AD&C loans.

Even though new non-performing loan volume from the distressed markets declined sharply in the quarter, we remain cautious about trends in these markets. We continue to monitor all of our markets closely and will watch to see if the distressed market trends continue before concluding that local market stabilization has truly begun.

As part of our efforts to aggressively address our portfolio of non-performing assets, we closed on a significant volume of loan sales in the quarter. We sold $93.7 million in non-performing residential construction loans and other real estate owned, largely coming from the distressed markets. These asset sales also affected the increase in quarterly charge-offs and impacted our provisioning levels as in some instances additional provisions were required when sale proceeds plus existing reserves were insufficient to retire the asset.

For example, as part of the FDIC resolution of IndyMac loans in which UCBH was a participant, UCBH was forced to accept between $0.05 and $0.20 on the dollar from loan sales. Excluding these loans, loans were sold for between $0.50 and $0.60 on the dollar. We also have some other real estate owned sales that received up to 100% on the dollar.

The commercial business portfolio non-performers are comprised of a variety of smaller loans with approximately $1.2 million in average loan size. There's no single industry driving credit migration in this portfolio. The commercial real estate portfolio of non-performers increased by $39.9 million, this increase was driven by a loan located in Arizona and a retail development project located in Nevada that has already been modified and will again be performing in the second quarter.

Generally, we have noticed that in our markets larger properties depended upon retail sales for leasing levels have experienced in most strain so far through the cycle. Fortunately, with an average loan size of $1.8 million these properties are not typical of our portfolio. With regard to total non-performing commercial real estate loans, excluding two non-performing loans from Nevada totaling $28 million, which were identified in the fourth quarter of 2008, forecasted lost content in this portfolio continues to remain low.

Net charge-offs in the first quarter totaled $131.7 million, which was significantly higher than the $43.6 million in the fourth quarter charge-offs. The quarterly net loan charge-off ratio for the entire portfolio was 1.57% in the first quarter compared with 0.5% in the fourth quarter. We expect that quarterly charge-offs in 2009 will remain at an elevated level as we aggressively address our non-performing loan levels.

Construction loan gross charge-offs were $82.2 million compared with $30.9 million in the fourth quarter of 2008 representing 4.28% of the total construction portfolio versus 1.56% in the fourth quarter of 2008. This higher level of charge-offs reflected the sale of residential AD&C loans located primarily in the distressed markets.

Commercial business gross charge-offs totaled $46 million, a $38.3 million increase over fourth quarter 2008. This increase is associated with two loans, first highlighted in the third and fourth quarters of 2008. One loan, associated with fraud has been fully charged off. The second loan has been charged off almost completely pending a final assessment of the underlying collateral values.

Commercial real estate loan charge-offs remain small and represented 11 basis points of outstanding loans in the quarter. Although total delinquencies as a percentage of total loans was effectively flat at 3.13%, in dollar terms it actually declined by $16.4 million. The delinquency trend reflects loan migration to non-performing status with some new past dues appearing in the 30-day bucket. Construction loan delinquencies decreased to $51.2 million at March 31 from $104.9 million at December 31, 2008 bringing the delinquency ratio in construction loans at the end of the first quarter to 3.54% compared with 6.16% at the end of December. Commercial real estate loan delinquencies increased by $25.2 million to $96.1 million at the end of March.

The increase is reflected in the 30 to 89-day categories and nearly all of this was associated with two loans in Los Angeles that were related to a well publicized real estate property developer bankruptcy. The loss content of these two loans are very minimal and they are fully leased properties. We anticipate that total delinquencies as a percentage of loans outstanding will remain elevated through 2009. We are closely monitoring the portfolio and have allocated additional resources to managing the delinquencies in all portfolios.

We continue to carefully manage the growth in our loan portfolio in light of the current economic conditions. In the first quarter new credit extensions totaled $185 million with $57 million coming from commercial business lending and $52 million coming from our consumer lending activities. We have made good progress in our single-family lending programs as we deploy the capital we received under the U.S. Treasury Capital Purchase Program. Eighty-four percent of our new single-family lending volume has been for home purchases and not re-financings.

