UCBH Holdings 10-K 2009 Documents found in this filing:Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission File Number:
000-24947
UCBH
Holdings, Inc.
(Exact name of registrant as specified in its charter)
Registrants telephone number, including area code:
(415) 315-2800
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $0.01 Per Share
Name of each
exchange on which registered:
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock Purchase Rights
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the common stock held by
non-affiliates of the registrant is $245,025,266 and is based
upon the last sales price as quoted on the NASDAQ Global Select
Market as of June 30, 2008.
As of January 31, 2009, the Registrant had
120,436,096 shares of common stock, par value $0.01 per
share, outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Proxy Statement for the May 21, 2009, Annual Meeting of
Stockholders is incorporated by reference into Part III.
UCBH
HOLDINGS, INC. AND SUBSIDIARIES
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PART I
This document, including information included or incorporated
by reference in this document, contains certain forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements
provide current expectations or forecasts of future events and
include, among other things:
These forward-looking statements are based upon
managements current beliefs and expectations and are not
guarantees of future performance, nor should they be relied upon
as representing managements views as of any subsequent
date. These forward-looking statements are also inherently
subject to significant business, economic and competitive
uncertainties, risks and contingencies, many of which are
difficult to predict and generally beyond managements
control. In addition, these forward-looking statements are
subject to assumptions with respect to future business
strategies and decisions that are subject to change and actual
results, performance or achievements may be materially different
from the anticipated results, performance or achievements
discussed, expressed or implied by these forward-looking
statements. Factors that might cause such differences include,
but are not limited to the following:
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You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of
this document or the date of any document incorporated by
reference in this document. All subsequent written and oral
forward-looking statements concerning matters addressed in this
document and attributable to the Company or any person acting on
the Companys behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to
in this section. Except to the extent required by applicable law
or regulation, the Company undertakes no obligation to update
these forward-looking statements to reflect events, developments
or circumstances after the date of this document or to reflect
the occurrence of future events.
UCBH Holdings, Inc. (UCBH) is a Delaware corporation
incorporated in 1998, and registered with the Board of Governors
of the Federal Reserve System as a bank holding company. UCBH
conducts its principal business through its wholly owned banking
subsidiary, United Commercial Bank (UCB; UCBH, UCB
and UCBs wholly owned subsidiaries are collectively
referred to as the Company, we,
us or our), which makes up substantially
all of our consolidated assets and revenues. UCB is a California
state-chartered commercial bank.
UCB was founded as United Federal Savings and Loan Association
in 1974 to serve the financial needs of the San Francisco
Chinese community. As the Chinese population grew significantly
and expanded into new communities throughout California, we
became United Savings Bank, F.S.B. to provide statewide banking
services. In 1998, reflecting a rapidly growing focus on our
commercial banking capabilities, we converted our charter to
become UCB, a commercial bank. The Company went public on
November 5, 1998, and currently trades on the NASDAQ Global
Select Market (NASDAQ) under the symbol
UCBH.
During 2006, the Company completed its acquisition of Summit
Bank Corporation (Summit), headquartered in Atlanta,
Georgia. As of the acquisition date, Summits total assets
were $887.9 million and total deposits were
$547.6 million. The acquisition included five
branches/offices in Atlanta, Georgia, one branch in Houston,
Texas, two branches/offices in California and a representative
office in Shanghai, China. Additionally during 2006, UCB
established a wholly owned subsidiary, UCB Asset Management,
Inc. (UCBAM), which was created to provide
professional investment management services to
high-net-worth
clients.
In 2007, the Company completed two acquisitions; CAB Holding,
LLC (CAB), the holding company of The Chinese
American Bank, a New York state-chartered bank, and Business
Development Bank Ltd. (BDB), now United Commercial
Bank (China) Limited (UCB China Ltd), a wholly
foreign owned enterprise established and existing under the laws
of the Peoples Republic of China. As of the acquisition
date, CABs total assets were $357.2 million and total
deposits were $312.4 million. The acquisition included
three branches in the New York area. As of the acquisition date,
UCB China Ltds total assets were $338.7 million and
total deposits were $30.5 million. The acquisition included
branches in Shanghai and Shantou, China and representative
offices in Beijing and Guangzhou, China. UCB infused
$65 million in capital into UCB China Ltd at the closing of
the acquisition.
We intend to continue to expand within our existing markets and
move into new markets by developing new product offerings,
opening new branches
and/or
acquiring financial institutions in existing markets, and
entering into
and/or
acquiring financial institutions in other markets with high
concentrations of Asians in keeping with our capital
requirements and management abilities.
We have been expanding to develop a nationwide presence to
provide services to companies doing business in China and to
enhance our local presence in Asian communities. These areas
include the San Francisco Bay Area and the
Sacramento/Stockton, Los Angeles, Atlanta, Boston, Houston, New
York and Seattle metropolitan areas. We currently have fifty-one
branches/offices in the State of California, five in the Atlanta
metropolitan area, three in the Boston metropolitan area, a
branch in Houston, nine in the New York metropolitan area, two
in the Seattle metropolitan area and branches in Hong Kong,
Shanghai and Shantou, China. We also have representative offices
in
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Shenzhen, Beijing, and Guangzhou, China and Taipei, Taiwan. Our
Northern and Southern California locations encompass twenty-nine
and twenty-two branches/offices, respectively.
We have tailored our products and services to meet the financial
needs of the growing Asian communities in our market areas. We
believe that this approach, together with the relationships of
our management and the Companys Board of Directors with
the Asian communities, provides us with an advantage in
competing for customers in these areas.
Through our branch network, we provide a wide range of personal
and commercial banking services to small- and medium-sized
businesses, business executives, professionals and other
individuals. We offer multilingual services to all of our
customers in English, Cantonese and Mandarin.
We offer the following deposit products:
We offer a full complement of loan products, including the
following types of loans:
We also provide a wide range of specialized services, including
merchant bankcard services, cash management services, private
client services, brokerage investment products and services,
business credit card services, foreign exchange services, and
online banking services. In addition, we provide trade finance
facilities for customers involved in the import
and/or
export of goods principally between Asia and the United States.
UCB maintains an Internet banking website at
www.ibankUNITED.com. This website, which is available in
both English and Chinese character versions, provides
information about UCB as well as easy access to business and
personal online banking services, a web-based trade finance
management system and an online information services for home
loans. We believe our website serves as a strong platform to
promote UCB, to cross-sell the products and services that UCB
offers and to deliver advanced online banking services.
UCBH has eleven wholly owned subsidiaries, including UCB. Other
than UCB, the subsidiaries are special purpose trusts that were
either formed by UCBH to issue guaranteed preferred beneficial
interests in UCBHs junior subordinated debentures or
acquired by UCBH in the Summit acquisition.
UCB has ten wholly owned subsidiaries. United Commercial Bank
(China) Limited was acquired during the fourth quarter of 2007.
United Commercial Bank (China) Limited is a foreign owned bank
incorporated in China whose primary business efforts are on the
small and medium size enterprise corporate sector in China,
which include private companies and businesses with annual
revenues in the $7 million to $70 million revenue
range. California Canton International Bank (Cayman) Ltd. which
was acquired as part of the BCC transaction in 2002 provides
banking services and has deposits and assets consisting of cash
and investment securities. UCBIS is a registered broker-dealer
with the United States Securities and Exchange Commission and is
a member of the National
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Association of Securities Dealers, Inc. UCBAM provides
professional investment management services to
high-net-worth
clients. Newston Investments, Inc. owns the office building that
houses UCBs branch in Houston, Texas. Of the remaining
four subsidiaries of UCB, two are inactive, a third, U.F.
Service Corporation acts as a trustee under deeds of trust
securing promissory notes held by UCB and a fourth, United
Commercial Mortgage Securities, LLC is a Delaware limited
liability company organized for the purpose of serving as a
private secondary mortgage market conduit.
The disclosure regarding the Companys segments are
included in Note 32 to the Consolidated Financial
Statements as set forth herein under Item 8.
The banking and financial services industry in California, and
particularly in our market areas, is highly competitive. This is
due in part to changes in regulation, changes in technology and
product delivery systems, and the consolidation of the industry.
We compete for loans, deposits and customers with the following
types of institutions:
Many of our competitors are much larger in terms of total assets
and capitalization, have greater access to capital markets and
may offer a broader array of financial services. To compete with
these financial service providers, we rely on local promotional
activities, personal relationships established by our officers,
bilingual employees to effectively interact with customers and
specialized services tailored to meet our customers needs.
We also have several major competitors targeting Asian customers
in California and other markets in which we compete. These
competitors have branch locations in many of the same
neighborhoods, provide similar services and market their
services in similar Asian publications and media in California.
Additionally, we compete with numerous financial institutions
that do not target the Asian markets in California.
Supervision
and Regulation
Both the Company and UCB are extensively regulated under both
federal and state laws. The following is a summary of selected
laws and regulations that govern the activities of the Company
and UCB. These laws and regulations are intended to protect
depositors, the Federal Deposit Insurance Corporation (the
FDIC) Bank Insurance Fund and the banking system as
a whole, and are not intended to protect security holders.
UCBH is a bank holding company registered with the Board of
Governors of the Federal Reserve System and is subject to the
Bank Holding Company Act of 1956, as amended (the Bank
Holding Company Act), and the regulations of the Board of
Governors of the Federal Reserve System (Federal Reserve
Board). UCBH files quarterly and annual reports with the
Federal Reserve Bank of San Francisco, Banking
Supervision & Regulation Division (Federal
Reserve), as well as any other information that the
Federal Reserve may require under the Bank Holding Company Act.
The Federal Reserve examines UCBH and its non-bank
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subsidiaries. UCBH is also a bank holding company under Delaware
law and, together with UCB, is subject to examination by the
California Department of Financial Institutions (the
DFI).
The Federal Reserve has the authority to require that UCBH stop
an activity, whether conducted directly or through a subsidiary
or affiliate, if the Federal Reserve believes that the activity
poses a significant risk to the financial safety, soundness or
stability of UCB. The Federal Reserve can also regulate
provisions of certain debt instruments issued by bank holding
companies, including imposing ceilings on interest rates and
requiring reserves on such debt. In certain cases, UCBH will be
required to file written notice and obtain approval from the
Federal Reserve before repurchasing or redeeming its equity
securities. Additionally, the Federal Reserve imposes capital
requirements on UCBH as a bank holding company.
As a registered bank holding company, UCBH is required to obtain
the approval of the Federal Reserve before it may acquire all or
substantially all of the assets of any bank, or ownership or
control of the voting shares of any bank if, after giving effect
to such acquisition of shares, UCBH would own or control more
than 5% of the voting shares of such bank. The Bank Holding
Company Act allows UCBH to acquire voting shares of, or interest
in, all or substantially all of the assets of a bank located
outside the State of California, subject to the provisions of
the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994.
UCBH and any subsidiaries which it may acquire or organize are
deemed affiliates of UCB within the meaning of that
term as defined in the Federal Reserve Act and Federal Reserve
Regulation W. This means, for example, that there are
limitations on loans by UCB to affiliates and on investments by
UCB in affiliates stock.
UCBH and any subsidiaries are also subject to certain
restrictions with respect to engaging in non-banking activities,
including the underwriting, public sale and distribution of
securities and many insurance activities. Under the
Gramm-Leach-Bliley Financial Modernization Act of 1999,
qualifying bank holding companies may make an appropriate
election to the Federal Reserve to become a financial
holding company and may then engage in a full range of
financial activities, including insurance, securities and
merchant banking. See Gramm-Leach-Bliley Financial
Modernization Act of 1999 following this discussion.
Although the Company currently qualifies to make the election,
UCBH has not elected to become a financial holding company. UCBH
continues to review its business plan to determine whether it
would benefit from the expanded powers of a financial holding
company status.
As a company with securities registered under the Securities
Exchange Act of 1934, as amended (the Exchange Act),
and listed on NASDAQ, UCBH is also subject to the Sarbanes-Oxley
Act of 2002 and regulation by the SEC and NASDAQ. See the
Sarbanes-Oxley Act of 2002 section, which follows
this discussion.
Bank Regulators. UCB is a California
state-chartered commercial bank and its deposits are insured by
the FDIC up to the applicable legal limits. UCB is supervised,
examined and regulated by the DFI, as well as by the FDIC. In
addition, our wholly owned subsidiary, UCB China Ltd, is subject
to the regulatory oversight of the China Banking Regulatory
Commission in China (CBRC) and by the Hong Kong
Monetary Authority for our Hong Kong branch. Our broker dealer,
UCB Investment Services, is subject to the regulatory oversight
of the Financial Industry Regulatory Authority. Any of these
regulatory agencies may take formal enforcement action if they
determine that the financial condition, capital resources, asset
quality, earnings prospects, management or liquidity aspects of
UCBs operations are unsatisfactory. These agencies may
also take action if UCB or its management is violating or has
violated any law or regulation. No regulator has ever taken any
such action against UCB in the past.
Safety and Soundness Standards. The
FDIC has adopted guidelines that establish standards for safety
and soundness of banks. The Federal Reserve Board has
established safety and soundness guidelines for bank holding
companies. These guidelines are designed to identify potential
safety and soundness problems and ensure that banks address
those concerns before they pose a risk to the deposit insurance
fund. If the FDIC determines that an institution fails to meet
any of these standards, the agency can require the institution
to prepare and submit a plan to come into compliance. If the
agency determines that the plan is unacceptable or not
implemented, the agency must, by order, require the institution
to correct the deficiency.
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The FDIC also has safety and soundness regulations and
accompanying guidelines on asset quality and earnings standards.
The guidelines provide standards for establishing and
maintaining a system to identify problem assets and prevent
those assets from deteriorating. The guidelines also provide
standards for evaluating and monitoring earnings and for
ensuring that earnings are sufficient to maintain adequate
capital and reserves. If an institution fails to comply with a
safety and soundness standard, the agency may require the
institution to submit and implement an acceptable compliance
plan or face enforcement action.
Other Regulations. The activities of
UCB as a consumer lender are also subject to regulations under
various federal laws, including the Truth in Lending Act, the
Equal Credit Opportunity Act, the Fair Credit Reporting Act as
well as the Electronic Fund Transfer Act, the Fair Debt
Collection Practices Act, the Community Reinvestment Act, etc.,
in addition to various state laws. These statutes impose
requirements for providing timely disclosures to customers
primarily in connection with the making, enforcement and
collection of loans.
On February 8, 2006, President Bush signed into law the
Federal Deposit Reform Act of 2005, which reformed the deposit
insurance system. The law merged the Bank Insurance Fund with
the Savings Association Insurance Fund into a new fund, the
Deposit Insurance Fund (DIF). The law also granted
the FDIC Board broad authority in managing the adequacy of the
DIF, including the discretion to price deposit insurance
according to risk for all insured institutions regardless of the
level of reserve ratio.
Prior to the enactment of the law, the FDIC charged annual
assessments to insure a banks deposits that ranged from
zero to $0.27 per $100 of domestic deposits, depending on the
risk that a particular institution poses to the Deposit
Insurance Fund. The final rule, effective January 1, 2007,
consolidates the existing nine risk categories into four and
names them Risk Categories I, II, III, and IV.
Within Risk Category I, the final rule combines supervisory
ratings with other risk measures to differentiate risk. For most
institutions, the final rule combines capital, asset quality,
management, earnings, liquidity, and sensitivity
(CAMELS) components with financial ratios to
determine an institutions assessment rate. For large
institutions that have long-term debt issuer ratings, the final
rule differentiates risk by combining CAMELS component ratings
with these ratings. The final rule defines a large institution
as an institution that has $10 billion or more in assets.
The final rule set actual rates beginning January 1, 2007,
as follows: $0.05 to $0.07 per $100 of domestic deposits for
Risk I Category (most favorable category); $0.10 per $100 for
Risk II Category, $0.28 per $100 for Risk III
Category; and $0.43 per $100 for Risk IV Category.
Currently, UCB is in the Risk I Category.
During 2008, the economic downturn and continuing troubles in
the housing and construction sectors, financial markets, and
commercial real estate have caused failures of FDIC-insured
institutions. These recent failures have caused the reserve
ratio of the DIF to fall below the required minimum threshold.
Because the fund reserve fell below the required minimum and
that the FDIC expects the reserve ratio to remain below the
required minimum for the foreseeable future, the Reform Act
required the FDIC to establish and implement a Restoration Plan
to restore the reserve ratio to at least the required minimum
within five years.
