UCBH Holdings Inc. Q2 2008 Earnings Call Transcript

Jul.25.08 | About: UCBH Holdings (UCBH)

UCBH Holdings Inc. (UCBH) Q2 2008 Earnings Call Transcript July 25, 2008 11:00 AM ET

Executives

Doug Sherk- EVC

Tommy Wu - Chairman, President and CEO

Craig On - Interim CFO

John Kerr - CCO

Doug Mitchell - SVP, Corporate Development and IR

Analysts

Andrea Jao - Lehman Brothers

Aaron Deer - Sandler O’Neill

Brett Rabatin - FTN Midwest

Lana Chan - BMO Capital Markets

Erika Penala - Merrill Lynch

James Abbott - FBR Capital Markets

Joe Morford - RBC Capital Markets

Fred Cannon - KBW

Jim Doyle - Cambridge Place Investment Management

Jordan Hymowitz - Philadelphia Financial

Operator

Ladies and gentlemen, thank you for standing by and welcome to the UCBH Holdings Inc second quarter 2008 Earnings Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today Friday July 25, 2008.

I would now like to turn the conference over to Doug Sherk of EVC. Please go ahead sir

Doug Sherk

Thank you, operator, and good morning to everyone. Thank you for joining us today for the UCBH second quarter 2008 conference call and webcast. Before we begin the company's earrings release announcing the second quarter 2008 results was distributed yesterday after the market closed. And 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 passcode of 11115323 followed by the # 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 would 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 risks and uncertainties and other factors that may cause the actual results and performance or achievements of the company to be materially different from future results performance or achievement 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 risks detailed in the documents the company files from time-to-time with the SEC.

We wish to caution you 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-Qs, which have been filed with the SEC. The course of today's call, during the question-answer-period, we would like to ask each participant to limit their question to two each time and then re-queue, if you would like to ask additional questions. In advance, we thank you for the cooperation with this process.

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

Tommy Wu

Thank you, Doug, and good morning to everyone. We appreciate you all turning out this morning for our review of our second quarter 2008 results. On the call with me today is Craig On, our Interim Chief Financial Officer; John Kerr, our Chief Credit Officer; and Doug Mitchell, Senior Vice President, Corporate Development and Investor Relations.

We'll like to begin with a high level review of our second quarter financial result and we'll provide a detail review of our loan portfolio including a more detailed look at the composition of our three largest loan portfolio specifically construction, commercial real estate and commercial business loans.

Finally, we'll provide updates on several other important financial business metrics. We'll conclude with some general thoughts on the market and our outlook for the remainder of 2008. We encourage you to follow our narrative presentation with the slides provided on our webcast, which was available on www.ucbh.com. At the conclusion of our formal remarks, we'll take your questions.

I'll now ask Craig On to begin with a high level overview of our financial results for the second quarter. Craig?

Craig On

Thank you, Tommy, and good morning to everyone on the line. I would like to start by commenting on some of the key financial metrics in the second quarter. Despite the continuing difficulties in the marketplace, our core fundamental earnings power remained strong.

We are pleased to be able to report that our earnings grew over our first quarter 2008 results during this very challenging market environment. We reported net income totaling $7.7 million or $0.7 per share. This compares with $0.02 per share in the first quarter of 2008 and $0.27 per share in the second quarter of 2007.

The quarter was characterized by an expanded net interest yield, which was offset in part by continued weakness in our residential construction loan portfolio in certain distressed areas in California and Nevada and by other than temporary impairment charges on certain available for sale investment securities.

Even with a very large provision in the second quarter and the other than temporary impairment charges, our core earnings per share would have been $0.14 per share without the effect of the accounting rules adjustment, which governs the recording of the other than temporary impairment charges.

Our net interest margin increased 13 basis points from the prior quarter to 3.17%. The improvement in the NIM is primarily the result of the Fed Funds rate cuts that took effect during the first quarter of 2008, as these cuts were reflected in the reprising of our CD portfolio throughout the second quarter. Notably, in this very competitive environment for deposits, we were very successful in building our total deposits even as we were able to improve our NIM.

Our loan loss provision decreased slightly from $35.1 million in the first quarter to $32.6 million in the second quarter and was higher than we initially anticipated. The higher provisioning primarily reflects an increased assessment of loss severity on certain problem loans previously identified during the first quarter. Higher provisions were also necessitated by the high level of charge-offs, as we move aggressively to resolve these problem loans, thus demonstrating our desire to build our reserve ratio in the pace of the continued difficult environment.

Gross charge-offs more than doubled in the second quarter to $26.3 million from the $12.4 million in the first quarter, reflecting further deterioration of land based construction loans primarily in distressed areas in South California and Nevada. We take charge-offs as they are identified and this level of net charge-offs, while high has been anticipated by management.

Non-performing loans increased to $195.9 million or 1.52% of total assets. This compares with $181.4 million or 1.42% of total assets in the first quarter of 2008. I would like to point out that although NPLs have increased somewhat, they are beginning to stabilize. In the first quarter, they jumped $128 million in the second quarter; they increased only $14.6 million.

This significant decrease in the growth of NPLs is reflective of the decrease in volume of newly identified non-performing loans, during the second quarter. This decline had been anticipated by us given the comprehensive nature of the residential construction portfolio review, we conducted during the first quarter of 2008. During Q2, we continue to build our reserves. Our allowance for loan losses to total loans ratio increased to 1.26% from 1.25% in the first quarter of 2008. We plan to continue to increase this ratio throughout 2008.

Allowance for loan losses and the reserve for unfunded commitments excluding cash secured loans were 1.37% at the end of the second quarter 2008. With the aggressive deposit build-up, we had in the second quarter, we brought our net loan to deposit ratio from 102.1% in the first quarter to 98.2% in the second quarter. This represents very solid progress on our goal to bring this ratio down to below 100% and more importantly to keep it there.

Our effective tax rate decreased significantly during Q2, 2008. Nearly all of the reduction to the income tax rate for Q2 versus Q1 was caused by reducing the budgeted pretax income for 2008. Without that reduction the tax rate for Q2 would have been 24.3% compared to 26.8% for Q1. The reduction to the budgeted pretax income caused the effective income tax rate before discreet items to decrease. According to the accounting rules under APB 28 is required a catch up in Q2 that further reduced the Q2 effective income tax rate.