Loan commitments to borrowers in greater China represented approximately 12% of the total first quarter new commitments. We anticipate that the contribution from China will continue to benefit us as we carefully target our growth in that region. In addition to new loan production, we continue to actively manage our existing portfolio. In addition to the work being performed on the construction portfolio, we have completed the review of the major accounts in each of our commercial real estate and commercial portfolio.

I would now like to turn the discussion to our deposit portfolio. First as year end 2008 balances total deposits remained stable at March 31 and totaled $9 billion. Our efforts to build core deposit balances are gaining momentum as core deposits grew at an 11.1% annualized rate to $2.7 billion. Additionally with a significant portion of our time deposits under $100,000 re-pricing, we are running promotions and offering rates in the upper quartile of the competition to insure deposit retention.

Notably we experienced 6% growth in our CDs less than $100,000 while reducing our CD balances over $100,000 by 7%. Our goal is to continue to grow core deposits in this environment to maintain a comfortable level of liquidity. In addition, our liquidity position is very strong with $2 billion of borrowing capacity. Non-interest bearing deposits increased from the fourth quarter level, in part due to the growth of our signature home loan program, which requires opening a DDA account with a minimum deposit for customers in order to receive a residential mortgage.

Notably we opened a very significant 4,700 plus new checking accounts in the quarter. The average cost of total interest bearing deposits was 2.57% for the first quarter of 2009 compared to 2.9% in the fourth quarter of 2008 and 3.68% for the comparable first quarter of 2008. At quarter end, the cost of deposits was at 2.14%. We anticipate deposit costs to decline further in quarters two and three.

I would now like to address the company's capital position and related developments. Following the two significant capital raises during the fourth quarter, which augmented our already strong capital position, UCBH remains well capitalized. As a reminder, in the fourth quarter we received $298.7 million in new capital under the U.S. Treasury Capital Purchase Program.

The funds are treated as Tier 1 capital. In addition, China Minsheng Banking Corporation completed the second phase of its strategic investment in UCDH, purchasing 6.2 million new shares of the company for total proceeds of $29.9 million. Our Tier 1 capital at the end of March was 12.18% and total risk-based capital was 14.73%. Our capital in excess of the Tier 1 capital minimum is $600.5 million and we had $460 million in excess of the total risk-based capital minimums.

I would now like to turn the call back to Tommy for a discussion of important corporate initiatives and an update on our general outlook for 2009.

Tomas S. Wu

First, I would like to provide an update on the strategic partnership with China Minsheng Banking Corporation Limited. Both China Minsheng Bank and UCBH are fully committed to this strategic partnership and this commitment was reaffirmed by China Minsheng's chairman in an interview he gave Dow Jones on March 10 when he reiterated our company's intention to raise its stake in UCBH to 19% from 10%.

Minsheng has received the necessary approval from the Chinese Regulator, CBRC and we are currently working on the approvals we need from the U.S. regulators. We are moving forward diligently with the business partnership, expanding our cooperation since the closing of step two investment in December 2008. UCBH and Minsheng have been working closely to launch several business partnership initiatives, including Chase Finance Corporation.

UCBH has assigned a credit facility to Minsheng for discounting use in LCs and advising and confirming Minsheng [inaudible] out of China. The trade financing arrangement actually has already been finalized between UCBH and Minsheng and has been executed. Other cooperation includes the bilateral exchange of trade finance offices to further enhance the trade finance business between the two companies and training at UCB for a broader group of Minsheng employees in retail banking, lending and other areas.

Both companies have also started discussion for potential further retail banking partnerships. The operating environment remains exceptionally challenging. Credit concerns continue to be the key focus of management. We are being very aggressive in addressing the credit weakness of our portfolio and boost our reserve ratio to a record 3.3%. We are also moving very quickly to reduce non-performing loans on our balance sheet.

As we look into the second quarter, we anticipate that loan loss provisioning will likely remain high, but most likely be lower than the previous two quarters. Our strategy is to be aggressive in loan loss provisioning in Quarter 1 and Quarter 2 to better position ourselves to return to profitability a lot sooner rather than later. By doing so, this will allow management to focus on the future core of the company.