On October 7, 2008, the FDIC established a Restoration Plan
for the DIF. In the FDICs view, restoring the reserve
ratio to at least the required minimum requires an increase in
the deposit insurance assessment rates. Since the current rates
are already three basis points above the existing base rate
schedule, a new rulemaking was required. The rulemaking proposed
that effective January 1, 2009, current assessment rates
would increase uniformly 7 basis points for the first
quarter 2009 assessment period. Effective April 1, 2009,
the rulemaking proposed to alter the way in which the
FDICs risk-based assessment system differentiates for risk
and set new deposit insurance assessment rates. The final rule
on the assessment rate schedule for the first quarter of 2009
raises the current rates by 7 basis points for the
quarterly assessment period beginning January 1, 2009.
On February 27, 2009, the FDIC approved an interim rule to
institute a one-time special assessment of 20 cents per $100 in
domestic deposits to restore the DIF reserves depleted by recent
bank failures. The interim rule additionally reserves the right
of the FDIC to charge an additional up-to-10 basis point
special premium at a later point if the DIF reserves continue to
fall. The FDIC also approved an increase in regular premium
rates for the second quarter of
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2009. For most banks this will be between 12 to 16 basis
points per $100 in domestic deposits. Premiums for the rest of
2009 have not yet been set.
UCB (on a consolidated basis) is subject to the capital
requirements of Part 325 of the FDICs Rules and
Regulations Capital Maintenance. Part 325
includes a framework that is sensitive to differences in risk
between banking institutions. The amount of regulatory capital
that a financial institution is required to have is dependent on
its overall risk profile. The ratio of its regulatory capital to
its risk-weighted assets is called the risk-based capital
ratio. Assets and certain off-balance-sheet items are
allocated into four categories based on the risk inherent of the
asset and are weighted from 0% to 100%. The higher the
risk-weighted asset category, the more risk UCB is subject to
and thus more capital that is required. As of December 31,
2008, UCBs total risk-based capital ratio was 14.24%
compared to 10.80% at December 31, 2007.
The guidelines divide a banks capital into two tiers.
Tier 1 core capital is the sum of its common
stockholders equity, non-cumulative perpetual preferred
stock (including any related surplus), and minority interests in
consolidated subsidiaries, minus all intangible assets (except
for mortgage and nonmortgage servicing assets and eligible
purchased credit card relationships) and minus certain other
items specifically defined by Part 325. Tier 2 capital
includes, among other items, cumulative perpetual and long-term,
limited-life preferred stock, mandatory convertible securities,
certain hybrid capital instruments, term subordinated debt and
the allowance for loan losses (subject to certain limitations).
In addition, certain items are required to be deducted from
Tier 2 capital as specified in Part 325.
Banks must maintain a total risk-based capital ratio of 8%, of
which at least 4% must be Tier 1 capital, to maintain a
status as adequately capitalized as set forth by the
prompt corrective action rules adopted by the FDIC. The
well capitalized levels established by the FDIC are
10% and 6% for total risk-based capital ratio and Tier 1
risk-based capital ratio, respectively.
In addition, the FDIC has regulations prescribing a minimum
Tier 1 leverage ratio (Tier 1 capital to total
adjusted assets, as specified in the regulations). The required
minimum Tier 1 leverage ratio is 3% if the FDIC determines
that the institution is not anticipating or experiencing
significant growth and has well diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and in general is considered a strong
banking organization. Banks that do not meet the conditions for
a 3% minimum must have a minimum Tier 1 leverage ratio of
4%. The FDIC may impose higher limits on individual institutions
when particular circumstances exist, including if a bank is
experiencing or anticipating significant growth. At
December 31, 2008, UCBs Tier 1 leverage ratio
was 9.06% compared to 7.42% at December 31, 2007.
UCB was in compliance with the FDICs capital maintenance
rules as of December 31, 2008 and 2007. For further
discussion of UCBs capital, refer to the Capital
Management section under Managements Discussion and
Analysis incorporated in Part II, Item 7 and
Note 22 to the Consolidated Financial Statements in this
Annual Report on
Form 10-K.
The Federal Deposit Insurance Corporation Improvement Act of
1991 requires the federal banking regulators to take
prompt corrective action against undercapitalized
institutions. The FDIC and the other bank regulatory agencies
have established a framework of supervisory actions for insured
depository institutions that are not adequately capitalized. The
following capital categories have been created to define capital
adequacy:
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Federal banking regulators are required to take prompt
corrective action to resolve the problems of those institutions
that fail to satisfy their minimum capital requirements. As an
institutions capital level falls, the level of
restrictions that can be imposed by the FDIC becomes
increasingly severe and the institution is allowed less
flexibility in its activities.
As of December 31, 2008 and 2007, UCB was well
capitalized under the regulatory framework for prompt
corrective action.
Under the Community Reinvestment Act (the CRA), as
implemented by Part 345 of the FDICs regulations, a
bank has an obligation, consistent with safe and sound
operation, to help meet the credit needs of its entire community
in which an institution is chartered, including low- and
moderate-income neighborhoods. The CRA does not establish
specific lending requirements or programs, nor does it limit a
banks discretion to develop the types of products and
services that it believes are best suited to its community. It
does require that federal banking regulators, when examining an
institution, assess the institutions record of meeting the
credit needs of its community and to take such record into
account in evaluating certain applications. As a state-chartered
non-member bank, UCB is subject to the fair lending requirements
and reporting obligations involving home mortgage and small
business lending operations of the CRA. Federal banking
regulators are required to provide a written examination report
of an institutions CRA performance using a four-tiered
descriptive rating system and these ratings are available to the
public. UCB has received an outstanding rating for
the past four CRA examinations.
The Gramm-Leach-Bliley Financial Modernization Act of 1999 (the
Gramm-Leach-Bliley Act) eliminated most of the
depression-era firewalls between banks, securities
firms and insurance companies, which were established by The
Banking Act of 1933, also known as the Glass-Steagall Act. The
Glass-Steagall Act sought to insulate banks as depository
institutions from the perceived risks of securities dealing and
underwriting, and related activities.
Bank holding companies, which qualify as financial holding
companies, can now, among other things, acquire securities firms
or create them as subsidiaries, and securities firms can now
acquire banks or start banking activities through a financial
holding company. This liberalization of United States banking
and financial services regulation applies both to domestic and
foreign institutions conducting business in the United States.
Consequently, the common ownership of banks, securities firms
and insurance firms is now possible, as is the conduct of
commercial banking, merchant banking, investment management,
securities underwriting and insurance within a single financial
institution using a financial holding company
structure authorized by the Act. As noted earlier, the Company
has not elected to become a financial holding company.
The Gramm-Leach-Bliley Act also requires that federal financial
institutions and securities regulatory agencies respect the
privacy of their customers and protect the security and
confidentiality of customers non-public personal
information. These regulations generally require that financial
institutions:
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Under Title III of the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act (the USA PATRIOT Act) adopted by the
United States Congress on October 26, 2001, which
strengthened the then existing anti-money laundering provisions
of the Bank Secrecy Act, FDIC insured banks are required to
increase their due diligence efforts for correspondent deposit
accounts and private banking customers. The USA PATRIOT Act
requires banks to perform additional record keeping and
reporting, require identification of owners of deposit accounts
and the customers of foreign banks with correspondent deposit
accounts, and restrict or prohibit certain correspondent deposit
accounts. The Financial Crimes Enforcement Network, a bureau of
the Department of Treasury, has also issued regulations to
implement the provisions of the USA PATRIOT Act. UCBs
regulatory compliance in this important area has been found
satisfactory.
The Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley
Act) represents a comprehensive revision of laws affecting
corporate governance, accounting obligations and corporate
reporting. The Sarbanes-Oxley Act is applicable to all companies
with equity or debt securities registered under Section 12
of the Exchange Act. Among other things, the Sarbanes-Oxley Act
establishes:
In addition, the Sarbanes-Oxley Act generally prohibits loans by
the Company to its executive officers and directors. However,
the Sarbanes-Oxley Act contains a specific exception from such
prohibitions for loans by a bank to its executive officers and
directors in compliance with federal banking regulatory
restrictions on such loans. UCBs authority to extend
credit to affiliates is also governed by federal law. Such loans
are required to be made on terms substantially the same as those
offered to unaffiliated individuals and that do not involve more
than the normal risk of repayment. An exception exists for loans
made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does
not give preference to affiliates over other employees. The law
limits both the individual and aggregate amount of loans that
UCB may make to affiliates based, in part, on UCBs capital
position and requires certain board approval procedures to be
followed. For the years presented in this Annual Report on
Form 10-K,
UCBs policy was to make no loans to the Companys and
UCBs executive officers or directors.
Although we have incurred additional accounting and other
expense in complying with the requirements under the
Sarbanes-Oxley Act and the regulations promulgated thereunder,
such compliance has not had a material impact on our results of
operations or financial condition.
The United States federal bank regulatory agencies
risk-based capital guidelines are based upon the 1988 Capital
Accord of the Basel Committee on Banking Supervision (the
Basel Committee). The Basel Committee is a committee
of central banks and bank supervisors/regulators from the major
industrialized countries that develops broad policy guidelines
that each countrys supervisors can use to set the
supervisory policies they apply. In January 2001, the Basel
Committee released a proposal to replace the 1988 Capital Accord
with a new capital framework (the Basel II
Framework) that would set capital requirements for
operational risk and would also materially change the existing
capital requirements for credit risk and market risk exposures.
Operational risk is defined by the proposal to mean the risk of
direct or indirect loss resulting from inadequate or failed
internal processes, people and systems or from external events.
The 1988 Capital Accord does not include separate capital
requirements for operational risk. The Basel II Framework
standard is intended to strengthen the regulation of large,
complex
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banking companies by making their capital requirements more
sensitive to changes in risk. In June 2004, the Basel Committee
issued a new capital accord (the Basel II
Accord) to replace the 1988 Capital Accord. Institutions
can elect not to use the Basel II Framework; however, the
prospect of reductions in risk-based capital requirements under
the Basel II Accord has given rise to competitive equity
concerns among smaller banks and thrifts.
On December 26, 2006, the United States banking regulators
issued proposed rulemaking that revises the existing risk-based
capital framework for those institutions that elect not to use
the Basel II Framework. This new framework is sometimes
referred to as Basel
1-A as it is
anticipated to apply to banks that do not adopt the
international Basel II Accord. The proposed rule would
allow an institution that elected not to adopt the Basel II
Accord to continue using the existing risk-based capital rules
or adopt the new Basel
1-A rules.
The new rules would:
On December 7, 2007 the final rule implementing the
advanced approaches of the Basel II Capital Accord was
published jointly by the United States federal banking agencies.
The final rule establishes regulatory capital requirements and
supervisory expectations for credit and operational risks for
banks that choose or are required to adopt the advanced
approaches of the Basel II Capital Accord. The final rule
retains the three groups of banks identified in the proposed
rule: (i) large or internationally active banks that are
required to adopt advanced capital approaches under
Basel II (core banks); (ii) banks that voluntarily
decide to adopt the advance approaches (opt-in banks); and
(iii) banks that do not adopt the advanced approaches
(general banks), and for which the provisions of the final rule
are inapplicable. The final rule also retains the proposed rule
definition of the core bank as a bank that meets either of two
criteria: (i) consolidated assets of $250 billion or
more, or (ii) consolidated total on-balance sheet foreign
exposure of $10 billion or more. Also, a bank is a core
bank if it is a subsidiary of a bank or bank holding company
that uses advanced approaches. The final rule contains relevant
implementation timeframes for core banks and qualification
requirements that each core and opt-in bank must meet before
using the advanced approaches for risk-based capital purposes.
The final rule is effective April 1, 2008. The agencies
expect to publish in the near future a proposed rule that would
provide all non-core banks with the option to adopt a
standardized approach under the Basel II Capital Accord.
As of the date of this document, the agencies have not published
the final rule governing the adoption of a standardized approach
under the Basel II Capital Accord for all non-core banks.
On February 17, 2009, the American Recovery and
Reinvestment Act of 2009 (ARRA) was signed into law
by President Obama. The ARRA includes a wide variety of programs
intended to stimulate the economy and provide for extensive
infrastructure, energy, health, and education needs. In
addition, the ARRA imposes certain new executive compensation
and corporate expenditure limits on all current and future TARP
recipients, including the Company, until the institution has
repaid the U.S. Treasury, which is now permitted under the
ARRA without penalty and without the need to raise new capital,
subject to the U.S. Treasurys consultation with the
recipients appropriate regulatory agency.
The executive compensation standards are more stringent than
those currently in effect under the TARP Capital Purchase
Program or those previously proposed by the U.S. Treasury.
The new standards include (but are not limited to)
(i) prohibitions on bonuses, retention awards and other
incentive compensation, other than restricted stock grants which
do not fully vest during the TARP period up to one-third of an
employees total annual compensation,
(ii) prohibitions on golden parachute payments for
departure from a company, (iii) an expanded clawback of
bonuses, retention awards, and incentive compensation if payment
is based on materially inaccurate statements of
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earnings, revenues, gains or other criteria,
(iv) prohibitions on compensation plans that encourage
manipulation of reported earnings, (v) retroactive review
of bonuses, retention awards and other compensation previously
provided by TARP recipients if found by the U.S. Treasury
to be inconsistent with the purposes of TARP or otherwise
contrary to public interest, (vi) required establishment of
a company-wide policy regarding excessive or luxury
expenditures, and (vii) inclusion in a
participants proxy statements for annual shareholder
meetings of a nonbinding Say on Pay shareholder vote
on the compensation of executives.
At December 31, 2008, we had 1,542 employees. None of
the employees are covered by a collective bargaining agreement.
The Company believes that the relationship with its employees
are good.
Our corporate Internet address is www.ucbh.com. We make
available free of charge through our Internet website our Annual
Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) of the Exchange Act as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the SEC.
The public may read and copy any materials that the Company
files with the SEC at the SECs Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549. The
public may obtain information on the operation of the Public
Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy
and information statements and other information regarding
issuers that file electronically with the SEC. The Internet
address of the SEC website is www.sec.gov.
The following table sets forth the names, ages and positions of
the executive officers of UCBH and UCB as of December 31,
2008. There are no family relationships between any director or
executive officer and any other director or executive officer of
UCBH or UCB.
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The Chief Executive Officer updates UCBHs and UCBs
Management Succession Plan on an annual basis for review by the
Compensation Committee and the Board of Directors.
Mr. Thomas S. Wu has been Chairman, President, and
Chief Executive Officer of UCBH and UCB since October 10,
2001. Prior to this appointment, Mr. Wu served as President
and Chief Executive Officer of UCB effective January 1,
1998. Prior to that appointment, Mr. Wu was an Executive
Vice President and Director of UCB as of September 25,
1997. Mr. Wu was elected President and Chief Executive
Officer of UCBH effective March 26, 1998, and as a director
of UCBH on April 17, 1998. Previously, Mr. Wu was the
Director of Customer Care for Pacific Link Communications
Limited in Hong Kong where he was responsible for formulating
and implementing customer care, customer retention and customer
communications strategies. Mr. Wu served as a director of
UCB from 1995 to 1996 and was a Senior Vice President, Head of
Retail Banking of UCB from 1992 to 1996, when in addition to
heading up the retail banking division, he directed marketing,
public relations, loan originations, branch administration and
operations control functions. Mr. Wu also served as Vice
President and Regional Manager of UCBs Southern California
Retail Banking Division from 1991 to 1992. Prior to joining
UCBH, Mr. Wu held various banking positions with First
Pacific Bank in Hong Kong, Chase Manhattan Bank, Banque
Nationale De Paris and Standard Chartered Bank.
Mr. Craig S. On was appointed Executive Vice
President and Chief Financial Officer of UCBH and UCB effective
October 23, 2008. Mr. On has been serving as Senior
Vice President and Interim Chief Financial Officer of the
Company since May 2008. Prior to that, he had served as the
Companys Deputy Chief Financial Officer since March 2008,
and Senior Vice President and Corporate Controller since June
2005. Mr. On joined UCB after a twenty-one year career with
the public accounting firm of Deloitte & Touche LLP,
where he served in the capacity of Audit Director and oversaw
the audits of commercial and community banks, investment
management and hedge fund companies, as well as multi-lateral
development banks and mortgage banking organizations.
Mr. Daniel M. Gautsch was appointed Executive Vice
President and Chief Risk and Compliance Officer of UCBH and UCB
effective August 23, 2006. Prior to this appointment,
Mr. Gautsch was Executive Vice President and Director of
Enterprise Risk Management of UCBH and UCB since
February 7, 2005. Prior to joining UCB, Mr. Gautsch
was the Assistant Regional Director, San Francisco Region
of the FDIC responsible for overseeing over 270 insured
institutions in Alaska, Hawaii, Northern California, Oregon,
Washington and the Pacific Rim. His career at the FDIC spanned
more than 30 years during which he served in various
management and other positions.