Our capital position was healthy in the first quarter of 2008 and as even stronger now. The strengthening of our ratio reflects the effects of both our issuance of $135 million in non-cumulative perpetual convertible preferred stock as well as our ability to generate positive earnings in the second quarter.

Our tangible equity ratio increased to 5.78% from 5% at the end of March. Our Tier 1 capital increased by 123 basis points to 10.40% and our total risk-based capital ratio increased 126 basis points to 12.81% at the end of June. These levels are well above regulatory minimums and are at levels, we believe offer the support we need to not only continue expanding customer relationships, but also to pursue potential growth opportunities.

At this point, I would like to turn the discussion over to John Kerr to provide an overview of the loan portfolio and related credit profile. John?

John Kerr

Thank you, Craig, and good morning everyone. Gross charge-offs in the second quarter totaled $26.3 million more than double the first quarter charge-offs. Charge-offs came predominantly from construction loans, which increased from $8.6 million in the first quarter to $21 million in the second quarter. The charge-offs were primarily related to land loans or residential construction loans with significant undeveloped land. Charge-offs in the quarter were 1.11% of total construction loans.

Commercial lending charge-offs were approximately $2 million higher in the second quarter of 2008 than they were in the first quarter of 2008. However, we note that commercial lending charge-offs are lumpy in nature and the losses in the second quarter are not symptomatic of a general deteriorating condition in our portfolio. Annualized charge-offs relative to commercial loans for the second quarter, were 56 basis points in line with the banks long-term average for this portfolio.

The growth in non-performing construction loans slowed relative to the growth experienced during the first quarter of 2008. Construction loan NPLs increased to $123.2 million in the first quarter, as a result of our review of the residential construction portfolio. NPL growth slowed in Q2, which was partially attributable to charge-offs.

Our charge-offs and provisions in the second quarter of 2008 were primarily related to distressed market loans that have been previously identified. Projects in distressed areas have been appraised. However, we are also monitoring them closely and they have all been assigned to collection teams. These teams are intermittently involved in every aspect of the properties and proactively manage our collection efforts. This process includes both problem and non-problem loans in the distressed areas.

In Q2, we continued our focus on loans in distressed areas, while devoting more attention to California condo construction most of which is infill projects in major urban areas near the coast. We established a credit management process, whereby by all condo projects have been put through a formal evaluation using external indicators and our internal knowledge of the projects and markets.

The advantage of this approach is that we are now able to continuously monitor the portfolio with evaluations updated at least monthly for an anytime changes occur, which effect an individual project or market. We believe this is more effective then relying solely on point and time appraisals without materially sacrificing accuracy. This process allows us to be more proactive in identifying and managing potential problems.

Our initial conclusion is that there has been some reduction in infill condo prices and lower absorption. However, net asset coverage remained sufficient for the vast majority of the portfolio. Weaker situations had already been identified. Our other loan portfolio CRE, commercial business and consumer showed an improvement in non-performing status. Total non-performing loans as a percentage of total loans stood at 2.27% at the end of the second quarter up slightly from 2.17% in the first quarter.

Total delinquencies, as a percentage of total loans increased 27 basis points to 1.75 percentage at June 30, from 1.48% at the end of March. This increase was mostly driven by construction loan delinquencies, which increased to $93.6 million at June 30 from $44.3 at March 31st resulting in a delinquency ratio of 5.4% compared with 2.72% at the end of the first quarter.

In construction loan, delinquency increase was largely observed in the 90 day past due category, which increased by $58.1 million. This increase was mainly due to the migration of the delinquencies observed during the first quarter migrating from the 30 to 59 day and 60 to 89 day categories.

Majority of this 90 day delinquencies are $52.2 million are related to five borrowers associated with well secured projects. We characterize the potential loss content of these loans, as low. In the 30 to 89 day buckets, we expect about $14 million of the $35 million to roll off shortly from property sales and refinancing.

The delinquency rates of other segments of our portfolio, notably CRE, consumer and multifamily improved in the second quarter versus the first. UCB continues to manage its loan growth prudently in light of current market conditions. We are focusing on strong borrowers and risk adjusted pricing and although we continue to extend loans, it is at a slower pace than in prior years. We have slowed down our pipeline of new loans in 2008, as evidenced by the 19% reduction in loan commitments booked in the second quarter of 2008. 4% of the 14% annualized loan growth for the second quarter was from the Greater China region.

During the second quarter, the number of new problem loans declined relative to the first quarter of 2008. Most of the provisions in charge-offs came from previously identified residential construction loans in distressed areas. Further, deterioration of distressed market ADC loans in the second quarter resulted in higher provisions than anticipated. We are unable to complete all of the loan sales; we planned for the second quarter. There were six construction loan sales in the pipeline during the quarter and one sale that close by the end of the second quarter.

We observe no systemic weakness either in geographic location or by industry in our commercial lending portfolio. In the CRE and multifamily portfolios, credit metrics continued to be strong and charge-offs were low.

At this point, I would like to move into a more detailed discussion of the construction loan portfolio. Construction lending in distressed areas continues to be the source of the majority of our credit problems. Our construction loan portfolio totaled $1.89 billion at June 30 remains well diversified by both location and loan type. 18% of the portfolio is comprised of loans on properties and what we have defined as distressed areas including Riverside, the Central Valley, San Bernardino, Sacramento and Imperial County in Southern California and the high desert in Reno, Nevada. Majority of our loans, 78% of the portfolio on owned properties outside these distressed areas including 35% outside of California and to-date their performance and price value those have been solid.

Turning now to loan type, the credit issues in the product continue to be concentrated in land and acquisition development and construction loans, which have experienced continued declines in evaluation. Our raw land exposure is only 5%. New construction loan commitments totaled $186 million in the second quarter, an increase from $139 million in the first quarter. The majority of these commitments $108 million were based in New York City and in Seattle areas, where we have focused this year.

The New York and Seattle construction markets have remained relatively stable and we see opportunities for continued activity there in the office retail, industrial, and apartment segments of the market. We continue to seek strong borrowers, high quality transactions and good pricing.

I'll now move into a discussion of the commercial portfolios. Our commercial business loan portfolio increased to $2.34 billion in the second quarter. All of our commercial business loan growth has been organic and the portfolio was well diversified by location and by industry. While we do have a significant presence in California, which has been sited as an area of potential C&I problems, due to the slowdown in the economy and rising unemployment rate, our commercial lending there is primarily related to trade finance and is continuing to perform.