We expect stable to modest loan growth as new loans volume increases starting the second quarter. Loan growth is expected in commercial real estate, single multi-family residential mortgages and commercial business, both domestically and in the United States and in Greater China. Deposits will continue to grow modestly and will continue to focus on shifting the competition to favor core deposits over time deposits. We will continue to build liquidity through deposit generations.

Capital remains a key focus of the company. We are cognizant of our tangible common capital levels and appreciate its importance to our investors and shareholders. At the same time, we must recognize that we have very strong regulatory capital that we have to factor it into our capital management strategies.

We will continue to give every opportunities and options to optimize our capital structure. The continued economic weakness hinders our ability to provide reasonable and accurate guidance. However, we continue to provide the foreign insight into full year 2009 performance. Loan growth in the range of 4% to 6%, deposit growth in the range of 5% to 8%, non-interest income growth is in the range of 6% to 8%, the core operating expense run rate of $55 million to $58 million per quarter and non-interest margin of 2.95% to 3.1% by year end.

Cost management will also be an ongoing focus in 2009. We will make every effort to drive cost reductions through the region and through the organization while pursuing our growth initiatives. We will continue to manage the companies for the long-term, strengthening our core operations, including our reserves, expanding our capital base and leveraging our unique franchise in Greater China and the major [proximities] in the United States.

UCBH has an outstanding franchise and remains confident that our efforts in 2009 will further enhance our competitive positions, market share and financial potential and then our success will be evident during this fiscal year. This concludes our formal remarks. Thank you again for participating in this call.

I would now like ask the operator to open up the line for any question you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Aaron Deer - Sandler O'Neill.

Aaron Deer – Sandler O'Neill & Partners

I guess first you had some discussion on credit. I'm just curious with the, I've seen the problems move from kind of the distressed single-family home market, now it's moved to the urban condominium market. What's your kind of next area of big concern? You made mention of retail. Are there other areas and how big are each of those exposures?

Thomas S. Wu

Well, I was mentioning retail in terms of the CRE market and that's the market that we are actually having some concerns, or a lot of concerns if you will. But we don't, we have much exposure in those areas. That's the point I was trying to make, okay, I just want to make it very clear.

And then in terms of the condo market in the urban areas I think in the fourth quarter we mentioned that particularly in Los Angeles and San Diego area we do have some concerns. And actually the condo price came down quite a bit in the first quarter, particularly in those two areas.

So, what we have planned is to immediately address these potential problems by recognizing the NPA, so that's why the NPA actually increased quite a bit during the first quarter as a result. And we also monitor our portfolio in the construction of these condo projects in those areas.

And majority of these actually have almost completed, but many of these developer will also be varied in the home sales market, the price, and also many of these condos may be converted to apartments for leasing and rental purposes. So, we're doing all this to continue to minimize the future NPA migration. That's what we are focusing on right now.

Aaron Deer – Sandler O'Neill & Partners

So, the broader commercial real estate portfolio and even I guess the commercial construction, those portfolios are still holding up reasonably well?

Thomas S. Wu

Yes, absolutely.

Aaron Deer – Sandler O'Neill & Partners

And then just one last question on the margin, you mentioned the expectation that it be at 3.95% or so by year end. Is that coming off of the 2.35% or 2.52% base? Do we expect to see that ramp up earlier or late in the year?

Thomas S. Wu

I just want to clarify, 2.95% to 3.1%.

Aaron Deer – Sandler O'Neill & Partners

I'm sorry. I misspoke.

Thomas S. Wu

And actually starting Q4 because in Q4 we have about $2 billion CD will be actually maturing and will be re-priced, Q2 I'm sorry, and Q3 about $1 billion. So, when you look at these metrics so we should expect the maturity of the NIM expansion will happen in Q3 and Q4 as a result.

Operator

Your next question comes from Erika Penala - Bank of America Securities Merrill Lynch.

Erika Penala - Bank of America Securities Merrill Lynch

Can I just ask for more detail on the OREO sale? I was wondering what type of projects were you able to successfully sell. Were these mostly completed projects or were you able to dispose of some land and lot development problem loans?