Mr. William J. Laraia was appointed Executive Vice
President and Director of the New York Region of UCBH and UCB
effective January 1, 2007. Prior to this appointment,
Mr. Laraia was formerly the Chairman, President and Chief
Executive Officer of Great Eastern Bank (GEB). Prior
to serving at GEB, Mr. Laraia served as Chairman and Chief
Executive Officer of Apple Bank for Savings in New York City
from 1991 to 1996 and as Executive Vice President and Group Head
of National Westminster Bancorps Community Banking Group,
where he managed the activities of the retail bank, from 1984 to
1991. Prior to joining National Westminster Bancorp,
Mr. Laraia ran the Long Island Commercial Lending Division
for Chemical Bank.
Ms. Sylvia Loh was appointed Executive Vice
President and Chairman of UCB/China Minsheng Banking Corporation
Strategic Alliance Task Force effective January 2008. Prior to
this appointment, she was Executive Vice President and Chief
Lending Officer of UCBH and UCB since August 1, 2005. Prior
to this appointment, Ms. Loh served as Executive Vice
President and Director of Commercial Banking of UCBH and UCB
from July 1, 2002 to August 1, 2005, and joined UCB as
Vice President and Head of Commercial Banking in January 1996.
From 1992 to 1996, Ms. Loh held the position of Vice
President, Relationship Manager at Bank of America,
International Trade Division.
Mr. Ebrahim Shabudin has been Executive Vice
President and Chief Operating Officer of UCBH and UCB since
August 1, 2005. Prior to this appointment,
Mr. Shabudin served as Executive Vice President and Chief
Credit Officer of UCBH and UCB since January 1, 2004. Prior
to joining UCBH, Mr. Shabudin was the Managing Director of
Credit Risk Management with Deloitte & Touche LLP.
Prior to that, Mr. Shabudin worked for Bank of America in
various management positions for over 25 years with the
most recent experience as a Senior Vice President and Credit
Policy Executive.
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Mr. Ka Wah Tsui has been Executive Vice President
and General Manager, Greater China Region of UCBH and UCB since
January 1, 2005. Prior to this appointment, he served as
Senior Vice President and General Manager of our Hong Kong
Branch since September 2003. Previously, Mr. Tsui held
various management positions at Citibank, First Pacific Bank and
International Bank of Asia in Hong Kong.
Mr. David Yu was appointed Executive Vice President
and Director of the Southeast Region of UCBH and UCB effective
December 30, 2006. Prior to joining UCB, Mr. Yu was
the President of Summit Bank Corporation and Chairman of The
Summit National Bank. Mr. Yu served as President and CEO of
the Company until December 1989, at which time he was elected
Chairman of the Board of Directors of The Summit National Bank.
Mr. Wu was the founder and organizer of the Summit Bank
Corporation and The Summit National Bank. Before organizing the
Summit Bank Corporation and The Summit National Bank,
Mr. Yu worked for The Citizens and Southern National Bank
and First National Bank of Atlanta. From 1976 to 1980,
Mr. Yu was employed as an Assistant National Bank Examiner
by the Office of the Comptroller of the Currency in Atlanta.
Mr. John M. Cinderey was appointed Executive Vice
President and Director of Commercial Banking of UCBH and UCB
effective January 2008. Prior to this appointment, he served as
Senior Vice President and Director of Real Estate Lending since
November 2006 and Senior Vice President and Senior Credit
Approval Officer of the Commercial Banking Division of UCB from
May 2004 to November 2006. Prior to joining UCB,
Mr. Cinderey spent over 20 years with Bank of America
and over 10 years at other financial institutions,
including Mount Diablo National Bank, GMAC Commercial Finance
and Union Bank of California in various management functions.
Mr. John M. Kerr was Executive Vice President and
Director of Portfolio Management and Credit Compliance of UCBH
and UCB as of December 31, 2008. Prior to this appointment,
he served as Senior Vice President and Chief Credit Officer
since October 13, 2005. Prior to joining UCB, Mr. Kerr
served as Senior Portfolio Manager for Primus Financial
Products, an AAA-rated credit insurer in New York and a company
in which he played a key role in building the business from a
start-up in
2002 to its going public in 2004. Prior to that, Mr. Kerr
was with Bank of America for 18 years, where he held senior
positions in credit approval, corporate and commercial banking,
private banking, and international banking. He also spent
11 years with Royal Bank of Canada in business development
and credit in corporate and commercial banking, in strategic
planning, and in international banking.
Mr. Dennis A. Lee has been Senior Vice President and
Corporate Counsel of UCBH and UCB since January 1, 2001.
Prior to that appointment, he served as Vice President and
Corporate Counsel of UCBH and UCB since 1993.
Mr. Jonas B. Miller was appointed Senior Vice
President and Treasurer of UCBH and UCB effective July 27,
2006. Prior to this appointment, he served as Senior Vice
President and Treasurer of UCB from July 27, 2004 to
July 27, 2006 and First Vice President and Treasurer of UCB
from January 1, 2003 to July 27, 2004.
Mr. Douglas J. Mitchell was appointed Senior Vice
President and Director of Corporate Development and Investor
Relations of UCBH and UCB effective March 3, 2008.
Mr. Mitchell joined UCB in 2004 and has been a major
contributor in improving the Banks operations since that
time. Over the past three years, he has helped the Bank
implement many risk management solutions, including the
Allowance for Loan Loss Methodology and Country Risk Management.
He created and led the Business Technology Implementation group,
which is responsible for new technology projects bank-wide,
until it was transferred to IT at the end of 2006. Prior to
joining UCB, Mr. Mitchell first spent seven years with ABN
AMRO Bank in Chicago focusing initially on lending &
retail banking and then on trading risk management, treasury,
and bank ALM. Most recently, he spent seven years helping large
and small banks and financial services companies implement
solutions to risk management, operations, and technical
accounting issues while working for Deloitte & Touche
and Arthur Andersen in their Capital Markets consulting
practices.
Mr. Robert C. Nagel was appointed as Senior Vice
President and Chief Audit Executive of UCBH and UCB effective
July 14, 2008. With 29 years of experience in banking
with major financial institutions, including Wells Fargo, First
Interstate, Union Bank of California and Charles Schwab,
Mr. Nagel was most recently the Head of Internal Audit for
the Charles Schwab Bank in San Francisco. Prior to internal
audit, he held numerous positions including Relationship
Manager, Regional Manager, Senior Credit Administrator and
Director of Credit Review.
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Ms. Martha F. Perry was appointed Senior Vice
President and Director of Financial Planning &
Analysis effective January 2008. Prior to this appointment she
served as First Vice President and Director of Financial
Planning & Analysis since November 2005. With over
35 years of financial services experience, prior to joining
UCB Ms. Perry served as Vice President Finance for the
Charles Schwab Corporation. Prior to that she served as the
Chief Financial Officer for Civic Bank of Commerce, and also
held various positions with the Federal Reserve Bank of
San Francisco and Union Bank of California.
Mr. Burton D. Thompson has been Senior Vice
President and Corporate Controller of UCBH and UCB effective
August 1, 2008. Prior to this appointment, he served as
Senior Vice President and Tax Director for the past two years.
Prior to joining UCB, Mr. Thompson was Controller at
Cosentino Wineries for 1 year, supporting their IPO on the
London AIM exchange. Prior to that he was Controller/CFO at
Charles Krug Winery for three years. That followed 15 years
in public accounting, mainly with Deloitte &
Touches tax practice and with MKF as their director of
assurance services.
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Item 1A. Risk
Factors
The following describes some of the risk factors associated with
UCBH Holdings, Inc. and subsidiaries (collectively referred to
as the Company, we, us and
our):
Banking companies earnings depend largely on the
relationship between the cost of funds, primarily deposits and
borrowings, and the yield on earning assets, primarily loans and
investments. This relationship, known as the interest rate
margin, is subject to fluctuation and is affected by economic
and competitive factors, which influence interest rates, the
volume and mix of interest-earning assets and interest-bearing
liabilities, and the level of nonperforming assets. Fluctuations
in interest rates will also affect the customers demand
for the products and services that we offer.
The Companys operations are subject to fluctuations in
interest rates, to the degree that its interest-bearing
liabilities may reprice or mature more slowly or more rapidly or
on a different basis than their interest-earning assets. Given
our current volume and mix of interest-bearing liabilities and
interest-earning assets, the Companys net interest margin
would be expected to increase during times of rising interest
rates and, conversely, to decline during times of falling
interest rates. As a result, significant fluctuations in
interest rates may have an adverse effect on the Companys
consolidated financial condition and results of operations.
In addition, in a falling interest rate environment, we are
subject to the risk of higher loan prepayments from our loan
portfolio, which in turn may have a negative impact on our net
interest margin.
Given the significance of our business in the United States, we
are particularly exposed to downturns in the U.S. economy.
The dramatic declines in the housing market over the past year,
with falling home prices, increasing foreclosures, and
unemployment, have negatively impacted the credit performance of
mortgage loans and resulted in significant write-downs of asset
values by financial institutions, including government-sponsored
entities and major commercial and investment banks. These
write-downs, initially of mortgage-backed securities but
spreading to credit default swaps and other derivative and
investment securities, in turn, have caused many financial
institutions to seek additional capital, to merge with larger
and stronger institutions and, in some cases, to fail. Due to
the concern about the stability of the financial markets
generally and the strength of counterparties, many lenders and
institutional investors have reduced or ceased providing funding
to borrowers, including to other financial institutions. This
market turmoil and tightening of credit have led to an increased
level of commercial and consumer delinquencies, lack of consumer
confidence, increased market volatility and widespread reduction
of business activity in general. The resulting economic pressure
on consumers and lack of confidence in the financial markets
have adversely affected our business, financial position and
results of operations. We do not expect that the difficult
conditions in the financial markets are likely to improve in the
near future. A worsening of these conditions would likely
exacerbate the adverse effects of these difficult market
conditions on us and others in the financial institutions
industry. In particular, we may face the following risks in
connection with the aforementioned events:
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The capital and credit markets have been experiencing volatility
and disruption since the latter part of 2007. During 2008, such
volatility and disruption reached unprecedented levels. In some
cases, the market disruptions have created downward pressure on
stock prices and credit availability from certain issuers
without regard to those issuers underlying financial
strength. If the current levels of market disruption and
volatility continue or worsen, there can be no assurance that we
will not experience an adverse effect, which may be material, on
our ability to access capital on our domestic and international
businesses, financial position and results of operations.
Management makes various estimates that affect reported amounts
and disclosures in our financial statements. These estimates are
used in measuring the fair value of certain financial
instruments, accounting for goodwill and identifiable
intangibles, establishing our provision for loan losses, valuing
equity-based compensation awards and assessing the realizability
of deferred income taxes. Such estimates are based on available
information and on judgments by management of the Company. As
such, actual results could differ from these estimates and the
differences could have a material effect on our financial
statements.
Where available, fair value is based on observable market prices
or parameters or derived from such prices or parameters. Where
observable prices or inputs are not available, valuations from
outsourced service providers are generally obtained to assist
the company. The valuations performed by the service providers
involve some level of estimation and judgment, the degree of
which is dependent on the price transparency of the financial
instrument being valued and the financial instruments
complexity. In particular, the residual tranche on our
collateralized mortgage backed securities arising from our
commercial real estate loan securitization, certain
collateralized debt obligations and mortgage related asset
backed securities, and certain other investments have no direct
observable prices, and as a result, the related valuations
require significant estimation and judgment and are therefore
subject to significant subjectivity. Reliance on the estimation
and judgment process increases in adverse market conditions with
decreased liquidity, such as those experienced during 2008 and
expected to continue for 2009.
Because the majority of our borrowers and depositors are
individuals and businesses located and doing business in the
states of California, Georgia, Massachusetts, New York, Texas
and Washington, our success depends on the strength of these
economies. In addition, as we expand into other areas in the
United States and into China, we will become increasingly
dependent on the local economies in those markets, as well.
Adverse economic conditions in these markets could reduce our
growth rate, affect the ability of our customers to repay their
loans and generally affect our financial condition and results
of operations. Conditions, such as inflation, recession,
unemployment, high interest rates, short money supply, scarce
natural resources, international disorders, terrorism and other
factors beyond our control, may adversely affect our
profitability. In addition, any sustained period of increased
payment
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delinquencies, foreclosures or losses caused by adverse market
or economic conditions in our markets could adversely affect the
value of our assets, revenues, results of operations and
financial condition.
We expect to experience growth in both loans and deposits as
well as in our level of operations. Achieving our growth targets
will require us to attract customers that currently do business
at other financial institutions in our existing and future
markets. Our ability to successfully grow will depend on a
variety of factors, including our ability to attract and retain
experienced management staff, the continued availability of
desirable business opportunities, the competitive responses from
other financial institutions in our markets and our ability to
effectively manage our growth. While we believe we have the
management resources and internal systems in place to
successfully manage our future growth, there can be no assurance
that we will be able to achieve our growth goals.
Our
continued pace of growth may require us to raise additional
capital in the future, but that capital may not be available
when it is needed.
We are required by federal regulatory authorities to maintain
adequate levels of capital to support our operations. We believe
that our capital resources will satisfy these capital
requirements for the foreseeable future. However, we may at some
point need to raise additional capital to support our continued
growth. Our ability to raise additional capital, if needed, will
depend on conditions in the capital markets at that time, which
are outside our control. Accordingly, we cannot be assured of
our ability to raise additional capital, if needed, on terms
acceptable to us. If we cannot raise additional capital when
needed, our ability to further expand our operations through
internal growth and acquisitions could be materially impaired.
We plan to increase the level of our assets, including our loan
portfolio. Our ability to increase our assets depends in large
part on our ability to attract additional deposits at
competitive rates. We intend to seek additional deposits by
continuing to establish and strengthening our personal
relationships with our existing customers and by offering
deposit products that are competitive with those offered by
other financial institutions in our markets. We cannot provide
assurance that these efforts will be successful. Our inability
to attract additional deposits at competitive rates could have a
material effect on our business, consolidated financial
position, results of operations and cash flows.
We must maintain sufficient funds to respond to the needs of our
depositors and borrowers. As a part of our liquidity management,
we use a number of funding sources in addition to core deposits.
As we continue to grow, we are likely to become more dependent
on these sources, which include Federal Home Loan Bank advances,
proceeds from the sale of loans, brokered certificates of
deposit, federal funds, repurchase lines, and a line of credit
from another financial institution. Our financial flexibility
could be severely constrained if we are unable to maintain our
access to funding or if adequate financing is not available to
accommodate future growth at acceptable interest rates. Finally,
if we are required to rely more heavily on more expensive
funding sources to support future growth, our revenues may not
increase proportionately to cover our costs. In this case, our
operating margins and profitability would be adversely affected.
The Company recorded a $43.1 million writedown on its
investment and mortgage-backed securities available for sale
during 2008. We continue to have exposure in our investment
securities portfolio and as market conditions continue to
evolve, the fair value of these financial instruments could
further deteriorate. In addition, recent market
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volatility has made it difficult to determine the fair value of
certain of our investment securities and mortgage servicing
rights. Further, cashflow shortfalls arising from actual
prepayments and credit defaults exceeding our original estimates
could in turn trigger other-than-temporary impairment in certain
of our investment securities. Subsequent valuations, in light of
factors then prevailing, may result in significant changes in
the value of these investment securities and mortgage servicing
rights in future periods. Any of these factors could require us
to take further writedowns in our investment securities
portfolio, which could adversely affect our results of
operations and regulatory capital in the future.
The banking and financial services business is highly
competitive. Competitive pressure is increasing as a result of
changes in regulation, changes in technology and product
delivery systems, and the accelerating pace of consolidation
among financial service providers. The Company must compete for
loans, deposits and customers with other commercial banks,
savings and loan associations, securities and brokerage
companies, mortgage companies, insurance companies, finance
companies, money market funds, credit unions and other nonbank
financial service providers. Many of these competitors are much
larger in total assets and capitalization, have greater access
to capital markets and offer a broader array of financial
services than we do. There can be no assurance that the Company
will be able to compete effectively in its markets and the
Companys consolidated financial condition and results of
operations could be adversely affected if circumstances
affecting the nature or level of competition change.
The Companys performance and prospects will depend to a
significant extent on the performance of its loan portfolio.
There are a number of factors that could negatively impact the
performance of the loan portfolio including, among others, the
general political and economic conditions in the Companys
markets, significant changes in the mix of our loan products,
significant changes in the interest rate environment, pressures
from products and services from competitors and any negative
changes in the financial condition of the individual borrowers.
In addition, to the extent that the Company does not retain the
customers that it acquires in its acquisitions or incurs
additional expenses in retaining them, there could be adverse
effects on the Companys future consolidated financial
condition and results of operations.