Greater China with 35% of the portfolio continues to be a major source of commercial business loan production. This is a unique portfolio and then it has stronger collateral support then typically found in the domestic loan structure specifically approximately 80% of the commercial loans in Greater China are secured by their first liens on real estate or cash. We anticipate that SME loans in Greater China will continue to be a major source of growth.

We do have some exposure to industries that will be affected by the downturn in the economy including the building supply; home furnishing and auto based industries. We closely monitored these segments and are pleased with our portfolios current performance. The first vacation across industry sectors however has helped our commercial portfolio maintain its stability during current economic conditions.

Commercial business commitments totaled $259 million in the second quarter compared with $481 million in the first. We remain very pleased with the progress that we continue to make in building our presence in Greater China. The majority of our new commitments $128 million or 49% in the quarter came from SME lending in the Greater China Region. We also continue to generate new C&I commitments in Southern and Northern California. The area is a greatest trade finance opportunity for our bank.

It is important to note that the overlap with the distressed real estate markets, which is a concentration in our construction portfolio, is minimal in commercial real estate. Our CRE portfolio is performing well and remained strong and well diversified and keeping with our strategy to mitigate the risks in this portfolio by expanding geographically. On a geographical basis, 41% of the portfolio was outside California and only 2% is located in distressed areas.

CRE loans by collateral type display even greater diversity with our largest concentration in retail stores, which make up 19% of the portfolio and offices were 17%. Our new CRE commitments totaled a $167 million down from $250 million in commitments from the first quarter.

As we discussed previously over the past couple of years, we have consciously diversified our loan portfolio away from CRE lending. We are committed to geographical diversification in this portfolio as well. Of $167 million in total commitments $19 million of new loan production came from New York and the North East, $29 million from Southern California, $29 million from the Northwest, $22 million form Northern California and $18 million from Greater China. The largest concentration of new commitments by collateral type came from hotel loans to two very strong borrowers located in New York, California in the Northwest.

Now, I would like to turn the call back to Craig On for an update of some additional second quarter activities and financial results. Craig?

Craig On

Thanks, John. I would like to start to discuss our results by reviewing our investment portfolio. During the second quarter and as a result of the continued weakness in the markets for certain securities, we'll require to recognize other than temporary impairment charges on some of our securities. The bank old Fannie Mae and Freddie Mac preferred stock and it's available for sale investment portfolio.

Given the sharp decline in value on the securities, we'll require to write-down $4.4 million on four Freddie Mac Perpetual Preferred Securities. Additionally, a review of the residual tranche of the internal commercial real estate loan securitization that we completed during 2007 also indicated that a write-down was necessary. As such, we wrote down the book value of the residual by $5 million or 38%.

Finally, a further impairment was identified on one of the CDO trust preferred security bonds that the bank had previously written down during the first quarter. This impairment totaled $1.4 million. At this point, we have written this particular security down approximately 85%.

Outside of the securities that were impacted by other than temporary impairments. The majority of our investment portfolio is highly rated. As you can see on this slide, 99% of the investment portfolio is comprised of investment grade securities. I'll now address UCBH's capital position and related developments from the second quarter.

In June 2008, we completed the sale of a $135 million in non-cumulative convertible preferred stock. The transaction allowed UCBH to further strengthen its capital position to ensure that we can weather the current economic conditions, while continuing to pursue potential growth opportunities. While, we were already well capitalized in terms of regulatory capital requirements, we have been growing our capital aggressively since the fourth quarter of 2007.

Since that time our capital ratios have grown substantially above the regulatory requirements. In two quarters, our Tier I risk-based capital ratio increased by 189 basis points to 10.40% and our total risk-based capital increased by 205 basis points to 12.81%. Also, our tangible equity ratio increased 130 basis points from 4.48% to 5.78% at the end of June.

I'll now discuss our deposits and deposit growth. Our total deposits grew 14% year-over-year, which is our four year compound annual growth rate. However, relative to the first quarter of 2008, total deposits grew at an annualized rate of 30%. Deposits totaled $8.7 billion at June 30, which is up from the $8.1 billion at March 31.

Non interest bearing deposits remained roughly unchanged from the first quarter level with most of the deposit growth coming from time deposits. The increase in time deposits was driven by promotions, we ran this quarter on CD to lock in rates in light of the expectation of rising rates in late 2008 and into 2009. We locked in longer-term deposits of one year or more and our loan to deposit ratio was 98.2% at quarter end. We are very pleased with our results in this area.

Now, I would like to discuss in more detail our second quarter financial performance. Interest income grew 3% year-over-year in a declining rate environment. Core non-interest income was strong in the second quarter increasing 13% over the first quarter of 2008. The increase was driven by higher fee income from commercial banking and trade finance activities as well as service charges on deposits.

We also realized a $1.6 million gain on the sale of securities that resulted, as we began unwinding the leverage strategy that we had put in place in the first quarter of 2008 to hedge our interest rate risk in a declining rate environment. As you can see in the chart, we also recognized a loss in our other equity investment, as a result of changes in our CRA portfolio investments.

As previously noted, the continued decline in illiquidity in the marketplace for certain securities resulted in further write-downs in the investment portfolio totaling $10.9 million. As discussed earlier, we had the temporary impairments on the Freddie Mac preferred stock. The impairment on the residual tranche of our internal CRA securitization and the additional impairment on the CDO.

Net interest income grew 16% year-over-year driven by the interest rate environment organic balance sheet growth as well as the acquisitions of the Chinese American Bank in May of 2007 and UCB China Ltd in December of 2007. Interest expense for the second quarter fell to $88.3 million from $95 million in the first quarter of 2008.

A decline in interest expense on deposits contributed to the overall drop in interest expense, as our CD portfolio, which has a five month average life caught up to the interest rate cuts from the first quarter. This decline in expense occurred concurrent with total deposits growth in the second quarter of 30% on an annualized basis.

In the second quarter, our net interest margin grew 13 basis points from the prior quarter, while both the efficiency ratio and operating leverage exhibited improvements. The decrease in the average loan yield for the quarter from 6.94% in the first quarter to 6.38% in the second quarter was offset by a corresponding decrease in the average cost of deposits from 3.28% at the end of the first quarter to the 2.71% that you can see in the chart at the end of the second quarter.

The performance in deposit management was very strong in the second quarter. Our operating leverage ratio improved as well as revenue growth increased over expense growth. The ratio of 1.08 for the second quarter compares with 0.99 for the first quarter of the year.