Thomas S. Wu

It's a mixture of the completed project and also some land and developed AD&C loans, and we also for the most liquid NPA basically a land loan we actually did some lock sales. But for OREO sales a majority of which are actually [verticals] and actually many of those are completed projects. So, those actually have very high I would say in terms of the value. So, some of those actually a couple projects we received 100% on the book value.

Erika Penala - Bank of America Securities Merrill Lynch

And I know that Doug had gone through what you had been able to recover on the dollar. In terms of the weighted average, could you give us a sense on what the ultimate severity ended up realizing on the group of loans that you sold in the first quarter?

Doug Mitchell

Erika, this is Doug. When we were looking at that information we have looked at it relative to carrying book value. The information relative to original par value, I guess for lack of better expression, is perhaps something I could get back to you offline as I don't have it directly in front of me. There's a little bit of challenge when you think about that in terms of which figure you ultimately want to look at from par, whether you're talking commitments or ongoing funding, especially for projects that have been halted. But you and I could maybe talk about that a little bit offline.

Erika Penala - Bank of America Securities Merrill Lynch

And just one follow-up question on capital, Tommy, I know you mentioned that the regulatory capital ratios are still strong, but have you had conversations with the board in terms of looking at the options for potentially reinforcing tangible common ratios and whether or not the ideal method would be either to increase the partnership with Minsheng or the conversion in TARP funds?

Thomas S. Wu

The Minsheng capital definitely will be an option for us to push the common healthy capital level. And as I said, that’s something that we continue to be very focused on. That's something that we continue to be very focused on. We've been [inaudible] on a continued basis and also, as I said, we also must recognize we have excessive regulatory capital at this point. So we have to balance everything out and to optimize the capital structure for our long-term in terms of growth and also what we are addressing today.

Operator

Your next question comes from [John Heck] JMP Securities.

[John Heck] JMP Securities

I was wondering if you could give a little color on the commercial loan portfolio, particularly two things. One is, maybe some color on China and both the origination trends there as well as the credit trends and then second, it looks like there wasn’t a new $40 million in additional loans that were brought into NPO’s during the quarter and can you characterize those in terms of maybe regional characteristics or the type of borrower?

Thomas S. Wu

In terms of China, I think we continue to expect the CNI will continue to grow. Of course, because of the global economy we purposely slowed down a little bit. That’s the prudent management in terms of credit. In terms of credit trends, actually we recognize actually about $20 some million in NPA’s in China during the first quarter. But these credits are fully secured by the real estate and cash. The loss contents are very minimal.

It’s just that between the China GAAP and the U.S. GAAP there are some differences, which we actually would like to recognize in the first quarter in terms of NPA, but we expect the NPA trend will stabilize also in China as well.

[John Heck] JMP Securities

Okay, and then the second question is you mentioned the $2 billion of deposits expiring this quarter. Can you give us the average pricing on those and maybe give us a comparison what current market rates are to give us a sense for where margins might be going on that particular part of the balance sheet?

Thomas S. Wu

Absolutely, we have about $2 billion will be maturing, the CD actually during the quarter. The average cost for those CD between 3.8% or 3.5%. And then just to give you a little bit more color on quarter three, another $1 billion will be mature in Q3. The average cost about 3.8% or 3.9% So the current market for CD for about six to nine months is priced at about 2.5% to 2.6% So we can see there’s a huge differential between what will be maturing in coming quarters and what we will be offering in the current quarters.

Operator

Your next question comes from Jason Goldberg - Barclays Capital.

Jason Goldberg – Barclays Capital

You mentioned the term material weakness. I wondered if you had any discussion with your regulators with respect to their response in terms of a written agreement or MOU or cease and desist order or anything of that nature?

Thomas S. Wu

Anything to do with the regulators is 100% confidential we are not supposed to discuss in public. And also just for your information, we are actually working very aggressively for the remediation, so we are actually seeing very positive progress right now. So we expect to be rid of this issue very quickly.