Like all financial institutions, we maintain an allowance for
loan losses to provide for loans in our portfolio that may not
be repaid in their entirety. We believe that our allowance for
loan losses is maintained at a level that is adequate to absorb
probable losses inherent in our loan portfolio as of the
respective balance sheet date. However, our allowance for loan
losses may not be sufficient to cover actual loan losses, and
future provisions for loan losses could materially adversely
affect our operating results.
In the past three years, we have been growing our commercial
business and construction loan portfolios. In addition, with a
significant portion of our loans continuing to be in the state
of California, a decline in local economic conditions could
continue to adversely affect the value of the real estate
collateral securing our loans. A further decline in property
values would diminish our ability to recover on defaulted loans
by selling the real estate collateral, making it more likely
that we would suffer losses on defaulted loans. Additionally, a
further decrease in asset quality could require additions to our
allowance for loan losses through increased provisions for loan
losses, which would reduce our future profits and regulatory
capital. Real estate values are affected by various factors in
addition to local economic conditions, including, among other
things, changes in general or regional economic conditions,
governmental rules or policies and natural disasters.
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The Companys business is highly dependent on our ability
to process, on a daily basis, a large number of transactions
across geographic boundaries, both domestically and
internationally. The Company performs the functions required to
operate in different geographies either on our own or through
agreements with third party service providers. The Company
relies on the ability of its employees and its internal systems
and information systems to process a high volume of
transactions. In the event of a failure or improper operation of
the Company or a third party service providers systems, or
improper action by employees or third parties, the Company could
suffer financial loss, business disruption, regulatory
intervention or reputational damage, which in turn could
adversely impact our financial condition.
We have announced that our future growth strategy could include
acquiring other financial service companies. In addition, we
intend to establish additional overseas offices and branches in
the Asia Pacific region. We could encounter unplanned
difficulties associated with integration of the operations with
new acquisitions or branch expansions. These difficulties could
include retaining customers, successful conversion of systems
and processes, combining different corporate cultures, and
retaining key employees. Any problems with integration would
negatively impact the Companys day-to-day operations and
increase the costs associated with the acquisition/branch
expansion, which, in turn, could negatively affect the
Companys consolidated financial condition and results of
operations.
To the extent we make acquisitions, we face numerous risks and
uncertainties with respect to combining operational, accounting
and data processing systems and management controls, and in
integrating relationships with business partners and customers.
Unexpected transition costs or future operating expenses, as
well as other types of unanticipated issues or developments,
could have an adverse effect on the Companys future
results of operations and financial condition. There is no
assurance that any business we acquire in the future will be
successfully integrated and result in all of the positive
benefits anticipated. If we are not able to integrate
successfully such acquisitions, there is a risk that our results
of operations and financial condition may be materially and
adversely impacted. In addition, there is a risk that the
goodwill arising from any acquisitions could be subject to
potential impairment.
The Company has disclosed its intention to take advantage of
future expansion opportunities. There are risks associated with
such expansion and, in particular, expansion through
acquisitions. These risks include, among others, incorrectly
assessing the asset quality of a bank acquired in a particular
acquisition, encountering greater than anticipated costs of
opening new branches or integrating acquired businesses, facing
resistance from customers or employees, and being unable to
profitably deploy assets acquired through expansion or in
acquisitions. Additional country- and region-specific risks are
associated with any expansion and acquisitions that take place
outside the United States, including in China. To the extent
UCBH issues capital stock in connection with additional
acquisitions, these acquisitions and related stock issuances may
have a dilutive effect on earnings per share and share ownership.
To fund internal growth and future acquisitions, UCBH may offer
shares of its common stock to the public and future acquirees
including to China Minsheng Banking Corp., Ltd. Any such
offerings would have a dilutive effect on earnings per share and
share ownership. In addition, there is no assurance that UCBH
would be able to effectively utilize any additional capital in
the manner that it has done so in the past. UCBH does not
currently have any definitive understandings or plans to raise
additional capital.
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On October 7, 2007, UCBH and China Minsheng Banking Corp.,
Ltd., a Chinese joint stock commercial bank
(Minsheng), entered into an Investment Agreement,
which was amended by a letter agreement dated as of
September 22, 2008 (as so amended the Investment
Agreement). Under the Investment Agreement, upon mutual
consent and regulatory approvals, Minsheng may increase its
ownership to 20.0% (calculated on a post-closing basis). The
issuance of shares to Minsheng may have a dilutive effect on
UCBHs earnings per share as well as change the ownership
control balance of UCBH which may have an impact on the
management of UCBHs operations and future growth.
The banking industry is subject to extensive federal and state
supervision and regulation. Such regulations limit the manner in
which the Company conducts its business, undertakes new
investments and activities, and obtains financing. These
regulations have been designed primarily for the protection of
the deposit insurance funds and consumers, and not to benefit
holders of the Companys common stock. Financial
institution regulation has also been the subject of considerable
legislation in recent years, and may be the subject of further
significant legislation in the future, none of which is within
our control. New legislation or changes in, or repeal of,
existing laws may cause the Companys consolidated results
to differ materially from its historical performance. Further,
federal monetary policy, particularly as implemented through the
Federal Reserve System, significantly affects credit conditions
for financial institutions, primarily through open market
operations in United States government securities, the discount
rate for bank borrowings, and bank reserve requirements. Any
material change in these conditions would likely have a material
impact on the Companys consolidated financial condition
and results of operations.
On October 3, 2008, the Troubled Asset Relief Program
(TARP) was signed into law. TARP gave the Treasury
authority to deploy up to $750 billion into the financial
system with the goal of improving liquidity in the financial
markets. On October 14, 2008, the Treasury announced a
voluntary TARP Capital Purchase Program (the CP
Program), pursuant to which the Treasury may purchase
equity securities of eligible U.S. financial institutions,
to enable such financial institutions to build capital and
increase the flow of financing to U.S. businesses and
consumers and thereby support the U.S. economy.
On November 14, 2008, UCBH issued to the Treasury, in
exchange for aggregate consideration of $298.7 million,
(i) 298,737 shares of UCBHs Fixed Rate
Cumulative Perpetual Preferred Stock, Series C, having a
par value of $0.01 per share and a liquidation preference of
$1,000 per share (the Series C Preferred
Stock), and (ii) a warrant (the Warrant)
to purchase up to 7,847,732 shares of UCBHs common
stock, par value $0.01 per share, at an exercise price of $5.71
per share, subject to certain anti-dilution and other
adjustments.
By participating in the CP Program, the Company is subject to
certain terms and conditions as well as on-going monthly
reporting requirements to the FDIC that could have an impact on
the Companys business. Certain terms and conditions of the
CP Program include restriction of dividend payments to the
Companys shareholders and adopting the Treasury
Departments standards for executive compensation and
corporate governance. The Companys participation in the
program must adopt the Treasury Departments standards for
executive compensation and corporate governance, for the period
during which Treasury holds equity issued under the CP Program.
These standards generally apply to the chief executive officer,
chief financial officer, plus the next three most highly
compensated executive officers.
On February 10, 2009, the U.S. Treasury and the
federal bank regulatory agencies announced in a Joint Statement
a new Financial Stability Plan which would include additional
capital support for banks under a Capital Assistance Program, a
public-private investment fund to address existing bank loan
portfolios and expanded funding for the Federal Reserve
Boards pending Term Asset-Backed Securities Loan Facility
to restart lending and the securitization markets.
On February 17, 2009, the American Recovery and
Reinvestment Act of 2009 (ARRA) was signed into law
by President Obama. The ARRA includes a wide variety of programs
intended to stimulate the economy and provide for extensive
infrastructure, energy, health, and education needs. In
addition, the ARRA imposes certain new executive compensation
and corporate expenditure limits on all current and future TARP
recipients, including the
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Company, until the institution has repaid the
U.S. Treasury, which is now permitted under the ARRA
without penalty and without the need to raise new capital,
subject to the U.S. Treasurys consultation with the
recipients appropriate regulatory agency.
The executive compensation standards are more stringent than
those currently in effect under the TARP Capital Purchase
Program or those previously proposed by the U.S. Treasury.
The new standards include (but are not limited to)
(i) prohibitions on bonuses, retention awards and other
incentive compensation, other than restricted stock grants which
do not fully vest during the TARP period up to one-third of an
employees total annual compensation,
(ii) prohibitions on golden parachute payments for
departure from a company, (iii) an expanded clawback of
bonuses, retention awards, and incentive compensation if payment
is based on materially inaccurate statements of earnings,
revenues, gains or other criteria, (iv) prohibitions on
compensation plans that encourage manipulation of reported
earnings, (v) retroactive review of bonuses, retention
awards and other compensation previously provided by TARP
recipients if found by the U.S. Treasury to be inconsistent
with the purposes of TARP or otherwise contrary to public
interest, (vi) required establishment of a company-wide
policy regarding excessive or luxury expenditures,
and (vii) inclusion in a participants proxy
statements for annual shareholder meetings of a nonbinding
Say on Pay shareholder vote on the compensation of
executives.
On February 23, 2008, the U.S. Treasury and the
federal bank regulatory agencies issued a Joint Statement
providing further guidance with respect to the Capital
Assistance Program (CAP) announced February 10,
2009, including: (i) that the CAP will be initiated on
February 25, 2009 and will include stress test
assessments of major banks and that should the stress
test indicate that an additional capital buffer is
warranted, institutions will have an opportunity to turn first
to private sources of capital; otherwise the temporary capital
buffer will be made available from the government;
(ii) such additional government capital will be in the form
of mandatory convertible preferred shares, which would be
converted into common equity shares only as needed over time to
keep banks in a well-capitalized position and can be retired
under improved financial conditions before the conversion
becomes mandatory; and (iii) previous capital injections
under the TARP Capital Purchase Program will also be eligible to
be exchanged for the mandatory convertible preferred shares. The
conversion of preferred shares to common equity shares would
enable institutions to maintain or enhance the quality of their
capital by increasing their tangible common equity capital
ratios; however, such conversions would necessarily dilute the
interests of existing shareholders.
On February 25, 2009, the first day the CAP program was
initiated, the U.S. Treasury released the actual terms of
the program, stating that the purpose of the CAP is to restore
confidence throughout the financial system that the
nations largest banking institutions have a sufficient
capital cushion against larger than expected future losses,
should they occur due to a more severe economic environment, and
to support lending to creditworthy borrowers. Under the CAP
terms, eligible U.S. banking institutions with assets in
excess of $100 billion on a consolidated basis are required
to participate in coordinated supervisory assessments, which are
forward-looking stress test assessments to evaluate
the capital needs of the institution under a more challenging
economic environment. Should this assessment indicate the need
for the bank to establish an additional capital buffer to
withstand more stressful conditions, these larger institutions
may access the CAP immediately as a means to establish any
necessary additional buffer or they may delay the CAP funding
for six months to raise the capital privately. Eligible
U.S. banking institutions with assets below
$100 billion may also obtain capital from the CAP. The CAP
program does not replace the TARP Capital Purchase Program, but
is an additional program to the TARP Capital Purchase Program,
and is open to eligible institutions regardless of whether they
participated in the TARP Capital Purchase Program. The deadline
to apply to the CAP is May 25, 2009. Recipients of capital
under the CAP will be subject to the same executive compensation
requirements as if they had received TARP Capital Purchase
Program.
Pursuant to the American Recovery and Reinvestment Act of 2009,
further compensation restrictions, including significant
limitations on incentive compensation and golden
parachute payments, have been imposed on the
Companys most highly compensated employees, which may make
it more difficult for the Company to retain and recruit
qualified personnel. Also, the restriction of dividend payments
may result in constraining the Companys future capital
management practices.
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The dividends declared and the accretion on discount on our
outstanding preferred stock will reduce the net income available
to common stockholders and our earnings per common share. Our
outstanding preferred stock will also receive preferential
treatment in the event of liquidation, dissolution or winding up
of the Company. Additionally, the ownership interest of the
existing holders of our common stock will be diluted to the
extent the TARP Warrant is exercised. Although the
U.S. Treasury has agreed not to vote any of the shares of
common stock it receives upon exercise of the TARP Warrant, a
transferee of any portion of the TARP Warrant or of any shares
of common stock acquired upon exercise of the TARP Warrant is
not bound by this restriction.
In addition to the regulatory oversight in the United States of
America, we are subject to regulation in China. As such, we are
subject to intervention by regulatory authorities, such as the
CBRC in China and by the Hong Kong Monetary Authority for our
Hong Kong branch. Among other things, we could be fined,
prohibited from engaging in some of our business activities or
subject to limitations or conditions on our business activities.
Significant regulatory action against the Company could result
in an adverse financial impact, cause significant reputational
harm, or harm the Companys business prospects. New laws or
regulations or changes in the enforcement of existing laws or
regulations applicable to our clients may also adversely impact
the Companys business.
The commercial soundness of many financial institutions may be
closely interrelated as a result of credit, trading, clearing
and other relationships between such institutions. As a result,
concerns about, or a default or threatened default by one
institution could lead to significant market-wide liquidity
problems, losses or defaults by other institutions. This is
sometimes referred to as systemic risk and may
adversely affect financial intermediaries, such as clearing
agencies, clearing houses, banks, securities firms and
exchanges, with which we interact on a daily basis, and
therefore could adversely affect the Company.
During 2008, the economic downturn and continuing turmoil in the
housing and construction sectors, financial markets, and
commercial real estate have caused failures of FDIC-insured
institutions. These recent failures have caused the reserve
ratio of the DIF to fall below the required minimum threshold.
Because the fund reserve fell below the required minimum and
that the FDIC expects the reserve ratio to remain below the
required minimum for the foreseeable future, the Reform Act
required the FDIC to establish and implement a Restoration Plan
to restore the reserve ratio to at least the required minimum
within five years.
On October 7, 2008, the FDIC established a Restoration Plan
for the DIF. In the FDICs view, restoring the reserve
ratio to at least the required minimum requires an increase in
the deposit insurance assessment rates. Since the current rates
are already three basis points above the existing base rate
schedule, a new rulemaking was required. The rulemaking proposed
that effective January 1, 2009, current assessment rates
would increase uniformly 7 basis points for the first
quarter 2009 assessment period. Effective April 1, 2009,
the rulemaking proposed to alter the way in which the
FDICs risk-based assessment system differentiates for risk
and set new deposit insurance assessment rates. The final rule
on the assessment rate schedule for the first quarter of 2009
raises the current rates by 7 basis points for the
quarterly assessment period beginning January 1, 2009.
On October 3, 2008, the Emergency Economic Stabilization
Act of 2008 (EESA) was signed into law. The
legislation was the result of a proposal by the
U.S. Treasury Department to the United States Congress in
September 2008, in response to the financial crises affecting
the banking system and financial markets, as well as the going
concern threats to certain investment banks and other financial
institutions. Pursuant to EESA, the Treasury will have the
authority to, among other things, invest in financial
institutions and deploy up to $750 billion into the
financial system with the goal of improving liquidity in the
financial markets. On October 14, 2008, the Treasury
announced the voluntary TARP Capital Purchase Program (the
CP Program), whereby the Treasury may purchase
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equity securities of eligible U.S. financial institutions,
to enable such financial institutions to build capital and
increase the flow of financing to U.S. businesses and
consumers and thereby support the U.S. economy. In
addition, in November 2008, the Temporary Liquidity Guarantee
Program was enacted, which enables the Federal Deposit Insurance
Corporation to temporarily guarantee newly-issued senior debt of
FDIC insured institutions and their holding companies, as well
as noninterest-bearing deposit transaction accounts. The
behavior of depositors in regard to the new level of FDIC
insurance could cause new customers to open deposit accounts at
UCB. The level of composition of UCBs deposit portfolio
directly impacts UCBs funding cost and net interest
margin. There can be no assurance, however, as to the actual
impact that EESA and these related actions will have on the
financial markets, including the extreme levels of volatility
and limited credit availability currently being experienced. The
failure of EESA and these related actions to help stabilize the
financial markets, coupled with a continuation or worsening of
the current financial markets, could materially and adversely
affect our business, financial position, results of operations,
access to credit, or the trading price of our investment
securities.
Our liquidity is critical to our ability to operate our
business, as well as to allow us to grow and maintain
profitability. The primary sources of funding for our banking
subsidiary include customer deposits and wholesale market-based
funding. A compromise on liquidity can have a significant
negative effect on the Company. Some potential conditions that
could negatively affect the Companys liquidity may be
beyond our control and may be a result of general market
disruption, negative views about the financial services industry
generally, or operational problems that affect third parties,
which in turn affects ourselves. Our ability to raise funding in
the debt or capital markets has been and could continue to be
adversely affected by economic conditions in the United States
and international markets including China. As a result, we may
experience diminished access to capital markets, and unforeseen
outflows of cash, including customer deposits.