I would now like to turn the call back to Tommy Wu for his discussion of our guidance for 2008 and our strategy going forward. Tommy?

Tommy Wu

Thank you, Craig. While the second quarter and indeed the first half of 2008 has been very challenging. I would like to emphasize that the fundamentals and core competent of the UCBH performance remain strong. We continue to generate strong top line core income. Our net interest margin is increasing. Our focus on generating deposits proved effective in the second quarter to bring down the loan to deposit ratio below 100%.

We also further strengthened our already well capitalized provision through the issuance of preferred stock in June of this year. We are now well positioned to weather the current credit cycle and to take advantage of business opportunities, while maintaining our stringent underwriting standard and attractive loan pricing.

The expansion of our branch network across the United State and in Asia has not only given out access to a broader customer base, but also had provided opportunities to diversify our loan portfolio. We'll continue to build our branch network in 2008 yield customer relationships, when and where appropriate in the marketplace.

Our Greater China platform is unique. Our franchise value in Asia continues to grow as our name recognition increases in the region. We are building new relationships everyday and experiencing strong and steady loans and deposit growth among existing and new customers.

At the same time, (inaudible) very carefully and are prudent in our pursuit of good performance and profitability. In light of the rapidly changing business environment, which makes forecasting performance more difficult, we no longer considered the earnings guidance provided during our first quarter earnings call appropriate.

We have revised our outlook for 2008 and providing the following insights on trends, we anticipate for the second half of the year based on the best information that is available today. Most importantly, the company expects that core operating result and top line revenue generating ability will remain solid, as we weather through ongoing challenges in the credit market. We note that our provisioning in the first half of the year has been high, but expect that provisioning in the second half of the year will turndown from the levels experienced during the first half of the year.

Additionally, in the second half of the year NPLs are expected to stabilize or decline moderately from second quarter 2008 level. The bank has a strong balance sheet and we further strengthened its capital position after making additional capital in the second quarter of 2008.

While, we are slowing our loan growth at the end of this cycle, we'll also be able to continue to built customer relationships [putting the] while maintaining stringent underwriting standards and attractive loan pricing. We anticipate full year loan growth between 5% to 10% and full year deposit growth between 8% to 12%. Our net interest margin is expected to remain flat to slightly up from second quarter 2008 level for the remainder of the year. Finally, non-interest expense should remain stable at quarterly run rate of approximately $52 million. Tax rate for the year should be in the range of 16% and 18%.

Our strategy for the second half of the 2008 is basically unchanged. The economic environment remains challenging. The slowdown in the economy continued to affect segments of our market and loan portfolios and we remained cautious with regards to the speed of recovery of the residential construction market in California.

Our other portfolio, commercial, CRE and multifamily remains very strong in credit quality. And as we have discussed in our first quarter call, we are confident that we have the right people and processes in place to identify, monitor and manage potential problems early to mitigate the financial impact to UCBH. The prudent management of loan gross remains a priority. We are still making real estate loans in areas, where it makes the economic sense to do so.

We continue to focus on commercial lending and trade finance; two of our most profitable lines of business and to geographically diversify our real estate portfolio. Credit quality has always been a hallmark of UCBH and we'll continue monitor it very carefully. Our credit quality matches are beginning to stabilize especially related to the NPLs.

We are already seeing a positive effect of our aggressive pursuit of low cost deposits restrictive in expense of our net interest margins. Our ability to generate deposits in today's very challenging environment it's an indicative of the strength of our franchise and the retail network that we have built. We'll continue to leverage on our network to generate deposit to fund for the loan growth in the future.

Our domestic franchise keeps us focused on customer relationships here in the United States. Our relationships are the core cornerstones of our business. Client service and customer satisfaction will always be a top priority at UCBH. Prudent expansion in China, another important area to our future growth and profitability remains very positive. Our unique franchise with UCB China Limited allows us to expand our customer base and market presence there. We look forward to expanding our existing clients and relationships who are doing business across the Pacific Rim and build new ones in the SME market segments in the Mainland China.

The effect of our management of expenses can already be seen in the improvement of our income for the quarter. We'll continue to focus on managing expensing down keeping them as low as possible. The second phase of China Minsheng transaction is scheduled to close this year. In this phase, Minsheng will acquire an additional 5% of UCBH bringing its ownership to 9.9% by the end of the year. The interest of capital coming in from Minsheng before year end 2008 will fortify our already strong capital ratios. In fact, we are currently planning the first phase of the transaction.

One final note, our plan is to name a new CFO to succeed John Downing in the third quarter. We have a couple of strong candidates identified and we plan to conclude the recruitment very shortly.

This concludes our formal remarks. Thank you again for participating in this call. I'll now ask the operator to open up the lines for any questions you may have.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And our first question is from the line of Andrea Jao with Lehman Brothers. Please go ahead.

Craig On

Andrea, Good morning.

Andrea Jao - Lehman Brothers

Good morning, everyone.

Craig On

How are you?

Andrea Jao - Lehman Brothers

Pretty good, thank you. My question is could you remind us what exactly the steps were that you took to make sure that you loan review is thorough therefore giving you confidence that your provisioning will go down and what gives you confidence that non-performers will continue to be stable?

Craig On

John Kerr, can you pick that question please?

John Kerr

Well first of all our view has been fairly comprehensive in the all of the distressed areas and generally in California. We have created some sizeable special assets group to deal with the problem loans and with the lower generation of new business in the market particularly in construction that has freed up our underwriting staffs to manage the problems and get their arms around the loss potential.

As far as the NPLs are concerned some of this will depend on our ability to start moving some assets out of the portfolio and in combine with the charge-offs and so forth we should be able to provide some stability. It is however somewhat depended on our ability to realize on the assets and we are started to get some attraction in that regard.

Andrea Jao - Lehman Brothers

Okay.

Tommy Wu

John, could you also provide as of more color as to what we're doing in terms of within our loan portfolio on a monthly basis that just to put together very, very detail process on the review on an going basis because we believe that once, you do the appraisal at certain point in time because of the continued changes in the marketplace that may not be accurate two months from now. So, we have put in place a much stronger process in place to review our loan portfolio in the construction lending area?

John Kerr

Well to start within the construction portfolio, where we have weaknesses and particularly in the distressed markets and ADC loans, our side group is all over this and they meet weekly discuss every loan that we have in the portfolio and I attend most of those meetings. In terms of the large exposures in California, we do have a lot of condo construction loans mainly in the very urban parts of LA and Central San Francisco and we carried out the evaluation using FDIC approved formats and so forth to do a evaluation using external data from various sources and our knowledge of sales in the local market.