Jason Goldberg - Barclays Capital

Good to hear. And then I guess secondly, I guess in March you guys put out a release saying operating income pre-provision was running in Q1 ahead of that of Q4. So I guess when you kind of look at the results, net interest income was down, expenses were up, fee income lower. So, I guess, is there anything that happens in the last month of the quarter in particular?

Thomas S. Wu

Yes, I think the allotment, because what it drives down the interest income growth to a [little negative] was because of reversal of the accrued interest for the non-accrual during the months of March. Otherwise the income actually would have been grown. Any color Craig, you want to add?

Craig S. On

Yes, that’s precisely right. First quarter is typically, there is a seasonality factor to our lending, in addition and even though we aren’t seeing any systemic problems in our CNI portfolio, some of the economic malaise is affecting our borrowers, so as they de-leverage, as their cash needs perhaps are being looked at much more tightly also, it impacts the amount of drawdown that they do with us in terms of our lending relationship.

So that really equated to a bottom line a lower average loan balance, which I think is not only something that we felt, but a lot of banks throughout the United States. So those are probably the components that caused, when you mix that all together and get to pre-provision, pre-tax income caused us to fall a little behind where we thought we we’re going to be when we announced where we thought we would be at our last earnings call.

Jason Goldberg - Barclays Capital

Okay, and then, I guess, lastly you mentioned comments that Minsheng made back on March 10. I was wondering if you have any kind of updated discussions with them post the earnings release or if you think the increase in NPA’s would change their view of making an initial investment?

Thomas S. Wu

Well, the chairman of China means, they make it very clear to the public that investment in UCB is very long-term, it is strategic. They’re not buying stock they’re not actually making an investment in the United States for the short-term. So for the fact that they are fully committed in terms of our franchise,

I think they will continue to be fully committed and there’s no reason to believe that they will be backing off at this point because of our current quarter performance, because I think if you read all his public announcements or interviews, particularly, mostly the Dow Jones or in China. They make it very clear, this is long-term and strategic. It’s not buying stock for investments.

Operator

Your next question comes from Lana Chan - BMO Capital Markets.

Lana Chan - BMO Capital Markets

My question is on the construction loan portfolio. When I look at the total loan balances, they're actually not that down, not too much from over the last couple of quarters. I’m surprised about that given what the trends we’re seeing in that portfolio. Why haven’t you contracted that construction book more? Is it just because of the extensions?

Thomas S. Wu

Well, if you’ve noticed, a new origination almost very minimal there’s no new originations, Lana. There is still some funding on some of the good projects, okay, in that portfolio. We need to continue to fund those projects in the portfolio and thus drive the increase in the balance.

Lana Chan with BMO Capital Markets

Okay, and then my follow-up is on the condo construction loans in New York. Are you seeing any signs of weakness in that market right now?

Thomas S. Wu

A little bit of weakness, particularly in the Manhattan area, some of the condos. But because, as I said, many of our projects are basically in Flushing or some in Brooklyn, those condo prices are about $400 something thousand. We still see some slow in terms of (fluxion) but I think the Manhattan area actually got a big weakness right now.

Operator

Your next question comes from James Abbott – FBR Assets Investment.

James Abbott – FBR Capital Markets

I have a handful of questions so maybe I’ll just ask a couple now and circle back later in the call. First of all, on the net charge-off’s can you give us a breakdown, or at least a rough breakdown of how much was attributable to the sales loans, sort of three categories, sales loans, new appraisals of existing non-performing assets that have been there for three or six months or longer. And then the third would be the inflows that are coming into the non-performing bucket into the new arrivals. So that’s my first question and I’ll have a follow-up after that.

Doug Mitchell

Some of the figures there James, we don’t have directly in front of us but when we look at the charge-offs related to loan sales, that would be somewhere in the area of about $50 to $60 million, right around there. Now, the differentiating between, as you were characterizing, longer term NPAs and shorter term NPAs, is a slice that's a little bit harder for us to get in our hands on in particular. So they represent the balance then of the remaining charge-offs. I'd have to get a slice for you maybe offline.