As a holding company, UCBH Holdings, Inc. relies on the earnings
of its wholly owned subsidiary, United Commercial Bank, for its
cash flow and consequent ability to pay dividends and satisfy
obligations. The payments by United Commercial Bank typically
take the form of dividends. United Commercial Bank is, in turn,
subject to regulatory capital requirements or other regulatory
or contractual restrictions on its ability to provide such
dividends. Limitations in the dividends that UCBH Holdings, Inc.
receives from United Commercial Bank could negatively affect
UCBH Holdings, Inc.s liquidity position.
The Companys credit ratings are important to our
liquidity. Rating agencies regularly evaluate us and our
investment securities. Their ratings are based on a number of
factors, including our financial strength, as well as factors
not entirely within our control, including conditions affecting
the financial services industry generally. In light of the
difficulties currently being experienced in the financial
services industry and the financial markets, there can be no
assurance that we will maintain our current ratings. Our
inability to maintain those ratings could adversely affect our
liquidity and competitive position, increase our borrowing costs
or limit our access to funding in the capital markets.
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Item 1B. Unresolved
Staff Comments
None.
UCBH Holdings, Inc.s and United Commercial Banks
principal office and headquarters is located at 555 Montgomery
Street in San Francisco, California. UCB also owns an
office building located at 711 Van Ness Avenue in
San Francisco, California. With the acquisition of Summit
Bank Corporation, UCB acquired two buildings. One building in
Atlanta, Georgia, serves as an administrative facility for the
Atlanta banking operations. The other serves as a branch and
administrative facility for the Houston operations, which UCB
owns through its subsidiary, Newston Investments, Inc. With the
acquisition of CAB, UCB acquired two buildings. One building
serves a full-service branch office in Manhattans
Chinatown and the second building serves as a branch in
Flushing, Queens. UCB also owns two buildings in the Boston,
Massachusetts area, which serve as branch and administrative
facilities for the Boston banking operations. In addition, UCB
owns five branch facilities and leases all of its remaining
branch and office facilities under noncancelable operating
leases. Some of these branch leases contain renewal options and
some include rent escalation clauses.
United Commercial Bank has been a party to litigation incidental
to various aspects of its operations, in the ordinary course of
business. Management is not currently aware of any litigation
that in managements opinion will have a material adverse
impact on UCBH Holdings, Inc.s consolidated financial
condition or the results of operations.
Item 4. Submission
of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders or
otherwise for the three months ended December 31, 2008.
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UCBH Holdings, Inc.s (UCBH) common stock is
traded on the NASDAQ Global Select Market (NASDAQ)
under the symbol UCBH. At December 31, 2008,
there were approximately 17,141 stockholders of UCBHs
common stock. The last reported sale price of the common stock
on NASDAQ on January 30, 2009, was $2.33 per share.
The high and low sales prices of UCBHs common stock, as
quoted on NASDAQ, during the years ended December 31, 2008
and 2007, were as follows:
![]()
ZACKS
TOTAL RETURN ANNUAL COMPARISON
NOTE: Data complete through last
fiscal year.
NOTE: Corporate Performance Graph
with peer group uses peer group only performance (excludes only
company).
NOTE: Peer group indices use
beginning of period market capitalization weighting.
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The frequency and amount of dividends paid per common share
during the years ended December 31, 2008 and 2007, were as
follows:
On January 22, 2009, UCBHs Board of Directors
declared a dividend on UCBHs preferred stock. A cash
dividend of $21.25 per share on its 8.50% Non-Cumulative
Perpetual Convertible Series B Preferred Stock was declared
payable on March 16, 2009, to stockholders of record as of
the close of business on February 27, 2009. A cash dividend
of $12.63 per share on Fixed Rate Cumulative Perpetual Preferred
Stock, Series C was declared payable on February 15,
2009, to stockholders of record as of the close of business on
February 5, 2009.
On February 17, 2009, UCBHs Board of Directors
declared a dividend on UCBHs common stock. A cash dividend
of $0.01 per share on the outstanding shares of Common Stock was
declared payable April 13, 2009, to stockholders of record
as of the close of business on March 31, 2009.
Unregistered
Sales of Equity Securities
None.
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Item 6. Selected
Financial Data
The following selected financial data should be read in
conjunction with the UCBH Holdings, Inc. and subsidiaries
consolidated financial statements and the accompanying notes
presented elsewhere in this Annual Report on
Form 10-K
(dollars in thousands, except per share amounts):
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UCBH Holdings, Inc. (UCBH) and its consolidated
subsidiaries (collectively referred to as the
Company, we, us or
our) is a $13.50 billion bank holding company
with headquarters in San Francisco, California. The
Companys operations are conducted primarily through its
banking subsidiary, United Commercial Bank (UCB).
UCB operates through seventy-eight offices and branches in the
United States and Asia and is a leader in providing financial
services to Asians in the United States. At December 31,
2008, we had seventy-one domestic branches and offices;
twenty-nine in Northern California, twenty-two in Southern
California, five in the Atlanta metropolitan area, three in the
Boston metropolitan area, nine in the New York metropolitan
area, two in the Seattle metropolitan area and one branch in
Houston. UCB also has offices and branches in Hong Kong,
Shanghai and Shantou, China and representative offices in
Beijing, Guangzhou and Shenzhen, China and Taipei, Taiwan.
In providing its services, UCB has two primary goals:
UCB has established and intends to continue establishing
branches in areas of high Asian population concentration to
attract retail deposits through new branch openings as well as
through acquisitions.
Currently, UCB has offices and branches in Hong Kong, Shanghai
and Shantou, China and representative offices in Beijing,
Guangzhou and Shenzhen, China and Taipei, Taiwan. Our fully
operational Hong Kong, Shanghai and Shantou branches are
authorized to conduct a complete range of banking operations,
including offering deposit, foreign exchange and remittance
services, issuing cashier orders, and providing trade finance,
commercial banking and lending services. Our representative
offices on the other hand, cannot conduct any profit generating
banking business and are restricted to the specific activities
that have been approved by the local banking authorities of
their respective country, such as providing market research and
acting in the capacity of a liaison to existing bank customers.
As of December 31, 2008, UCBs Hong Kong branch had
total loans of $659.3 million and total deposits of
$828.6 million. This office has expanded its trade finance
services since its opening and the fees associated with those
services have also increased over last year. As of
December 31, 2008, UCB China Ltd had total loans of
$355.0 million, total deposits of $110.2 million and
interbank borrowings of $148.0 million.
UCB intends to establish additional overseas offices and
branches to facilitate international trade across the Asia
Pacific region. In this regard, UCB has focused much of its
growth strategies toward the expanding opportunities that have
been emerging from China. Trade between China and the United
States has increased steadily over the past several years and
the trade finance business has followed. We anticipate that the
opportunities for growth presented by the expansion of the
Chinese economy will continue for some time.
Success in attaining our goals will be dependent on our
adherence to the fundamentals that we believe are vital to our
ongoing successful growth. These fundamentals include:
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In addition, we believe that we have a unique set of
capabilities that provide us with an in-depth understanding of
the Asian population, our targeted market. These capabilities
help to differentiate us and enable us to enhance the service
that we provide. These capabilities include:
We are providing you with an overview of what we believe are the
most significant factors and developments that impacted the
Companys results for 2008 and that could impact future
results. We encourage you to carefully read this full document
for more detailed information with regard to the trends, events
and uncertainties that have or may affect us in the future.
The Companys primary or core business consists
of providing commercial and retail banking services to both
individuals and companies in markets with high concentration of
Asians both in the United States and the greater China regions.
2008 was a year in which our economy moved into an economic
recession. This recession worsened significantly during the
second half of 2008. The deepening financial crisis was the
result of housing activity and price declines occurring
throughout the year, the spike in energy prices, softening of
consumer spending, worsening trends in employment, and loss of
household wealth resulting from declines in home prices and
stock market valuations. Businesses cut production and
employment, as well as postponed capital spending plans. As a
result of the economic slowdown and financial crisis, the United
States Department of the Treasury and the Federal Reserve
initiated several actions which changed the landscape of the
United States financial services industry.
The deteriorating economy continued to impact the credit quality
of our residential construction loan portfolio, with
significantly more rapid deterioration occurring in the fourth
quarter of 2008. In addition, the market dislocations occurring
throughout 2008, including the severe volatility, illiquidity
and credit dislocations that were experienced in the debt and
equity markets, adversely impacted our collateralized debt
obligations and CMBS residual investment securities. Further, we
incurred losses associated with Fannie Mae and Freddie Mac
equity securities.
The Company reported a net loss for 2008 of $67.7 million
or diluted earnings per share of $(0.70). This compares with a
net income of $102.3 million or diluted earnings per share
of $0.97 for 2007 and a net income of $100.9 million or
diluted earnings per share of $1.03 for 2006. Return on average
equity (ROE) was (5.96)% and return on average
assets (ROA) was (0.53)% in 2008, compared with
11.55% and 0.97% in 2007 and 15.59% and 1.23% in 2006,
respectively.
Net interest income before loan loss provision in 2008 grew
$13.5 million to $336.1 million, a 4.18% increase from
$322.6 in 2007 despite the Federal Reserve interest rate cuts
throughout 2008. However, the Company recorded provision for
loan losses of $262.9 million for 2008 compared to
$20.2 million for 2007. The significant increase in loan
loss provision was primarily due to the deterioration in certain
residential construction markets, loan growth and changes in the
mix of the loan portfolio. In addition, the Company recorded
other-than-temporary
charges of $43.1 million for the full year of 2008. The
other-than-temporary
charges included a $5.2 million write-down in two non-bank
Real Estate Investment Trust (REIT) collateralized
debt obligations (CDOs) backed by trust preferred
securities (TPS), a $22.3 million write-down on
U.S. government sponsored enterprises
(GSE)
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investment securities, a $5.0 million write-down on the retained
residual tranche from UCBs commercial real estate loan
securitization and a $10.6 million write-down on three CDOs
backed by pooled bank trust preferred securities.
When we evaluate the Companys performance, we focus on
five primary areas: (1) loan and deposit growth,
(2) credit quality, (3) net interest margin,
(4) expense control and (5) capital adequacy.
Since 2004, UCB has experienced steady and strong growth in
loans and deposits. This was accomplished in spite of a
challenging economic and competitive environment that was
present during a large portion of this time period. The net
loans held in portfolio and total deposits at December 31,
2008, 2007, 2006, 2005 and 2004, were as follows (dollars in
thousands):
The growth that was experienced in net loans held in portfolio
and in deposits was achieved both organically and from
acquisitions. Over the past six years, the Company has acquired
seven banking companies, which added an aggregate of
$1.83 billion in net loans held in portfolio and
$2.71 billion in deposits as of the respective acquisition
dates.
We expect modest growth in deposits and certain loans held in
portfolio such as commercial business and international trade
finance loans. However, a continued economic downturn may affect
the Companys loan portfolio growth. In addition, as part
of its balance sheet management UCB enters into loan sales,
which are discussed in later sections of this document.
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 ARMs. 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 UCBs loan portfolio. In
addition, loan losses may increase due to the effects of the
unprecedented economic downturn on credit quality.
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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, 2008, 2007, 2006, 2005 and 2004,
were as follows (dollars in thousands):
The increase in the nonperforming loans to loans held in
portfolio ratio and the allowance for loan losses to loans held
in portfolio ratio is primarily the result of the downturn in
the economy in 2008 and the resultant impact on the construction
loan portfolio.
The economic downturn and continuing troubles in the housing and
construction sector, financial markets, commercial real estate
and challenging interest rate environment that has been
affecting financial institutions over the past several years,
continued to impact our net interest margin. In addition, our
net interest margin reflects the effects of the Federal Reserve
interest rate cut of 425 basis points during the year.
However, we expect to continue our efforts to improve the net
interest margin in the future through prudent balance sheet
management and emphasis on growth in core deposits. See
Interest Rate and Market Risk Management later in
this document. The Companys net interest margin on a
nontax equivalent basis and average federal funds rate for the
years ended December 31, 2008, 2007, 2006, 2005 and 2004,
were as follows:
We are continuously monitoring our costs and expenses and
seeking new ways to maintain them at acceptable levels. For
2008, we experienced an increase in our noninterest expense.
Much of this increase was a result of increased personnel and
occupancy expenses due to additional cost of supporting the
Companys commercial business, the expansion of the
Companys infrastructure, full year expenses associated
with the May 2007 acquisition of CAB and the December 2007
acquisition of BDB, increase in deposit insurance premium and
other real estate owned expenses.
As regulated financial institutions, the Company and UCB (on a
consolidated basis) are required to maintain adequate levels of
capital as measured by several regulatory capital ratios. One of
our goals is to maintain a well capitalized level of
regulatory capital as defined by the banking regulators for both
the Company and UCB. The Companys and UCBs
risk-based capital ratios at December 31, 2008, 2007, 2006,
2005 and 2004, were as follows:
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The notes to the consolidated financial statements contain a
summary of the Companys significant accounting policies
that are presented elsewhere in this Annual Report on
Form 10-K.
We believe that an understanding of certain policies, along with
the related estimates that we are required to make in recording
the financial transactions of the Company, is important to have
a complete picture of the Companys financial condition. In
addition, in arriving at these estimates, we are required to
make complex and subjective judgments, many of which include a
high degree of uncertainty. The following is a discussion of
these critical accounting policies and significant estimates
related to these policies. We have discussed each of these
accounting policies and the related estimates with the Audit
Committee of the Companys Board of Directors.
Valuation
of Financial Instruments
Effective January 1, 2008, the Company determines the fair
values of its financial instruments based on the fair value
hierarchy delineated in Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value
Measurements (SFAS 157), which requires the
Company to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.
SFAS 157 describes three levels of inputs that may be used
to measure fair value:
Level 1: Quoted prices for identical financial
assets or liabilities in active markets.
Level 2: Quoted prices for similar financial assets
or liabilities in active markets; quoted prices for identical or
similar financial assets or liabilities in markets that are not
active; and valuations derived by models in which the
significant inputs and significant value drivers are observable
in active markets.
Level 3: Valuations derived by models in which one
or more significant inputs or significant value drivers are
unobservable. These unobservable assumptions reflect our own
estimates of assumptions that market participants would use in
pricing the financial asset or liability.
When determining the fair value measurements for financial
assets and liabilities required to be recorded and reflected at
and/or
marked to fair value, the Company considers the principal or
most advantageous market in which it would transact, and
considers assumptions that market participants would take into
account when pricing the asset or liability. When possible, the
Company uses quoted market prices from active and observable
markets to determine fair value for identical assets and
liabilities. When identical assets and liabilities are not
traded in active markets, the Company looks to market observable
information for similar assets and liabilities. However, certain
of the Companys assets and liabilities are not actively
traded in observable markets and as such, the Company must use
alternative valuation techniques to derive a fair value
measurement. The information obtained from third parties is
typically derived from models that take into account
market-based or independently sourced market parameters, such as
interest rates, currency rates, credit default, and prepayment
rates.
It should be noted that the resulting fair value measurements
derived from alternative valuation techniques oftentimes result
in a fair value that cannot be determined with precision and may
not be realized in an actual sale or immediate settlement of the
underlying financial asset or liability. Additionally, there may
be inherent weaknesses in any calculation technique, and changes
in the underlying key assumptions used, such as discount rates
and estimates of future credit defaults, prepayments rates and
future cash flows, that could significantly affect the results
of current or future fair values.
Additionally, for these investments in which direct observable
prices or inputs are used in the valuation process but in cases
where the observable prices or inputs are either not current or
are based on transactions in inactive or illiquid market
conditions, such observable prices or inputs might not be
relevant and could require significant adjustment. In these
cases, the Company may use an internal cash flow model, which
utilizes Level 3 inputs, including assumptions about future
cash flows and risk-adjusted discount rates, in order to
determine fair value of a particular investment security.
The Company holds fixed income mortgage and asset-backed
securities, exchange traded equity securities, retained
interests in securitizations, investments in private equity,
venture capital and other nonpublic investments,
over-the-counter
foreign exchange derivative contracts and other financial
instruments.
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Financial instruments measured at fair value at
December 31, 2008, on a recurring basis are investment and
mortgage-backed securities available for sale, and derivative
contracts that consist primarily of foreign currency forward,
option contracts, and swaps. Investment and mortgage-backed
securities comprise almost all of the financial instruments that
are measured at fair value on a recurring basis at
December 31, 2008.