And we covered a 102 projects that we have in California and the result is that the vast majority of these projects are still doing fine and the coverage's are a little bit lower than they were before but we don't lended high LTVs on these small projects anyway. The problem is that we identified and evaluation had largely already been identified previously through our normal process and a number of them already have reserves against the eventual workouts.

Andrea Jao - Lehman Brothers

Thank you very much.

Operator

Thank you. Our next question is from the line of Aaron Deer with Sandler O’Neill. Please go ahead.

Craig On

Aaron, good morning.

Aaron Deer - Sandler O’Neill

Hi, good morning to everyone I guess may this is a follow-up to what Andrea was getting at. But can you talk a little about, what kind of drove the provision in the quarter? I guess I'm wondering obviously you go through a rating process. But, were there other qualitative factors may be you could have ramped up more to kind of maybe to front end more of any expected losses that might have, just kind of clear the way for better earnings picture going forward?

Craig On

Well we deal with things as we become aware of them and see them. But basically what drove the provisions in this quarter was a deteriorating market for the existing ADC loans, which we already had provided for and we decided to take further provisions. We also had mentioned before to sell some of this during the quarter, but only one or two sales happened.

We didn't realize of about $4 million worth of OREOs, which was encouraging. The source of the provisions $22.9 million was in construction, about $3.9 in commercial. Commercial were mainly on accounts that have been problems for sometime, they weren't new account. And they were a small amounts of provisions, CRE with the minimus maybe $100,000 and multifamily about $300 and SBA about $0.05 million.

And then there was, we did have growth in the portfolio with some construction drawdowns and the growth in China, which added about $4.8 million in provisions. So, some of it was good news. Those were good loans we'll put on and any drawdown in construction, it's because of the good loan. If it wasn't a good loan we wouldn't allow the drawdown. So, in the source of charges-offs $22.2 in construction and 90% of those were in distressed areas and most of it was ADC loans. Commercial was about $3 million and there were drips and drapes elsewhere for a total of just over $26, as we mentioned earlier.

Aaron Deer - Sandler O’Neill

All right. And then separately, obviously the deposit gathering it sounds like that's going very well and you got the re-pricing of CD rates, just you are bringing in cost of funds down. It doesn't sound like your expecting a whole lot of margin improvement. What is that there would be holding that back at this point?

Tommy Wu

Holding back what?

Aaron Deer - Sandler O’Neill

Margin expansions.

Tommy Wu

Well because we don't expect the interest rate effect will actually increase the rate actually in the second half of the year. It is our model. So, based on the current Fed fund rate environment and we expect that. And in fact some of the bigger banks like Bank of America actually has been promoting CD at a much higher rate in the marketplace today. I don't know whether you all remember when we did the Investor Day on May 13 in New York, I was telling everybody that we were actually promoting 12 month CD at 3.25% to 3.5% range and we were very successful during the second quarter.

But I can tell you we did it when nobody was doing it at that time. Now, because of the challenging market and even big banks promoting seven month CD at 4.05% APY, so that tells you how proactive we have been in terms of the profit generation in the second quarter to lock in a lot of money for a longer-term to protect our NIM in [effectively] downturn environment. Because we expect rates going to go up at the end of the year or early from 2009 so that partly lock into NIM protection.

But at the same time because of the current economic environment we don't believe, we can't project that fed fund will increase substantially in the second half that's why we just want to keep the guidance on a margins flat or slightly higher in the second half of the year.

Aaron Deer - Sandler O’Neill

Thank you, Tommy.

Tommy Wu

Thank you, Aaron.

Operator

Thank you. Our next question is from the line of Brett Rabatin with FTN Midwest. Please go ahead.

Tommy Wu

Hi, Brett good morning.

Brett Rabatin - FTN Midwest

Good morning Tommy, how are you? I wanted to ask on the construction piece. I'm curious if I heard you correctly you are giving loan growth expectations for 5% to 10%. And I'm curious what you think the percentage of the construction portfolio might be at the end of the year, it sound like you are conservative on construction lending. But at the same time portfolio grew quite a bit this quarter. And so I'm curious if you're still aggressive or optimistic about construction and maybe outside of California or just kind of what's your thought is on the construction portfolio in the second half of the year?

Tommy Wu

Yeah, sure. First of all the construction, new commitment in the second quarter is, are those loans basically we committed early on and those are very strong projects, very strong borrowers, very good pricing that's why we allow them to close those new commitments and most of these actually is in New York and Seattle areas.

In second half of the year, in terms of new loan growth majority of which will be in the areas of trade finance, some CRE, some multifamily, but the most of the trade finance will be in the US and also in the Greater China region. We anticipate the construction lending activities in the second half of the year will go down to a minimum. So, the percentage of new production will also be I think very, very minimal in the construction lending areas in the second half of the year. I just want to make it very, very clear to everybody.

Brett Rabatin - FTN Midwest

Okay. And then the other question I have was, I'm not clear on what the charge-offs were on the new loans that you put on non-accrual this quarter the amount of NPA increase was minimal but the charge-offs were substantial. So, I guess I'm trying to get kind of what the discount rate was on the new loans you move to non-accrual status this quarter?

Craig On

Well, on charge-offs, all of our charge-offs in construction this quarter were related to deals that were already non-accrual in the first quarter. We did have provisions on the new loans that we moved in. However about 60% of the provisions were on increased provisions on loans that has already been identified again most of which were 80 ADC loans in distressed areas, about 40% were on new non-performing loans.

Brett Rabatin - FTN Midwest

Okay. And then and I know, to only ask two. Just one last follow-up what is the specific reserve for impaired loans?

Craig On

The specific reserve for impaired loans is, you are talking about FAS 114?

Brett Rabatin - FTN Midwest

Yes.

Craig On

FAS 114 I believe is…

John Kerr

$27 million

Craig On

$27 million, which is up from $12 million.

Brett Rabatin - FTN Midwest

Okay, great. Thanks for the color.

Craig On

Thank you, Brett.

Operator

Thank you. Our next question is from the line of Lana Chan with BMO Capital Markets. Please go ahead.

Tommy Wu

Hi, Lana, good morning.

Lana Chan - BMO Capital Markets

Hi. Good morning, Tommy. I wanted to see on the portfolio sales that you mentioned John in the second quarter. What kind of discount did you realize on that portfolio sale and what are your expectation for the, I guess, the other five or six that you mentioned possibly closing in the third quarter?