Thomas S. Wu

And also, James, just a little bit more color, right now for any NPAs on some of the projects, we actually adopted appraisal policy that all these loans every six months we have a new appraisal to make sure that we're up-to-date on the value of the project, to make necessary provision or write-down appropriately. Second, we also use the proxy a lot in terms of case [inaudible] information from time-to-time, to make sure that our NPAs and our portfolio, in terms of variations is up-to-date.

James Abbott – FBR Capital Markets

I appreciate that, that's what I was trying to get at, is how much is due to re-appraisals because if you go back six, nine months ago, pretty much all of the banks that were putting assets in the non-accrual categories were taking appraisals and saying they felt that there wasn't going to be much additional loss.

So I'm trying to get at how much things have deteriorated during that period of time, how much of the charge-offs are attributable to what I'll call stale non-performing assets, as opposed to the increase, the in flow into the non-performing bucket this quarter that are brand new non-performing assets.

So, Doug, maybe we can circle back after the call.

My follow-up question is related to the CNI charge-offs, I don’t think that it's been talked about here, if it has I apologize. But can you take us through a little bit of a breakdown of the CNI charge-offs as to what loans they were, how many loans there were in that, if syndicated credits that were involved there or not and so forth?

Doug Mitchell

The charge-offs in the quarter, James, were related primarily to two large commercial loans. These were the ones that we were talking about. We identified one in the third quarter last year, which was a CNI loan related to consumer electronics industry where we determined there was fraud related. That loan was larger, it was somewhere between $20 and $30 million in outstandings. That loan we've charged off in entirety.

The second loan was another loan CNI also had an exposure to the electronics industry. That was one that we had identified that it had some legal issues. There was a patent case that went against the borrower that impacted their business significantly. And so as we've gone through and worked on evaluating collateral support associated with that, we charged that down as well very significantly. And there is a small residual balance outstanding on that loan while we're verifying some final collateral balances, but that one's almost charged off as well.

James Abbott – FBR Capital Markets

And how much was that again, Doug?

Doug Mitchell

I believe we charged off something in the vicinity of $15-ish or so million.

James Abbott – FBR Capital Markets

And are either of those related to the trade finance loans or were those domestic loans that were made prior to the, I guess it was about two or three years ago that UCBH made a big push into trade finance?

Thomas S. Wu

Those loans were actually made many years ago. It's related to the CNI loan in the domestic U.S. market.

Operator

Your next question comes from Julianna Balicka – KBW.

Julianna Balicka – KBW

On the loan portfolio, your total loan portfolio, what is the balance of your impaired, excuse me, I know your impaired loans are non-performing loans. What is the reserve breakdown between impaired and non-impaired loans?

Doug Mitchell

Julianna, so I characterize that between the FAS 114 and the FAS 5 split. I would characterize it 60/40 split, 60 to impaired loans.

Julianna Balicka – KBW

And what is the balance, and I'm sorry if you had stated that earlier in the call, the new non-performing loans this quarter, what is that balance again and what is the reserve associated with those loans?

Doug Mitchell

The net new non-performers were about $160 some odd million somewhere in that area. The total reserves that came in associated with those loans were approximately $75 million.

Julianna Balicka – KBW

And that's net of charge-offs that you had discussed on the previous question with someone else, right?

Doug Mitchell

That's correct.

Julianna Balicka – KBW

And finally, and I'll step back, on the conversion, the preferred…

Doug Mitchell

Julianna, before you ask that one question, I do want to make sure before we move off of that point, it is important to note, when we discuss about the new non-performers as well, the collateral characteristics of what we're talking about, because we're talking about net and gross non-performers, the issue of charge-offs comes up and the charge-offs that came through represent projects that were coming out of the distressed areas that had weaker collateral support.

As Tommy discussed earlier, we're talking about things that are with some vertical, some land-based loans were involved in that, but we continue to get more and more vertical in completed construction running through the portfolio and that is consistent with the new non-performers that have come in. So that when you look at increased vertical and knowing that everything that's come in on the new non-performers is associated with the current appraisal, it's key to remember that that's information that is relative to the reserves that we're putting up against new NPAs.