Investment and mortgage-backed securities available for sale
that are carried at fair value on a recurring basis at
December 31, 2008 total $2.96 billion or 21.9% of the
total assets of the Company. Investments and mortgage-backed
securities are made up of U.S. Treasury Bill, Agency
Preferred Stock, U.S Government sponsored enterprises notes
(Agency Note), U.S. Government sponsored
enterprises discount notes (Agency Discount Notes),
Agency Mortgage-Backed Securities (Agency MBS),
Agency Collateralized Mortgage Obligations (Agency
CMOs), Private Collateralized Mortgage Obligations
(Private CMOs), Municipals, Commercial Debt Obligations
(CDOs), Collateralized Loan Obligation
(CLO), Collateralized Mortgage-Backed Securities
(CMBS), SBA I/O Strips and SBA Pool.
The table below provides the FAS 157 valuation hierarchy
and fair value amount of the Companys investment and
mortgage-backed securities available for sale. The principal
market for these securities is the Fixed Income market (dollars
in thousands).
Level I securities, which include Agency Preferred Stock
and Treasury Bill, represents 1.70% of the total fair value of
the investment securities and mortgage-backed securities
available for sale. These securities are categorized as
Level 1 due to quoted prices being accessible for identical
securities in active markets.
Level II securities represent 87.0% of the investment and
mortgage-backed securities available for sale. These securities
are categorized as Level II due to no identical securities
being traded in active markets however, observable market inputs
are accessible. For example, quoted price on similar securities
are accessible in active markets and market prices are readily
available from different sources. The Company uses the pricing
source from a third party pricing service (pricing
service) to determine the fair value of the Level II
securities. The pricing service provides evaluations that
represent as to what a buyer in the marketplace would pay for a
given security in a current sale. The sources used by the
pricing service as inputs to its evaluated pricing vary
according to the type of security being evaluated. The main
source of information the pricing service uses include research
materials prepared by others, corporate rating services, annual
reports, prospectus, filings with the Securities and Exchange
Commission and company press releases. Other sources include
market maker, broker and dealer quotes, pricing service
generated yield scales, factors, prepayment rates, currency
rates, indices, and other data received from third parties. The
pricing services evaluations are based on objectively
verifiable information derived from or clearly relevant to the
market for such securities. The pricing service bases its
evaluation on interpretations of accepted Wall Street
conventions. Information that is typically considered includes
the securitys terms and conditions, including any features
specific to that issue, which may influence risk, and thus
marketability, and market activity with particular emphasis on
events affecting market sectors and individual issuer credit
worthiness.
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Level III securities represent 11.3% of investment and
mortgage-backed securities available for sale. These securities
are categorized as Level III due to no identical securities
in active markets and observable market inputs not readily
available. The Companys internal model is used to derive
the fair value of the CDOs, CLO and SBA I/O Strips. A third
party is used to value the Companys CMBS.
The fair value of the CDOs and one CLO was derived using the
Companys internal pricing model. In making the
determination on the use of its internal pricing model, the
Company obtained price indications from various brokers for the
December 2008 month end pricing. Based on the broker quotes
obtained, corresponding implied yields were estimated based on
the Companys projected cash flow. By interpreting the
implied yield against the credit rating of each CDO and CLO, the
Company deemed that the implied yields were relatively high when
compared to the respective cash flows. To access the market
conditions and market participant assumptions to determine the
valuation of the CDOs and CLO, various brokers were consulted.
Based on the consultation with the brokers, the Company
concluded that the CDO and CLO markets are inactive due to
substantial risk aversion initiated by the credit crisis started
in mid-2007 and fueled by continued negative market developments
afterward. Since trading activity remained thin, observable
transactions on these securities are scarce. Based on current
market conditions, broker price indication and consultation with
brokers, the Company concluded that the CDO and CLO markets are
inactive. Brokers informed the Company that most trades in the
market are related to liquidation sale, distress sale and
bankruptcy sale. These trades reflect exit prices of
transactions that are indicative of distressed or forced sales.
Observable inputs are not available as transactions on CDO and
CLO are scarce and not current.
The Company used its internal pricing model to generate
projected cash flows for its CDOs and CLO based on the most
recent trustee reports for these securities and using the
Companys prepayment, default and recovery assumptions. The
general assumptions on these factors were obtained from brokers.
Since market participants deemed the defaults will be front
loaded, different scenarios (with assigned probabilities) were
derived for each CDO and CLO according to different severities
of front-loaded default rates for the first twelve months. Since
observable transactions on similar CDO and CLO are rare, the
Company decided to determine the risk-adjusted discount margin
(DM) on pricing the CDOs and CLO by using the DM
implied by the corporate bond market. While the corporate bond
market has displayed widening spreads and lower volumes at the
end of September and throughout the fourth quarter of 2008, the
instrument variety and number of data points in the corporate
bond market enabled the Company to determine the appropriate
risk-adjusted DM for each CDO and CLO. The final model pricing
was determined by the sum of the probability weighted price
derived from the discounted cash flows in each scenario that the
Company stress tested with the appropriate risk-adjusted DM. The
probability to each scenario is determined under a conservative
view of the expected status of the economy.
The fair value of the SBA I/O Strips was derived using the
Companys internal pricing model. In making the
determination on the use of its internal model, the Company
obtained price indications from various brokers for the December
2008 month end pricing. To access the market conditions and
market participant assumptions to determine the valuation of the
SBA I/O Strips, various brokers were consulted. Based on the
consultation with the brokers, the Company concluded that the
SBA I/O Strips markets are inactive as no secondary market
activity is observed in the market. Observable transactions on
these securities are scarce. After performing due diligence on
both observable and unobservable inputs for the price indication
provided by the broker, the Company determined that the pricing
indication of brokers are largely based on scarce and
non-current data and unobservable inputs for their pricing. The
Company concluded that it was appropriate to place less reliance
on pricing indications from brokers to value the SBA I/O Strips.
The Company used its internal pricing model to determine the
pricing of its SBA I/O Strips. Since the cash flows of the SBA
I/O Strips are guaranteed by the United States Government, there
is virtually no risk involved in the cash flows. Therefore, the
only assumption built into the pricing model to generate the
projected cash flows used to compute the market values of the
SBA I/O Strips is the discount yield and prepayment speed. The
discount rate is based on the discount rate for the fair market
value assumption of the SBA Loan Mortgage Servicing Rights
estimated by a third party servicer. The Company used the
prepayment rate that it determined as the most reasonable based
on the underlying collateral of the SBA I/O Strips.
The Company used a third party service to determine the pricing
of its CMBS available for sale investments. The third party
performs pricing and scenario analysis for a variety of
institutions engaged in the issuance and management of
Commercial Mortgage-Backed Securities, Residential
Mortgage-Backed Securities, and
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Collateralized Debt Obligations. The third party service
maintains a database of credit spread information on each CMBS
transaction issued publicly as well as polling its client list
for information related to each clients current CMBS
credit spread assumptions. For prepayment and default scenario
assumptions, the third party service uses a combination of
internal credit default models and the published
dealer research that estimate prepayment rates and default rates
for each publicly available CMBS transaction.
The CMBS investments were the result of UCBs
securitization of commercial real estate loans during the fourth
quarter of 2007. The loans were exchanged for collateralized
mortgage backed securities, issued through a newly established
trust, United Commercial Mortgage Securities, LLC. There are
four certificates representing the trust: Class A
Certificates, Class M Certificates, Class C
Certificates and Class R Certificates. The Class R
Certificates have no economic value. In the pricing of the CMBS
investments, Class A was priced at a credit spread to the
interpolated U.S. Swap curve, Class M was priced at a
credit spread to the interpolated U.S. Treasury curve and
Class C was priced at the fixed rate credit spread. These
rates were obtained based on market observations. Also, in
deriving the price of the CMBS, the third party used different
prepayment and credit default rate scenarios in their pricing
model supplied by UCB since UCB is the Subservicer of the loans
and has visibility to the borrowers loan information. As a
Subservicer, UCB receives a fee based on an agreed upon rate
applied to the principal balance of the securitized loans as of
the first day of the related due period. UCB is also entitled to
any amounts earned on funds in the related subservicing account.
Any declines in a specific investment securitys fair value
that are determined to be
other-than-temporary,
result in a write-down of the investment security and a
corresponding charge to noninterest income. During the twelve
months ended December 31, 2008, as a result of continued
deteriorating market conditions, the Company recognized
other-than-temporary
impairments totaling $43.1 million.
The allowance for loan losses represents our estimate of the
losses that are inherent in the loans held in portfolio. UCB
continuously monitors the quality of its loans held in portfolio
and maintains an allowance for loan losses sufficient to absorb
losses inherent in the loans held in portfolio. At
December 31, 2008, UCBs total allowance for loan
losses was $230.4 million, which represented 2.66% of loans
held in portfolio.
UCBs methodology for assessing the adequacy of the
allowance for loan losses includes the evaluation of two
distinct components: a general allowance applied to loans held
in portfolio categories as a whole and a specific reserve for
loans deemed impaired. Loans that are determined to be impaired
are excluded from the general allowance analysis of the loans
held in portfolio and are assessed individually.
In determining the general allowance, UCB applies loss factors,
differentiated by an internal credit risk rating system, to its
major loan portfolio categories (based primarily on loan type).
UCBs risk rating system is applied at the individual loan
level within each of the major loan portfolio categories. The
credit quality of the loan portfolio is regularly assessed
through ongoing review.
The loss factors are developed from actual historic losses, and
reflect comparative analysis with peer group loss rates and
expected losses, which are in turn based on estimated
probabilities of default and loss given default. This
quantitative portion of the analysis also resulted in
establishing a minimum loss factor for each of the major loan
portfolio categories to better reflect minimum inherent loss in
all portfolios including those with limited historic loss
experience. Additionally, loss factors incorporate qualitative
adjustments that reflect an assessment of internal and external
influences on credit quality that have not yet been reflected in
the historical loss or risk-rating data. These influences may
include elements such as portfolio credit quality trends and
changes in concentrations, growth, or credit underwriting.
UCBs qualitative adjustments also include an economic
surcharge factor to adjust loss factors in recognition of the
impact various macro-economic factors have on portfolio
performance.
UCB assesses the loss factors that are applied to loan portfolio
categories on a quarterly basis, and as part of the assessment
concluded during the year ended December 31, 2008, UCB
effected further refinements in the determination of certain
loss factors during the first quarter of 2008 as a result of
UCBs annual methodology review. The annual methodology
review primarily addresses the approaches, assumptions, and data
inputs used in the quantitative support for the loss factors,
and focused primarily on the continued development of the loss
factors.
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During the third quarter of 2008, the only changes in our loss
factors were applicable to the construction portfolio due to the
further softening in the residential construction markets in
California and to the reserve for unfunded commitments related
to criticized loans. During the fourth quarter of 2008, changes
were made to the historic loss factor of criticized loans for
all portfolios. Changes were also made to the qualitative loss
and economic surcharge factors for construction and commercial
business loan portfolios. These changes were necessitated by the
continuing deterioration in the economy and the housing and
construction sectors.
The second component of the allowance for loan losses, the
specific reserve, applies to loans that are considered impaired.
A loan is considered impaired when it is probable that UCB will
not be able to collect all amounts due, including interest
payments, in accordance with the loans contractual terms.
Unless the loan is collateral-dependent, loan impairment is
measured based on the present value of expected future cash
flows that have been discounted at the loans effective
interest rate. If the loan is collateral-dependent, either the
observable market price or the current fair value of the
collateral, reduced by estimated disposition costs, is used in
place of the discounted cash flow analysis.
Additions to the allowance for loan losses are made by charges
to the provision for loan losses. Credit exposures deemed to be
uncollectible are charged against the allowance for loan losses.
Recoveries of previously charged off amounts are credited to the
allowance for loan losses.
While management uses its best judgment based on the information
available, the adequacy of the allowance for loan losses depends
on a number of important factors. Such factors include credit
quality of the loan portfolio, changes in the Companys
lending policies and procedures, changes in the interest rate,
changes in economic and business conditions, changes in the
severity and volume of past due and impaired loans, changes in
the value of the underlying collateral-dependent loans, the
effects of any changes in the concentration of credits, changes
in legal and regulatory requirements, and other external
factors. A weakening of the economy or change in any of the
factors described above that has an adverse affect on loan
quality could result in an increase in the loan loss provision
in future periods due to higher delinquencies, a higher level of
impaired loans and net charge-offs.
See Credit Risk Management for more information on
how the Company determines the level for the allowances for loan
losses and unfunded lending commitments.
UCB also estimates a reserve related to unfunded commitments and
other off-balance sheet credit exposure. In assessing the
adequacy of this reserve, UCB uses an approach similar to the
approach used in the development of the allowance for loan
losses. The reserve for unfunded commitments is included in
other liabilities on the Consolidated Balance Sheets.
The reserve for unfunded commitments decreased $145,000 from
December 31, 2007, to December 31, 2008, as a result
primarily of the discontinuance of unfunded commitments related
to criticized loans.
There are numerous components that enter into the evaluation of
the allowance for loan losses. Some are quantitative while
others require UCB to make qualitative judgments. Although UCB
believes that its processes for determining an appropriate level
for the allowance for loan losses adequately address all of the
components to estimate inherent credit losses, the processes and
their elements include features that may be susceptible to
significant change. Any unfavorable differences between the
actual outcome of credit-related events and UCBs estimates
and projections could require an additional allowance for loan
losses, which would negatively impact the Companys results
of operations in future periods. UCB continually monitors and
evaluates its allowance for loan loss methodology, seeking to
refine and enhance the processes used to estimate incurred
losses in our loan portfolios as appropriate.
UCB periodically enters into transactions that transfer loans
from UCB to third-party purchasers. In most instances, UCB
continues to provide the servicing on these loans as a condition
of the transfer. In addition, as part of these transactions, UCB
may retain a cash reserve account, overcollateralization, or an
interest-only strip, all of which are considered to be retained
interests in the sold loans.
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Whenever UCB initiates a loan transfer, the first determination
that it must make in connection with the transaction is whether
the transfer constitutes a sale under accounting principles
generally accepted in the United States of America. If it does,
the assets are removed from UCBs consolidated statement of
financial condition with a gain or loss recognized. Otherwise,
the transfer is considered to be a financing arrangement,
resulting in no gain or loss being recognized on the transfer,
which is recorded as a liability on UCBs consolidated
statement of financial condition. Generally, UCBs loan
transfers have been structured to meet the existing criteria for
sale treatment.
UCB must also make assumptions to determine the amount of gain
or loss resulting from a sale transaction as well as the
subsequent carrying amount for the above-discussed servicing
rights and retained interests. Initially, the total carrying
value of the loans being sold is allocated among the loans
themselves, the servicing rights and any retained interests
based on their relative fair values. The purchase price is then
compared to the amount assigned to the loans, and any difference
is recorded as either a gain or a loss on the sale. In
determining the fair values of the components of the
transaction, UCB uses estimates and assumptions that are based
on the facts surrounding each sale. Using different assumptions
could affect the amount of gain or loss recognized on the
transaction and, in turn, UCBs results of operations.
In 2008, UCB securitized $254.5 million of multifamily and
residential mortgage loans with servicing rights retained
through the Federal National Mortgage Association
(FNMA).
We have historically not sold any of the resulting securities or
retained interests to outside parties. The Company has a
substantive guarantee from the monoline insurer resulting in the
recharacterization of the loans. We have reflected the resulting
securities in our available for sale investment securities
portfolio. Initially, the total carrying value of the resulting
security is allocated to the various tranches and retained
interests based on their relative fair values. The fair value of
the securities is then compared to the net carrying value of the
underlying loans that have been securitized, along with the
related issuance costs. Any excess of carrying value over fair
value of the loan principal is charged off against our allowance
for loan losses. Subsequently, any changes in fair value are
measured and reflected in other comprehensive income. UCB uses
estimates and assumptions that take into account prepayment
speeds, credit defaults and discount rates, based on the facts
surrounding each securitization. In the event that actual
prepayments and credit defaults exceed our original assumptions,
the resulting cash flows related to the residual tranche could
be adversely affected, which would reduce the value and
potentially trigger an
other-than-temporary
impairment on such residual tranche.
UCB uses a third-party service to assist in the determination of
the ongoing fair values of the servicing rights and retained
interests subsequent to the transaction date. In valuing the
servicing rights and retained interests, UCB stratifies its
mortgage servicing rights based on the risk characteristics of
the underlying loan pools. The fair value of mortgage servicing
rights is determined by calculating the present value of
estimated future net servicing cash flows, using assumptions of
prepayments, defaults, ancillary income, adequate compensation
and discount rates that UCB believes market participants would
use for similar assets. These value estimations require a number
of assumptions, including: annualized prepayment speed of the
loans, expected annual net credit loss rate, and discount rate
for the residual cash flows. We generally determine fair value
of retained interests based on valuation models obtained from
outsourced service providers. Such valuation models take into
account observable inputs if such inputs are available.
