UCBH Holdings (UCBH)

 

The housing downturn and financial market disruptions that began in the second half of 2007 have continued to affect the economy and the financial services industry in 2008. The housing market downturn and broader economic slowdown accelerated significantly during the second half of 2008, particularly in the fourth quarter of 2008, and negatively impacted our residential construction loan portfolio. The depth and breadth of the economic downturn remain unclear. However, the Company expects continued market turbulence and economic uncertainty to continue well into 2009. This could result in relatively high levels of loan loss provisioning in future periods.

 

Credit risk is evaluated and managed with a goal that concentrations of credit exposure do not result in undesirable levels of risk. We review, measure, and manage concentrations of credit exposure by industry, product, geography and customer relationship. We have not offered certain mortgage products such as negative amortizing mortgages or option ARM’s. We continually monitor, evaluate and modify our credit underwriting criteria to address unacceptable levels of risk as they are identified. For example, during the latter part of 2007 and for the 2008 year, we tightened credit underwriting standards as we believed appropriate. We shifted our loan origination production mix to significantly more commercial business loans than in prior years, where production included a higher level of construction loans. Even with these credit management processes, we expect the related allowance for loan losses to increase corresponding to the growth in UCB’s loan portfolio. In addition, loan losses may increase due to the effects of the unprecedented economic downturn on credit quality.

 

While loan growth has been substantial over the past several years, UCB has maintained strong credit quality levels. We believe that this has been accomplished through UCB’s conservative credit underwriting criteria and credit risk management processes, which are discussed in more detail in “Credit Risk Management” that follows later in this document. Even with these strong credit management processes, we would expect that if UCB’s loan portfolio continues to increase, the related allowance for loan losses would also increase accordingly. In addition, despite strong underwriting standards and a solid credit culture, loan losses may increase due to the state of the economy.

 

The average loans held in portfolio, total loan charge-offs and the ratios of nonperforming loans to loans held in portfolio, allowance for loan losses to loans held in portfolio and net charge-offs to average loans held in portfolio as of and for the years ended December 31, 2007, 2006, 2005, 2004 and 2003, were as follows (dollars in thousands):

 

 

The increase in nonperforming loans and the allowance to loans held in portfolio ratio is primarily the result of the downturn in the economy the last half of 2007 and the resultant impact on primarily the construction portfolio.

 

 

While loan growth has been substantial over the past several
years, UCB has maintained strong credit quality levels. We
believe that this has been accomplished through UCB’s
conservative credit underwriting criteria and credit risk
management processes, which are discussed in more detail in
“Credit Risk Management” that follows later in this
document. Even with these strong credit management processes, we
would expect that if UCB’s loan portfolio continues to
increase, the related allowance for loan losses would also
increase accordingly. In addition, despite strong underwriting
standards and a solid credit culture, loan losses may increase
due to the state of the economy.

 

The average loans held in portfolio, total loan charge-offs and
the ratios of nonperforming loans to loans held in portfolio,
allowance for loan losses to loans held in portfolio and net
charge-offs to average loans held in portfolio as of and for the
years ended December 31, 2007, 2006, 2005, 2004 and 2003,
were as follows (dollars in thousands):

 

 

The increase in nonperforming loans and the allowance to loans
held in portfolio ratio is primarily the result of the downturn
in the economy the last half of 2007 and the resultant impact on
primarily the construction portfolio.

 

 

While loan growth has been substantial over the past several years, UCB has maintained strong credit quality levels. We believe that this has been accomplished through UCB’s conservative credit underwriting criteria and credit risk management processes, which are discussed in more detail in “Credit Risk Management” that follows later in this document. Even with these strong credit management processes, we would expect that if UCB’s loan portfolio continues to increase, the related allowance for loan losses would also increase accordingly.

 

The average loans held in portfolio, total loan charge-offs and the ratios of nonperforming loans to loans held in portfolio, allowance for loan losses to loans held in portfolio and net charge-offs to average loans held in portfolio as of and for the years ended December 31, 2006, 2005, 2004, 2003 and 2002, were as follows (dollars in thousands):

 

 

The increase in loan charge-offs in 2006 relates primarily to three borrowers whose loans were fully reserved prior to being charged off.