Thomas S. Wu

What means that because of the verticals, all these new NPAs from the construction are basically verticals, so the potential loss content of these non-performing assets will be very different from those that have been recognized or been sold or been charged off.

Julianna Balicka – KBW

That makes sense, I appreciate that color. And then my final two questions relate to the capital. On the conversion from the preferred, when in the quarter did it happen and what kind of conversion may we expect in the second quarter? And then the second related capital question is just this is a completely theoretical question, but in your conversations with the regulators, do you think they might be friendly to an acquisition by a Chinese bank outright?

And not to imply anything for your independence, but just simply from your conversations with regulators, do you think they have warmed up to foreign owners in the U.S. or anything like that because you have probably the most conversations with them on such topics?

Doug Mitchell

Julianna, let me address your first question. On the preferred stock, there was a holder of our Preferred B Series that performed voluntary conversion of their holdings early on in the quarter that happened towards the beginning of the year. So my ability to predict and forecast holder decisions to convert earlier, that's just out of my control so I can't give you any additional color there.

Thomas S. Wu

For the other question, I don't think it's appropriate for us to discuss publicly for ownership of the company from a foreign institution, so I don't think that's appropriate question for me to answer publicly.

Operator

Your next question comes from Joe Morford – RBC Capital Markets.

Joe Morford – RBC Capital Markets

Most of my stuff's been answer, so just a couple of quick housekeeping things. On the C income side, first quarter relative to fourth it looked commercial banking fees were down from the run rate you've had for a while and then, also there was $1 million foreign exchange loss or something. I just wanted a little additional color on either of those.

Thomas S. Wu

Yes, our fee income on this particularly related China because of Chinese New Year, typically first quarter's a bit slow, so that's the reason.

Craig S. On

The FX adjustment, Joe, is actually the true up of an item that we identified in connection with the 2008 year end close that was determined to be immaterial when you kind of look at immaterial adjustments. So as we typically do, the following month we'll true up. So that $1 million is really composed of a $1.4 million reversal, if you will, of a Q4 over accrual and then the remainder represents kind of our net gains during the year.

I also want to point out that we have, as deemed under the accounting standards, designated the functional and reporting currency of UCB China to now be the Renminbi. So because of that, there is no translation gain or loss coming through from the UCB China into our income statement.

Operator

Your next question is a follow-up from Erika Penala - Bank of America Securities Merrill Lynch.

Erika Penala - Bank of America Securities Merrill Lynch

Tommy, what are your thoughts in participating in the PPIP for legacy loans in terms of ridding yourself of some of these non-performing assets?

Doug Mitchell

Yes, I'll answer that if you don't mind, Tommy. Erika, frankly, as we look at our strategies on non-performing loans and non-performing loan disposition, we are evaluating and entertaining a myriad of different alternatives and strategies, the loan sales that we executed on in the first quarter is definitely a piece of that.

And, as we stated, we'll continue along those lines throughout 2009. Looking at things, whether it's PPIP or even other private structured strategies are things that definitely we'll continue to evaluate. We are sensitive to the level of non-performers and out goal in 2009 is to work those down aggressively.

Erika Penala - Bank of America Securities Merrill Lynch

And I guess my last question is a follow-up on James's question. Of the $93 million loan sale, you said there was the associated charge-off was $60 million?

Craig S. On

Erika, this is Craig On. Actually, the associated charge-off's about just under $50 million.

Erika Penala - Bank of America Securities Merrill Lynch

And then you had the associated OREO expenses both for valuation and for foreclosure expenses, correct?

Craig S. On

That's correct.

Erika Penala - Bank of America Securities Merrill Lynch

And so it's about $0.50 or so to the carrying value, I guess. I'm trying to back into it.

Craig S. On

If you were to, yes, in looking at that and again that's kind of the adjusted book if you will. But that does come in at about $0.50 on the dollar. Please be mindful that $19 million of that represents the additional charge we needed to take on the four IndyMac participation loans that we had to work through the FDIC that was kind of FDIC assisted and they were basically land loans in Bakersfield and in the distressed areas.