Observable inputs, however, may not be available, in which case
the valuation model estimates fair value using the present value
of expected future cash flows using estimates of key
assumptions, including forecasted credit default rates,
prepayment rates and discount rates commensurate with the rates
used by unrelated third parties. If the carrying amounts of the
servicing assets are greater than their fair values, impairment
is recognized through a valuation allowance. If there has been
an adverse cash flow change on residual interests, impairment is
recognized. Since the valuations are based upon estimates and
assumptions, any unfavorable differences between the actual
outcome of the future performance of the sold loans and our
estimates and assumptions could result in future impairment in
excess of that currently recorded.
A loan is considered to be impaired when it is probable that all
of the principal and interest due under the terms of the
original loan agreement may not be collected. Impairment is
measured using the practical expedient allowed by
SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, whereby the amount of a loans
impairment is
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measured based on either the present value of expected cash
flows, the observable market price of the loan, or the fair
value of the collateral securing the loan if the loan is
collateral dependent. Fair value is measured based on an
appraisal prepared by an independent appraiser. Impaired loans
are initially categorized as nonrecurring Level 2 but may
move to Level 3 if the value set forth by the independent
appraisals is significantly adjusted as a result of the
quarterly review processes. As of December 31, 2008,
impaired loans were categorized as Level 3 due to the
continued weakness in real estate market conditions resulting in
inactive market data which in turn required primarily the use of
unobservable inputs and assumptions in our fair value
measurements.
Business acquisitions often result in the recognition of
goodwill, which represents the value attributable to the
unidentifiable intangible elements in our acquired businesses.
Goodwill is initially recorded at fair value and is subsequently
evaluated at least annually for impairment in accordance with
Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets. In
accordance with the Companys annual review policy, the
Company performs this annual test as of September 30 of each
year. Evaluations are also performed on a more frequent basis if
events or circumstances indicate that an impairment could have
taken place. Such events could include, among others, a
significant adverse change in the business climate, an adverse
action by a regulator, an unanticipated change in the
competitive environment, and a decision to change the operations
or dispose of a reporting unit.
The first step in this evaluation process is to determine if a
potential impairment exists in any of the Companys
reporting units, and, if required from the results of this step,
a second step measures the amount of any impairment loss. The
computations required by both steps one and two call for us to
make a number of estimates and assumptions.
In completing step one, we determine the fair value of the
reporting unit that is being evaluated. There are a number of
methods that we can use in completing this step, including
market capitalization and the discounted present value of
managements estimates of future cash or income flows.
If step one indicates a potential impairment of a reporting
unit, step two requires us to estimate the implied fair
value of goodwill for that unit. This process estimates
the fair value of the units individual assets and
liabilities in the same manner as if a purchase of the reporting
unit were taking place. To do this, we must determine the fair
value of the assets, liabilities and identifiable intangible
assets of the reporting unit based upon the best available
information. If the value of implied goodwill calculated in step
two is less than the carrying amount of goodwill for the
reporting unit, an impairment is indicated and the carrying
value of goodwill is written down to the calculated value.
During the quarter ended March 31, 2008, and continuing
throughout 2008, our stock price declined significantly to a
level indicating a market capitalization well below book value.
In analyzing the decline in the stock price, we considered the
decline to be primarily attributed to general market declines
and overall concerns with regard to the financial services
industry. While this decline was considered in our analysis of
potential impairment, we concluded that the unusual and severe
conditions in the stock market meant that an entirely market
capitalization based approach was not the most reliable
indicator of fair value as we did in 2007. In 2008, we performed
goodwill impairment testing at each quarter end utilizing both a
market approach and income approach. The income approach was
based on a discounted cash flow model to estimate the fair value
of our reporting units, which we considered to be most
reflective of a market participants view of fair value
given the current market conditions.
The Company performed the goodwill impairment testing as of
December 31, 2008, because its market capitalization had
been less than its book value of equity for three consecutive
quarters. The Company used a third party valuation firm to
determine the goodwill valuation for its two reporting units,
Domestic Reporting Unit and International Reporting Units. The
estimated fair values of the two reporting units, Domestic
Reporting Unit and International Reporting Units were calculated
under the step one process. For the step one procedures, the
Market and Income Approaches were used to derive the valuation
of the Domestic Reporting Unit and International Reporting
Units. Based on the results of the step one procedures, it was
determined there is no goodwill impairment with the
International Reporting Units because the fair value was greater
than the carrying value. However, it was determined that the
goodwill in the Companys Domestic Reporting Unit needed to
be subjected to the step two
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implied fair value methodology. Based on the step
two evaluations, management has determined that there is no
goodwill impairment charge associated with the Domestic
Reporting Unit.
The discounted cash flow (DCF) method was used as an
income approach to establish the fair value of the equity of the
Domestic Unit and International Reporting Units. In determining
the value, the cash flow projections through 2013 were utilized.
Following 2013, the business was considered to have reached a
steady state. The projected earnings were adjusted for earnings
retained for capital growth and also adjusted to remove the
effects of depreciation and amortization, if significant, in
order to determine the projected cash flow of the reporting
units. An appropriate discount rate, calculated using the
Capital Asset Pricing Model and market participant based
assumptions, was then applied.
The after-tax net cash flows were then calculated and discounted
to their present value over the projection period. The terminal
cash flow was then established using the terminal years
projected cash flow to which a Gordon Growth multiple was
applied. The terminal value was discounted to present value and
added to the projected cash flows, resulting in a value of the
Domestic Reporting Unit and International Reporting Units
common equity. For the Domestic Reporting Unit, the market value
of the Domestic Reporting Units preferred equity was then
added to the concluded value of its common equity. In addition,
the market value of the TARP preferred equity and warrant was
added to the concluded value, leading to a total value of the
Domestic Reporting Unit under the DCF approach.
For the step two procedures on the Domestic Reporting Unit, the
implied fair value methodology was used. Step two of
SFAS 142 measures the impairment of goodwill by comparing
its carrying value to its implied fair value.
SFAS 142 states that the implied fair value of
goodwill should be determined in the same manner as goodwill is
determined in a business combination. The fair value of the
reporting unit should be allocated to the fair value of its
assets and liabilities as if the reporting unit had been
acquired in a business combination and the fair value of the
reporting unit was the purchase price. The remainder of the
excess of the fair value of the reporting unit over the fair
value of its tangible and intangible assets and liabilities is
the implied fair value of goodwill. SFAS No. 141,
Business Combinations, provides guidance for allocating
the purchase price in business combinations, which includes
identifying and qualifying intangible assets as well as valuing
such items. SFAS 142 does not lead to either a
write-up or
write-down of tangible or intangible assets or liabilities as a
result of the impairment testing process. In performing the step
two analysis of the Domestic Reporting Unit the major balance
sheet accounts were reviewed in addition to identifying all
unrecognized intangible assets. The analysis of the major
balance sheet accounts primarily involved the use of the DCF
approach and the use of key assumptions in determining the fair
value of the respective assets and liabilities. On the basis of
the analysis performed and the resulting fair values of the
major assets and liabilities, the determination was made that
the implied fair value of goodwill determined in the step two
analysis exceeded the carrying value. Therefore, it was
determined that there was no goodwill impairment and no
impairment charge was warranted as of December 31, 2008.
While management has a plan to return the Companys
business fundamentals to levels that support the book value per
common share, there is no assurance that the plan will be
successful, or that the market price of the common stock will
increase to such levels in the foreseeable future. Accordingly,
the Company will continue to monitor goodwill for potential
impairment until such time whereby the market capitalization
exceeds the book value of equity.
The current market volatility and lack of confidence in the
financial markets continue to adversely affect the stock prices
of financial institutions, in the United States as well as
globally. As one of these financial institutions, the Company
has seen its stock price decline from its December 31, 2008
level. In the event the Companys stock price remains at
its current level, the Company may be subjected to potential
goodwill impairment.
The Company follows SFAS No. 123(R), Share-Based
Payment. Under SFAS No. 123(R), the total fair
value of the stock options awards is expensed ratably over the
service period of the employees receiving the awards. The
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Company used the modified prospective method of adoption
effective January 1, 2006. Under this adoption method,
compensation expense recognized includes: (a) compensation
costs for all share-based payments granted prior to but not yet
vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation, and (b) compensation costs for all
share-based payments granted subsequent to January 1, 2006,
based on the grant date fair value estimated in accordance with
the provisions of SFAS No. 123(R).
In estimating the fair value of each stock option award on their
respective grant dates, we use the Black-Scholes pricing model.
The following are the average assumptions that were incorporated
in the model for the years ended December 31, 2008, 2007
and 2006:
The expected life of the options is based on the historical life
of options that have been exercised and cancelled after vesting
date and a forecasted assumption of unexercised options that
will be exercised at expiration. The expected stock price
volatility is estimated using the historical volatility of
UCBHs common stock. The historical volatility covers a
period that corresponds to the expected life of the options. The
expected dividend yield is based on the estimated annual
dividends that UCBH expects to pay over the expected life of the
options as a percentage of the market value of UCBHs stock
as of the grant date. The risk-free interest rate for the
expected life of the options granted is based on the
U.S. Treasury yield curve in effect as of the grant date.
The increase in average volatility rate is a result of
UCBHs stock price being less stable during the year ended
December 31, 2008, as compared to the same period in 2007.
The decrease in the risk free interest rate reflects the lower
U.S. Treasury yields for the year ended December 31,
2008, as compared to the same period in 2007.
In addition to the above assumptions, UCBH uses a forfeiture
rate based on historical data of UCBHs actual experience
to total grants awarded.
The fair values assigned to UCBHs stock options are based
upon estimates and assumptions. In accordance with
SFAS No. 123(R), once established, the fair value does
not change unless the option grant is modified subsequent to its
issuance. However, we believe that given the procedures that we
have followed in determining the assumptions used in the
estimation process, the fair values of the options are
appropriate.
Core deposit intangibles are created as a result of the
Companys acquisition of another financial institution.
They represent the value that the acquired deposits have as a
source of funding when compared to alternative funding sources,
such as borrowings. When acquired, core deposit intangibles are
valued by an outside service by computing the present value of
the expected cost savings attributable to the core deposit
funding relative to an alternative source of funding. Subsequent
to the initial recording, core deposit intangibles are amortized
based upon the expected runoff rate of the related deposits. In
addition, the value of core deposit intangibles is reviewed each
quarter for possible impairment by comparing actual deposit
runoff to estimated runoff. Should the actual runoff exceed the
estimate, the core deposit intangible is written down to the
adjusted amount through a charge to noninterest expense. At that
point, the runoff estimates are adjusted to reflect the actual
runoff and the new estimates are used for subsequent
amortization.
The provision for income taxes is based on income reported for
financial statement purposes and differs from the amount of
taxes currently payable, because certain income and expense
items are reported for financial statement purposes in different
periods than those for tax reporting purposes.
The Company accounts for income taxes using the asset and
liability approach, the objective of which is to establish
deferred tax assets and liabilities for the temporary
differences between the financial reporting basis and the tax
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basis of the Companys assets and liabilities at enacted
tax rates expected to be in effect when such amounts are
realized or settled. A valuation allowance is established for
deferred tax assets if, based on the weight of available
evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. A valuation
allowance is established, when necessary, to reduce the deferred
tax assets to the amount that is more likely than not to be
realized.
As part of the computation of the income tax provision,
estimates and assumptions must be made regarding the
deductibility of certain expenses and the treatment of tax
contingencies. There is a possibility that these estimates and
assumptions may be disallowed as part of an audit by the various
taxing authorities that the Company is subject to. Any
differences between items taken as deductions in our tax
provision computations and those allowed by the taxing
authorities could result in additional income tax expense
(benefit) in future periods.
FASB Staff Position (FSP)
FAS 140-4
and FIN 46(R)-8, Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities, amends
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, to require public entities to provide
additional disclosures about transfers of financial assets. It
also amends FASB Interpretation (FIN) No. 46
(revised December 31, 2003), Consolidation of Variable
Interest Entities, to require public enterprises, including
sponsors that have a variable interest in a variable interest
entity, to provide additional disclosures about their
involvement with variable interest entities. Additionally, this
FSP requires certain disclosures to be provided by a public
enterprise that is (a) a sponsor of a qualifying special
purpose entity (SPE) that holds a variable interest
in the qualifying SPE but was not the transferor (nontransferor)
of financial assets to the qualifying SPE and (b) a
servicer of a qualifying SPE that holds a significant variable
interest in the qualifying SPE but was not the transferor
(nontransferor) of financial assets to the qualifying SPE. The
disclosures required by this FSP are intended to provide greater
transparency to financial statement users about a
transferors continuing involvement with transferred
financial assets and an enterprises involvement with
variable interest entities and qualifying SPEs. FSP
FAS 140-4
and FIN 46(R)-8 is effective for the first reporting period
(interim or annual) ending after December 15, 2008, with
earlier application encouraged. Because FSP
FAS 140-4
and FIN 46(R)-8 impacts the Companys disclosure but
not its accounting treatment for transfers of financial assets
and interests in variable interest entities, the Companys
adoption of FSP
FAS 140-4
and FIN 46(R)-8 will not impact its financial position or
results of operations.
FSP
FAS 142-3,
Determination of the Useful Life of Intangible Assets,
amends the factors that should be considered in
developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible
Assets. The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under
SFAS No. 142 and the period of expected cash flows
used to measure the fair value of the asset under
SFAS No. 141 (revised 2007), Business
Combinations, and other U.S. generally accepted
accounting principles (GAAP). FSP
FAS 142-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years; early adoption is prohibited. The
Company does not expect the adoption of FSP
FAS 142-3
to have a material impact on the Companys financial
position or results of operations.
Statement of Financial Accounting Standards No. 162, The
Hierarchy of Generally Accepted Accounting Principles, was
issued in May 2008. SFAS No. 162 identifies the
sources of generally accepted accounting principles and provides
a framework, or hierarchy, for selecting the principal used in
preparing U.S. GAAP financial statements for
nongovernmental entities. SFAS No. 162 makes the GAAP
hierarchy explicitly and directly applicable to preparers of
financial statements, a step that recognizes preparers
responsibilities for selecting the
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accounting principles for their financial statements.
SFAS No. 162 is effective November 15, 2008. The
Company does not expect the adoption of SFAS No. 162
to have a material impact on the Companys financial
position or results of operations.
SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB
No. 133 (SFAS 161), was issued in
March 2008. SFAS 161 requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on
derivative instruments, and disclosures about
credit-risk-related contingent features in derivative
agreements. SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged.
Because SFAS 161 impacts the Companys disclosure but
not its accounting treatment for derivative instruments, the
Companys adoption of SFAS 161 will not impact its
financial position or results of operations.
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB
No. 51, was issued in December 2007 and establishes
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 changes the way
the consolidated income statement is presented. It requires
consolidated net income to be reported at amounts that include
the amounts attributable to both the parent and the
noncontrolling interest. It also requires disclosure, on the
face of the consolidated statement of income, of the amounts of
consolidated net income attributable to the parent and to the
noncontrolling interest. SFAS 160 establishes a single
method of accounting for changes in a parents ownership
interest in a subsidiary that do not result in deconsolidation.
SFAS 160 requires that a parent recognize a gain or loss in
net income when a subsidiary is deconsolidated. SFAS 160
requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the
interests of the parents owners and the interests of the
noncontrolling owners of a subsidiary. SFAS 160 is
effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008 (that
is, January 1, 2009, for entities with calendar year-ends).
Earlier adoption is prohibited. The Company does not expect the
adoption of SFAS 160 to have a material impact on the
Companys financial position or results of operations.
Statement of Financial Accounting Standards No. 141(R),
Business Combinations (SFAS 141R), was
issued in December 2007. SFAS 141R replaces
SFAS No. 141, Business Combinations
(SFAS 141). SFAS 141R retains the
fundamental requirements in SFAS 141 that the acquisition
method of accounting (which SFAS 141 called the purchase
method) be used for all business combinations and for an
acquirer to be identified for each business combination.
SFAS 141R requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions. This
replaces SFAS 141s cost-allocation process, which
required the cost of an acquisition to be allocated to the
individual assets acquired and liabilities assumed based on
their estimated fair values. SFAS 141R also requires the
acquirer in a business combination achieved in stages (sometimes
referred to as a step acquisition) to recognize the identifiable
assets and liabilities, as well as the noncontrolling interest
in the acquiree, at the full amounts of their fair values (or
other amounts determined in accordance with SFAS 141R).