John Kerr

Yeah. Its a little difficulty to predict because the market is so liquid on that particular deal I should tell you it was a bunch of land around Bakersfield, which is not exactly the best market. Their degrees are distressed, I guess that was a…

Craig On

About 35%.

John Kerr

Yeah. I can give you the exact numbers here if you bear with me just a second. On a $4.6 million loan the charge-off was $2.69 million that was pretty severe again it was in one of the worst areas.

Lana Chan - BMO Capital Markets

Okay. And I know it difficult to predict, but do you expect similar types of discount on the other portfolio sales?

John Kerr

May not be quite as severe. Suddenly, we are starting to get some traction and a few more serious buyers approaching. I think the buyers in the cases that sell through they just were quite frankly uncertain what they should pay themselves. And we expect to see that pick up a little bit and we have been approached on one or two properties already.

Lana Chan - BMO Capital Markets

Okay. And I just wanted to clarify on the construction loan book of $1.9 billion outside of the distressed areas and excluding the loans outside of California. How much of those loans, is pretty much within California, have you reappraised?

John Kerr

Well, we have reappraised pretty well everything that's in the distressed area, which is what we are more concerned with anything that shows any weakness we have reappraised and it's a very large percentage. I'm more concerned about covering the major urban areas now to make sure we have a handle on that. We understand the problem loans. What we want to understand is the past loans. So, if anything comes up that could bite us we get very early warning and take early action. That's why I institute an evaluation process because it allows us to virtually monitor the portfolio on a weekly basis.

Lana Chan - BMO Capital Markets

Okay. Thanks, John for the color.

Tommy Wu

Thank you, Lana.

Lana Chan - BMO Capital Markets

Thanks, Tommy.

Operator

Thank you. Our next question is from the line of Erika Penala with Merrill Lynch.

Tommy Wu

Hi, Erika good morning.

Erika Penala - Merrill Lynch

Hi, Tommy. I just wanted to follow-up to Andrea's question and get a little bit more detail on the valuation process. Is this an internal mechanism or you take recent comparables and apply it to your portfolio to monitor the value. And if so is it done through the bank or is there a third party that helps you determine this?

Craig On

It's an internal process that we are using quite a bit of external data. We're in various ways. One is that we are talking with a lot of our contacts with the brokerage houses and appraisal firms and we are looking at published external data on micro markets for example all around the LA area. What if prices done in various types of condos for example in the Pasadena or Venice, whoever they happened to be and we also are looking at stressing each of those evaluation, so we get a feel for how much cushion we have. It's quite a rigorous process and as I say it confirms with FDIC standards.

Erika Penala - Merrill Lynch

And is it based of transactions that have been done in that particular marketplace for that product or are there not enough transactions to be…

Craig On

Well, it's for the most part, for example just to start on the San Francisco area, where we have a lost of exposure the market hasn't deteriorated very much. In fact there are certain areas, where it hasn't deteriorated at all. The economy here is still very strong and land is very restricted here in San Francisco.

The LA area is the vast market. So, even though absorption is slow there is still sales happening. So, we are able to pickup sales information convert it to per square footage and so on and our underwriters are very, very experienced in these markets. So that they are able to add or subtract just as an appraisal would on things like square footage or something's over certain size that may effect the price movements more or less depending on where it is. So, it's actually pretty sophisticated and I really don't think it's any less valid or again its material less valid than what an appraisal would do.

And I don't claim that if you are doing an appraisal of an ADC loan in Fresno somewhere upon a mountain side that we could do it that way. But most of our condo exposure is pretty plain de nevo, its infill projects in the LA area and relatively easy to do.

Erika Penala - Merrill Lynch

And Tommy, if I can ask a question about the timing of the close of the second step of the Minsheng investments? When do you anticipate this closing and what factors are dictating the timing at this point?

Tommy Wu

Well as I said earlier the second step closing will happen before the end of 2008 that's for sure. In fact, I was in Beijing talking to China Minsheng two weeks ago in terms of arranging the logistics of the closing of the step two in the second half of the year. And we don't need new capital at this point in time, but we'll close it before the end of this year.

Operator

Thank you, sir. Ladies and gentlemen's our next question is from the line James Abbott with FBR Capital Markets. Please go ahead.

Tommy Wu

Hi, James.

James Abbott - FBR Capital Markets

Hi, Tommy and how are you?

Tommy Wu

Good morning.

James Abbott - FBR Capital Markets

Good morning. The question that I had is related to on the construction, where you said that you took that real state owned property $4.6 million loan I guess with a $2.7 million charge-off. The charge-off took place this quarter?

Tommy Wu

That yes. That charge off took place in this quarter and not all the provisioning. There had been quite a bit of provision in the first quarter.

James Abbott - FBR Capital Markets

Okay. So, and the reappraisal took place I guess in the first quarter, I'm just trying to understand the timing of how this works?

Craig On

Well that yes, we would have had the appraisal that affected our first quarter results. So, we had taken the charge. I said that the ADC the market for ADC properties that are undeveloped has weaken substantially through the second quarter. And so, we felt that in this particular property we felt that it was appropriate to selling it at this price. This also was a participation we were not the lead bank.

James Abbott - FBR Capital Markets

And had you charged it down at all at the beginning? And if this is not reflective of what is going on in the rest of portfolio then let me know. But had you charged it down at all during the first quarter and so you are taking an additional charge this quarter or are you waiting until the property sell to take the charge-off?

Craig On

As a rule, James, we are not waiting. In this particular case we had, we were taking a hard look at these particular properties to what was appropriate including site visits and so forth and talking with people in the area. So, we hadn't but in the second quarter, we have taken substantial charges against a lot of these properties.

James Abbott - FBR Capital Markets

Okay. And then also on the non-performing assets, when you are taking these fair value adjustments, are you are also adding in some sort of discount or future deterioration and also for selling cost? Some banks were doing that some are not. I 'm just kind of curious as to what approach we use?

Craig On

We don't speculate on the selling cost. But we always take a charge. So, we don't speculate on the price, but we always take a substantial selling cost.

James Abbott - FBR Capital Markets

Okay.

Tommy Wu

Legal costs or the relative expenses are included in the provisioning.

James Abbott - FBR Capital Markets

So, if valuations were to deteriorate another 10% or 15% from here. It would be reasonable to expect there was an additional losses embedded in the portfolio. But if they were to stabilize from here, then probably feel that they are fairly valued then?