Erika Penala - Bank of America Securities Merrill Lynch

What was the dollar, do you have the dollar amount of the, I know Tommy mentioned it was a mix, but do you actually have the dollar amount of the incomplete or land and lot development projects sold?

Thomas S. Wu

We don't have that in front of us.

Operator

Your last question is a follow-up from James Abbott – FBR Asset Investments

James Abbott – FBR Asset Investments

Question is a more strategic one. Would you consider shrinking the balance sheet at this point to try strengthen the capital ratios? And obviously the regulatory ratios are fine but I'm looking at the tangible common equity ratio. It seems appropriate to me to shrink the balance sheet very quickly to help strengthen those but perhaps you have other ideas or other thoughts as to perhaps why I'm wrong.

Doug Mitchell

James, its Doug, we're looking at frankly at all alternatives. We talked about, just a second ago, about what to do with non-performers and strategies that we might be able to employ to aggressively work on those balances. At the same time, we're very focused on evaluating balance sheet management strategies that would have a direct impact on the tangible common ratios as you highlighted, as those are different from some of the certainly the regulatory ratio balances.

And in conjunction with that, as Tommy said, we very much appreciate the focus on that as a ratio. It's something very important to our shareholders and to our investors. And so as we evaluate management our balance sheet management strategies and what we can do and where appropriate to optimize the capital structure, we're evaluating everything. And I think that as we look to 2009, we'll definitely be taking the strategies that make sense for our longer term focus and to the benefit of our shareholders.

James Abbott – FBR Asset Investments

Okay, but the guidance was for a nominal amount of loan growth. I think it was 5% to 6% so should we take that 5% to 6% as subject to change within a short period of time or is that the likely scenario? And if things continue to deteriorate, then you'll consider shrinking the balance sheet? When would you shrink the balance sheet? Let's put it that way.

Doug Mitchell

When we talked about that, one of the key focuses too is of course everything that we do we also want to maintain strong income generation capability and the core balance sheet structure and where our core performances is, is in the loan portfolio as an example, not per say in the securities portfolio.

So when you talk about loan growth, that doesn't per say go one for one with balance sheet growth. But it does go towards our ability to focus on higher yielding and better earning assets. And so, again, we can evaluate all kinds of different things to do with the balance sheet strategy and we are doing so.

James Abbott – FBR Asset Investments

And then a follow-up to a follow-up to a follow-up I guess is you have $670 million of non-performing assets right now, if you were to sell all of them, given some of the pricing metrics that you've talked about, which it looks like you're going to have to sell a fair amount of non-performing loans at this point to try to bring your Texas ratio into line. Could we be seeing a $200 to maybe $400 million worth of net charge-offs imbedded in that number?

Thomas S. Wu

Well, I think it is premature at this point to forecast how much we are going to be losing on those disposals of the NPA's because we're going to be maximizing out the usage of capital in disposal of the non-performing assets. What does this mean? It means that we look at every single project very diligently to determine if we're going to sell, at what price will we sell it? What would make sense to the company? What would make sense to our balance sheet? What would make sense to our shareholders?

So it would be a mistake to just [rush] a number and then apply to the potential charge-off for this NPA because, as I said, some of the new NPA's actually all the new NPA's came into from the construction are basically projects, condo projects almost finished or finished. So the loss potential is not, it's totally different from what we experienced in the past six or nine or 12 months. So things like that, I think we need to look at very carefully, very diligently and at the same time we're not going to be just dumping a couple million dollars of the NPA's into the market.

So that's why we want to look at, do this very carefully. Quarter-to-quarter we'll sell some but we'll continue to be very aggressive in the reduction of the NPA's. And I think that's something that I think everybody needs to put things in the right perspective.

Operator

At this time, there are no further questions in the queue. Please continue.

Thomas S. Wu

Thank you very much again for participating in this call. Should you have any follow-up questions, please feel free to contact any one of us. We appreciate very much and have a nice weekend. Thank you.

Operator

Ladies and gentlemen, this concludes the UCBH Holdings Incorporated first earnings conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3000 or 800-405-2236 with the access code of 11130176 pound. Thank you for your participation, and at this time you may now disconnect.

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