Tommy Wu

Well, the way we look at it is James is that. As John mentioned, we looked at all of these project on a monthly basis. We got all the data points from recent sales, from appraisals that we talk to appraisal almost everyday that's how we update our data for the monthly, weekly evaluations.

There are some of the projects there is no data available. We'll do a full appraisal as John indicated earlier. Well, if we believe that we don't have enough provision in the provision, we'll provide additional provision to cover ourselves that's the process, we do it every month.

James Abbott - FBR Capital Markets

Okay, thank you that's I have other questions. But I’ll step back I think I have used my time. Thanks.

Tommy Wu

Thank you. Thank you.

Operator

Thank you. Our next question is from the line of Joe Morford with RBC Capital Markets. Please go ahead.

Tommy Wu

Hi Joe, Good morning.

Joe Morford - RBC Capital Markets

Good morning Tommy and everyone else. Most of my questions have been asked. So, I guess just a couple of follow-ups. Are there any new markets that you are considering distressed markets here in California or any is it on the bubble that you maybe watching a little more closely?

Tommy Wu

Not really, I think John was mentioning that we have already identified what we describe as distressed area starting from Q4 '07 that's why we complete 100% of those that we do those long in those markets. Now, I think we compare that I think the focus for the second quarter was really on all the condo construction in the California to make sure that we continue to feel comfortable with the quality of our portfolio that's what we did what we did and now we have a very, very strong and vigorous process in place to review those loans on a weekly or monthly basis. But so far, we haven't identified any new distressed area at this point in time.

Joe Morford - RBC Capital Markets

Okay, I understand. And I guess the other thing and I -- apology if I missed this. But I just want to clarify what the drag on the margin this quarter was from interest reversals on new NPLs?

Tommy Wu

That's about 13 basis point.

Joe Morford - RBC Capital Markets

13 basis points, okay. Thanks so much Tommy.

Tommy Wu

Thank you, Joe.

Operator

Thank you. Our next question is from the line of Fred Cannon with KBW. Please go ahead.

Tommy Wu

Hi Fred, good morning.

Fred Cannon - KBW

Hi. Good morning Tommy. Hey, just you have really given us a lot of details, so thank you and most of my questions have been answered. Just to clarify on the process you have in place is this the regulators are completely pleased with this process and they are not demanding third party appraisals separate from this process as we go through the back half of the year, just want to clarify that.

Tommy Wu

Don't assume we don't get third party appraisals. Whenever we identify any glitch with the project we get an appraisal and appraisal though is at a point and time. So, I can't get the appraisal once a week or once a month on every property. So, if we see any delay in a project any cost overrun whatever the problem could be we get an immediate appraisal we decide whether we continue to fund and whether we continue to accrue interest. So, we get lots of appraisals.

Fred Cannon - KBW

Okay. So basically if there is a problem you had to pull it out of this process and go ahead and get a third party appraisal?

Tommy Wu

Absolutely

Fred Cannon - KBW

And that's kind of within the regulatory framework that's very acceptable.

Tommy Wu

Absolutely.

Fred Cannon - KBW

Okay, thanks very much.

Tommy Wu

Thanks, Fred.

Operator

Thank you. Our next question is from the line of Sarah Karenski with Cambridge Place Investment Management. Please go ahead.

Tommy Wu

Sarah, how are you? Good morning.

Jim Doyle - Cambridge Place Investment Management

Well actually it's Jim Doyle for Sarah. Hi.

Tommy Wu

Hi. Jim How are you?

Jim Doyle - Cambridge Place Investment Management

Good morning

Tommy Wu

Good morning.

Jim Doyle - Cambridge Place Investment Management

I had two questions first one relates to trust preferred CDOs structured stuff. How big is your entire portfolio structured trust preferred?

Tommy Wu

Would you please hang on a second?

Jim Doyle - Cambridge Place Investment Management

Thank you.

Craig On

This is Craig. Along the total structured trust preferred CDO portfolio is just north of $40 million or $43 million.

Jim Doyle - Cambridge Place Investment Management

And has any --

Craig On

And more of that's before our write-down.

Jim Doyle - Cambridge Place Investment Management

Okay. And you said you worked on two different tranches?

Craig On

We actually we've had on the CDOs. We have actually had two that we began writing down. We took an $11.5 million write-down in Q4 of '07

Jim Doyle - Cambridge Place Investment Management

Okay.

Craig On

And then $3.8 million on the same two corporate's if you will in the first quarter of '08. We had the one of the two that we've taken on additional $1.4 million. So, we are at about $0.15 on the dollar.

Jim Doyle - Cambridge Place Investment Management

Okay, all right. And any of that remaining on July 22, I'm sure where Moody's put a 182 tranches of 72 different trust deals on review mostly at the A level. Are any of the ones you have not reserved against part of that review for downgrade list?

Craig On

We have from what understand, two that are on that list.

Jim Doyle - Cambridge Place Investment Management

Okay. And then the second one is more, it's kind of shows my ignorance really of the greater Chinese legal system and market. Has there been any case law, where a foreign domicile bank has tried to attach the security backing up a secured loan within Greater China or particularly Mainland China?

Tommy Wu

Yes, it has, actually right now, China has a very, very -- I would say good legal process for bank. So, we possibly possess property at court and the court will be the trustees of those assets and they will distribute it to all the creditors. In fact, when we acquired the former business development bank, we have two problem assets, it actually ran for the whole legal process or repossession of properties are secured by the trustees of trust.

And the court system actually already repossess all the properties and actually now is in the part of distributing all the assets back to all the credit including the bank. We have two based up PDP at that time of two problem loans one of which will be actually ROCV to proceed from the court to settle all the outstanding and interest of that particular problem. Now so that's a very strong and good process in place in China already.

Jim Doyle - Cambridge Place Investment Management

Thank you very much for the education, guys.

Tommy Wu

Thank you, Jim.

Operator

Thank you. Our next question is from the line of (inaudible). Please go ahead.

Tommy Wu

Hi Dan. Good morning.

Unidentified Analyst

Good morning. May I ask are you required to hold the Fannie Mae and Freddie Mac reserves?

Tommy Wu

No we aren't.

Craig On

We are not.

Unidentified Analyst

Okay, thank you.

Craig On

Thank you.

Operator

Thank you. Our next question is from the line of Jordon Hymowitz with Philadelphia Financial. Please go ahead.

Jordan Hymowitz - Philadelphia Financial

Hey guys. Couple of quick questions. First, you have given guidance on the provision is going to trend down the rest of this year, you didn't commented on the charge-offs?

Tommy Wu

Yes. On the charge-off we'll also be trending down as well.

Jordan Hymowitz - Philadelphia Financial

So, the charge-offs this quarter will represent a peak for charge-offs?

Tommy Wu

Well I think what I would characterize in the charge-off, I think, I don't know whether its peak. But I think for the second half of the year I think might be go up a little bit in the third quarter and then go down in the fourth quarter.

Jordan Hymowitz - Philadelphia Financial

Or you think the second half will be below the first half?

Tommy Wu

Yes.

Craig On

Well. I think we should compare it to the second quarter rather than the whole first half.

Tommy Wu

Yeah.

Craig On

The charge-offs tend to lag and they lag provision. So, our provisions will start turning down we hope certainly within the next few quarters and our, with some lag the charge-offs will fall along as we identify assets that are likely to be recovered.

Jordan Hymowitz - Philadelphia Financial

Okay. So, net charge-offs up a little bit in Q3 and then down a little bit in Q4?

Craig On

That’s right.

Jordan Hymowitz - Philadelphia Financial

And then, for next year do you have gut sense on what the number will be?

Tommy Wu

In terms of what?

Jordan Hymowitz - Philadelphia Financial

Say that again?

Tommy Wu

We're not providing any guidance at this point in 2009.

Jordan Hymowitz - Philadelphia Financial

Okay. I'd like you to just take a step back at bigger picture. I mean, if we said here in 2010 or 2011, do you still think you are leased to a 1% [RA15 ROE Bank]?

Tommy Wu

2008 and 2010 and 2011, yes, of course, very confidently.

Operator

Thank you, sir. (Operator Instructions)

And we do have a follow-up question from the line of Andrea Jao with Lehman Brothers. Please go ahead.

Tommy Wu

Hi, Andrea

Andrea Jao - Lehman Brothers

Hello again. Hoping to get an update on UCB projects in terms of your joint ventures with China, Minsheng in the Mainland and you have an indication on when we will start seeing the fruits of these projects in the numbers?

Tommy Wu

In the China, we actually doing visit with the China Minsheng already. We have been doing a lot of remittance businesses together, trade finance business. We established correspondent bank lines already. We already established all the wire transfer logistics and also we have actually been participating loans together.

Because, as you know in UCB China Ltd. Our capital is only $1 billion RMB. So we have limited loan to one borrower a limit in the Mainland. So, we've been participating in the large loans together. So, in fact might not be service, okay, as a absolute number that we can benefit from the policy, but indeed without the spend relationship, we couldn't have done what we have done in terms of businesses at UCB China and also UCB USA. So it's coming up and I think maybe it takes another six to one 12 months time to really we can quantify the actual paid benefit of this relationship. But I can tell you we are doing a lot of business together right now.

Andrea Jao - Lehman Brothers

Great and then I believe foreign exchange translation, which were another expenses last quarter was $2.9 million. Do you guys have the number for this quarter?

Craig On

Just above $900,000, Andrea. So, the nature of the expense dropped a little bit as compared to Q1.

Andrea Jao - Lehman Brothers

Okay. And last question how much are total participations. How big is that portfolio in this, you have the number, how much are non-performance?

John Kerr

It was approximately 390 and the percentage, Doug, you recall. I don't usually split it out in credit quite this way.

Andrea Jao - Lehman Brothers

Okay

Tommy Wu

We can provide the information to you offline, Andrea after that.

Andrea Jao - Lehman Brothers

Okay. Thank you.

Operator

Thank you. Ladies and gentlemen our final question is from the line of James Abbott with FBR Capital Markets. Please go ahead.

Tommy Wu

Hi, James, hi.

James Abbott - FBR Capital Markets

Hey, thanks. A couple of quick housekeeping types of things. What is the annual tax credit that UCBH receives, which obviously affects, when you guys do the tax rate, there is a tax credit that you're taking into account there, sales credit.

Craig On

Basically, the components that we watch, kind of descending order of magnitude are the tax exempt interest from our mini bonds that we purchase. Just to give you a little color there, we really began an effort to increase that portfolio in '07. We were probably in the under $300 million range, really started ramping that up end of Q4 2007 and going into 2008 Q1. I think we were about $480 million in terms of our portfolio.

So, that is really the critical component that's allowing us this great impact on the effective tax rate. The second one, our low income housing tax credits. Finally, UCBH income that kind of comes in over the transom is moderately taxed and then most importantly also the translations gains that we have, since we report UCBH on the US dollar. So, those translation gains are very lightly taxed. So, those are the main drivers if you will in our effective tax provision account.

James Abbott - FBR Capital Markets

Okay. I may add the follow-up that latter it sounds little complex. But the other question that I had is on the loans grew in China $130 million, was that primarily cash secured, was it primarily what types of loans was that?

Tommy Wu

Okay. 100% of those loans are actually to the SME markets in China with average loans size from $250,000 to $2.5 million. About 65% of those loans are secured even though it's a C&I loan or trade finance with 65% as secured by real estate, about 15% secured by cash, the remaining 20% is secured by assets and also, for example, some of those loans are actually account receivable are secured by factoring. So, it's pretty well secured portfolio and we feel very, very comfortable with those loans in what which we booked in UCB China.

James Abbott - FBR Capital Markets

And the margin then on those would be a little bit better than cash secured obviously on some of the, Doug, could you give us a sense as to whether, what sort of net interest margin would you expect?

Doug Sherk

Actually it's above 3.5% to 4%.

James Abbott - FBR Capital Markets

Okay. That's very helpful, thank you again.

Craig On

Thank you, James.

Operator

Thank you. Ladies and gentlemen, this does conclude our question-and-answer session for today's call. I would now like to turn it back over to management for any closing remarks.

Tommy Wu

Once again, thank you everybody for participating in this call. Should you have any follow-up questions please feel free to call myself, Doug Mitchell, Craig On and thank you very much. Talk to you later and have a nice weekend.

Operator

Thank you. Ladies and gentlemen, if you would like to listen to a replay of today's conference, you can dial 1800-405-2236 or you can dial 303-590-3000 and enter access code 11115323. This does conclude the UCBH Holdings Inc second quarter 2008 earnings conference call. Ladies and gentlemen, you may now disconnect.

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