SFAS 141R applies prospectively to business combinations
for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after
December 15, 2008. An entity may not apply it before that
date. The Company will apply SFAS 141R for any business
combinations consummated on or after January 1, 2009.
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RESULTS
OF OPERATIONS
Financial
Highlights
(Dollars
in Thousands, Except Per Share Data)
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Year
Ended December 31, 2008, Compared to Year Ended
December 31, 2007
The consolidated net income for the year ended December 31,
2008 decreased by $170.0 million or 166.2%, to a net loss
of $67.7 million, compared to $102.3 million net
income for the same period in 2007. Income before income tax for
the year ended December 2008 decreased by $289.5 million or
186.5% to a loss before income taxes of $134.3 million as
compared to an income before income taxes of $155.2 million
for 2007. The decrease of $289.5 million in income before
income taxes during 2008 was primarily the result of an increase
in provision for loan losses of $242.7 million, a decrease
in noninterest income of $23.1 million and an increase of
$37.1 million of noninterest expense as compared to 2007.
Provision for loan losses was $262.9 million for 2008 as
compared to $20.2 million for 2007. Noninterest income was
$2.5 million for 2008 as compared to $25.6 million for
2007, a 90.4% decrease. Noninterest expense was
$209.8 million for 2008 as compared to $172.8 million
for 2007, a 21.5% increase. Income tax for 2008 was a tax
benefit of $66.5 million as compared to a tax provision of
$52.9 million for 2007. Further variance explanation of the
major income and expense categories for 2008 as compared to 2007
are outlined below. Diluted earnings per share were $(0.70) and
$0.97 for the years ended December 31, 2008 and 2007,
respectively.
Net Interest Income and Net Interest
Margin. Net interest income in 2008 grew
$13.5 million to $336.1 million, a 4.2% increase from
$322.6 in 2007 despite the Federal Reserve interest rate cuts
throughout 2008. This was driven by organic balance sheet growth
in loans, increased purchases of higher-yielding taxable
investment securities combined with a decrease in funding costs.
Average loans outstanding for 2008 was $8.59 billion
compared to $7.36 billion for 2007, an increase of 16.7%.
Average taxable securities investment for 2008 was
$2.36 billion compared to $1.73 billion for 2007, an
increase of 36.6%. Interest and dividend income from loans and
investments for 2008 was $697.4 million compared to
$706.3 million for 2007, a decrease of $9.0 million or
1.3%. At the same time funding costs for 2008 decreased
$22.5 million or 5.8% to $361.3 million from
$383.8 million for 2007.
- 45 -
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The following table reflects the distribution of average assets,
liabilities and stockholders equity, as well as the
amounts of interest income and resultant yields earned from
average interest-earning assets, and the amounts of interest
expense and resultant rates paid on average interest-bearing
liabilities for the years ended December 31, 2008 and 2007
(dollars in thousands):
Net interest margin declined 46 basis points to 2.82% for
the year ended December 31, 2008 compared to 3.28% for the
same period in 2007. The decline reflects the effect of the
Federal Reserve interest rate cuts of 425 basis points
during the year and the reversal of accrued interest of
$21.8 million on loans that have been placed on nonaccrual,
primarily in construction loans that have been downgraded during
the year ended December 31, 2008.
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For the year ended December 31, 2008, net interest margin,
calculated on a tax equivalent basis was 2.92% compared to 3.36%
for 2007, a decline of 44 basis points. Certain
interest-earning assets of the Company qualify for federal tax
exemptions or credits. The net interest margin, calculated on a
tax equivalent basis, considers the tax benefit derived from
these assets.
Average interest-earning assets for the year ended
December 31, 2008, increased $2.08 billion or 21.1%
over the same period last year. The increase was primarily in
the loans and investment and mortgage backed securities
portfolio. Average outstanding loans for the year ended
December 31, 2008 increased $1.23 billion or 16.7%
compared to the year ended December 31, 2007, primarily as
a result of organic commercial business loan growth in both the
domestic and China market areas. UCBs continued focus on
commercial lending activities, expansion of its Hong Kong branch
and loan growth generated from its BDB acquisition
reflects the increase in the average commercial loan balances of
$1.18 billion or 17.2% compared to the corresponding period
of 2007. Average commercial business loan balances for the year
ended December 31, 2008, increased $724.8 million or
45.4% compared to the corresponding period of 2007. Average
construction loan balances for the year ended December 31,
2008 increased $592.5 million or 46.0% compared to the same
period in 2007. However, due to the continuing challenging
current economic environment, the growth rate for commercial
lending activities, especially in the construction lending
market has slowed noticeably during the second half of 2008.
Total new loan commitments for the second half of 2008 was
$1.02 billion compared to $1.85 billion for the first
half of 2008, a decrease of 44.9%. As of December 31, 2008,
total loans represented 64.1% of total assets.
Average investment and mortgage-backed securities for the year
ended December 31, 2008 was $2.82 billion, an increase
of $792.2 million, or 39.0%, from the year ended
December 31, 2007. Increase in investment and
mortgage-backed securities resulting primarily from the
purchases of U.S. Government sponsored enterprise notes.
The balance of U.S. Government sponsored enterprise notes
at December 31, 2008 was $1.01 billion compared to
$447.2 million at December 31, 2007.
Total interest-bearing liabilities, which comprise of deposits
and borrowings, increased $1.93 billion, or 22.0%, for the
year ended December 31, 2008, from the year ended
December 31, 2007.
Average total deposits increased $867.9 million, or 11.72%,
for the year ended December 31, 2008, from the year ended
December 31, 2007, reflecting UCBs ongoing focus on
the generation of commercial and consumer deposits, both
domestically and in the China market areas. Average
interest-bearing deposits increased to $7.47 billion, up
12.6% from the year ended December 31, 2007, and average
noninterest-bearing deposits increased to $799.2 million,
up 4.1% for the year ended December 31, 2008, compared to
the year ended December 31, 2007. At December 31,
2008, total deposits represented 74.3% of total liabilities.
Average total borrowings increased $1.09 billion, or 50.8%,
for the year ended December 31, 2008, from the year ended
December 31, 2007. At December 31, 2008, total
borrowings were $2.99 billion and represented 24.7% of
total liabilities. FHLB advances made up $1.72 billion of
total borrowings at December 31, 2008.
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The changes in interest income and interest expense for the
major categories of interest-earning assets and interest-bearing
liabilities, and the amount of change that is attributable to
volume and rate changes by comparing the years ended
December 31, 2008 to 2007, are as follows (dollars in
thousands):
Provision for Loan Losses. The
provision for loan losses was $262.9 million for 2008, as
compared to $20.2 million for 2007. The economic and credit
turmoil that began in the latter part of 2007 continued to
worsen throughout 2008. The increased provision for loan losses
during the first quarter of 2008 was the result of increases in
classified residential construction loans and specific reserves
on residential construction loans geographically located in
distressed areas that included Riverside County,
San Bernardino County, the Greater Sacramento area,
Imperial County, the High Desert and the Central Valley, all of
which are in California and Nevada. The provision for loan
losses during the second quarter of 2008 reflects an increased
assessment of loss severity, primarily on certain residential
construction problem loans previously identified during the
first quarter. In addition, provision for loan losses during the
second quarter was necessitated by the high level of
charge-offs. The provision for loan losses during the third
quarter of 2008 was primarily due to further softening in the
residential construction markets in California. The construction
loan provision was impacted by increases in both specific
reserves and by increases in loss factors applied. Also,
$4.1 million of the third quarters provision was
associated with increased commercial lending reserves for one
commercial loan. Provision for loan losses during the fourth
quarter was greater than the loan loss provision for the three
quarters of 2008 combined. The significant loan loss provision
of $152.1 million during the fourth quarter was primarily
due to the further rapid deterioration in residential
construction markets in certain areas of California. We
experienced additional specific loss provisioning associated
with a certain number of commercial real estate and commercial
business loans, as a result of lender specific events that
occurred during the latter half of 2008. The deterioration in
the economy and the housing and construction sectors accelerated
during the later stages of the fourth quarter of 2008. As such,
the loan loss provision for the fourth quarter reflects a
significant increase in non-performing loans, substantial
increase in charge-offs, delinquencies and receipt of updated
appraisals, especially in the residential construction loan
portfolio as compared to the prior quarters of 2008.
For the year ended December 31, 2008, net charge-offs were
$113.2 million, an increase of $104.0 million from the
$9.3 million of net charge-offs for the year ended
December 31, 2007. Construction net charge-offs was $90.4
million, representing 79.9% of the net charge-offs for 2008. Net
charge-offs as a percentage of average loans held in portfolio
was 1.33% for the year ended December 31, 2008, as compared
to 0.13% for the year ended December 31, 2007, an increase
of 120 basis points as compared to 2007. The provision for
loan loss was $109.7 million greater
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than net charge-offs for the year ended December 31, 2008,
which resulted in a corresponding increase in the Companys
allowance for loan losses.
See Credit Risk Management for more information on
how the Company determines the level for the allowances for loan
losses and unfunded lending commitments.
Noninterest Income. Noninterest income
decreased by $23.1 million, or 90.4%, for the year ended
December 31, 2008, compared to the year ended
December 31, 2007. The net decrease was primarily the
result of
other-than-temporary
impairment on investments of $43.1 million recognized for
the full year of 2008. The other-than-temporary charges included
a $5.2 million write-down in two non-bank REIT TPS CDOs, a
$22.3 million write-down on GSE investment securities, a
$5.0 million write-down on the retained residual tranche
from UCBs commercial real estate loan securitization and a
$10.6 million write-down on three CDOs backed by pooled
bank trust preferred securities.
In addition, a $1.4 million charge was recorded during the
first quarter of 2008 for a lower of cost or market adjustment
on commercial real estate loans held for sale. Gain on sale on
loans decreased to $2.0 million for the year ended
December 31, 2008, from $8.2 million for the same
period in 2007 due to decreased sales volume resulting from the
current economic and market conditions. The decrease in
noninterest income was partially offset by $9.8 million in
foreign exchange gain for the year ended December 31, 2008,
an increase of $9.6 million over the same period in 2007.
For the year ended December 31, 2008, gain on available for
sale investment securities increased $5.5 million, or
103.8%.
Noninterest Expense. Noninterest
expense increased $37.1 million, or 21.5%, for the year
ended December 31, 2008 as compared to the same period in
2007. For the year ended December 31, 2008, personnel and
occupancy expenses increased by $19.6 million, or 16.4% as
a result of additional cost of supporting the Companys
commercial business, the expansion of the Companys
infrastructure and includes a full year of salary and occupancy
costs associated with the May, 2007 acquisition of The Chinese
American Bank and the December, 2007 acquisition of UCB China.
Included in noninterest expense for the year ended
December 31, 2008, was a $6.0 million of deposit
insurance premium, an increase of $4.2 million over the
same period in 2007 and $7.1 million in other real estate
owned expenses, and increase of $6.5 million over the same
period in 2007. The increase in deposit insurance premium
reflects a 22.1% growth in domestic deposits and the inclusion
of a one time credit of $3.6 million in the 2007 deposit
insurance premium expense. In addition, other real estate owned
expense increased by $6.5 million in 2008 due to increased
foreclosures.
Income Tax Benefit. The Company
recognized a $66.5 million income tax benefit for the year
ended December 31, 2008 compared to a $52.9 million
income tax expense for the year ended December 31, 2007.
The income tax benefit for 2008 was primarily caused by a
significant pretax loss for 2008 and tax exempt interest income
and low-income housing credits. The effective tax rate for the
year ended December 31, 2008, was 49.5% compared with 34.1%
for the year ended December 31, 2007.
Year
Ended December 31, 2007, Compared to Year Ended
December 31, 2006
The consolidated net income of the Company for the year ended
December 31, 2007, increased modestly by $1.4 million,
or 1.4%, to $102.3 million, compared to $100.9 million
for the same period in 2006. The modest increase in net income
was the result of increase in loan loss provision and realized
losses on certain collateralized debt obligations that were
deemed impaired in the fourth quarter of 2007 as a result of
credit downgrades. The ROE and ROA ratios for the year ended
December 31, 2007, were 11.55% and 0.97%, respectively.
These amounts compare with the ROE ratio of 15.59% and the ROA
ratio of 1.23% for the year ended December 31, 2006. During
the fourth quarter of 2007, the Company recorded an
$11.6 million other-than-temporary impairment charge on two
of its collateralized debt obligations. In addition, as a result
of credit deterioration in certain of its construction loans,
the Company recorded a $14.0 million provision for loan
losses in the fourth quarter of 2007. The declines in the ratios
are reflective of the growth rates of assets and equity that
exceeded the growth in net income, primarily as a result of the
Companys expansion and acquisitions that were consummated
in the latter part of 2007 as well as a result of the CDO
writedown and increase loan loss provisions recorded in the
fourth quarter of 2007. The efficiency
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ratio was 49.61% for the year ended December 31, 2007,
compared with 49.32% for the same period in 2006. The higher
efficiency ratio is reflective of the growth in noninterest
expense that exceeded the growth in net interest income and
noninterest income, resulting from the Companys expansion
and acquisitions. Diluted earnings per share were $0.97 and
$1.03 for the years ended December 31, 2007 and 2006,
respectively.
Net Interest Income and Net Interest
Margin. The increase in net interest income
for the year ended December 31, 2007, compared to the same
period in 2006 was principally due to a $2.02 billion
increase in average interest-earning assets, which resulted
primarily from organic loan growth along with the CAB
acquisition. The average cost of deposits increased
36 basis points from 3.37% for the year ended
December 31, 2006, to 3.73% for the year ended
December 31, 2007, as a result of an increase in market
interest rates during the past twelve months, the change in the
composition of deposits and the procurement of certificates of
deposit from brokers. These factors were partially offset by a
44 basis point increase in average loan yields reflecting
the repricing of adjustable-rate loans as market interest rate
indices rose during parts of 2007. The yield on taxable
securities also increased for the year ended December 31,
2007, compared to the same period in 2006 as a result of
purchases of higher-yielding securities during 2007.
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The following table reflects the distribution of average assets,
liabilities and stockholders equity, as well as the
amounts of interest income and resultant yields earned from
average interest-earning assets, and the amounts of interest
expense and resultant rates paid on average interest-bearing
liabilities for the years ended December 31, 2007 and 2006
(dollars in thousands):
The decline in the net interest margin for the year ended
December 31, 2007, compared to same period in 2006 reflects
the impact of increased costs of money market accounts and
certificates of deposit resulting from higher market interest
rates, the runoff of savings accounts due to the current market
interest rates, the change in the composition of deposits and
the procurement of costlier certificates of deposit from
brokers, all of which were partially offset by higher loan
yields.
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The net interest margin, calculated on a tax equivalent basis,
was 3.36% for the year ended December 31, 2007, as compared
to 3.45% for 2006. Certain interest-earning assets of the
Company qualify for federal tax exemptions or credits. The net
interest margin, calculated on a tax equivalent basis, considers
the tax benefit derived from these assets. The net interest
margin decline reflects the impact of increased costs of money
market accounts and certificates of deposit resulting from
higher market interest rates, the change in the composition of
deposits and the procurement of costlier certificates of deposit
from brokers partially offset by higher loan yields, and
decreases in interest rates causing deposits to reprice faster
than loans.
Average interest-earning assets for the year ended
December 31, 2007, increased 25.8% compared to the year
ended December 31, 2006, primarily as a result of organic
construction and business loan growth and the assets acquired
from the CAB and BDB acquisitions. Average outstanding loans
increased by $1.28 billion for the year ended
December 31, 2007, from the year ended December 31,
2006, principally as a result of UCBs continued focus on
commercial lending activities. Average commercial loan balances
increased 24.8% compared to the corresponding period of 2006,
primarily due to UCBs past emphasis on commercial real
estate, continued emphasis on commercial business loans,
expansion of its Hong Kong branch and from the CAB and BDB
acquisitions. Average consumer loans for the year ended
December 31, 2007, decreased $73.8 million, or 12.1%,
compared to the same period in 2006. As of December 31,
2007, total loans represented 67.8% of total assets. New loan
commitments of $4.12 billion for the year ended
December 31, 2007, were comprised of $3.91 billion in
commercial loan commitments and $201.8 million in consumer
loan commitments.
Average investment and mortgage-backed securities for the year
ended December 31, 2007, increased $510.9 million, or
33.6%, from the year ended December 31, 2006. In
preparation for the closing of the acquisitions of Summit and
The Chinese American Bank, the Company increased its securities
portfolio in the fourth quarter of 2006. The Company experienced
a reduction in the securities portfolio during the first and
early second quarter of 2007 as Summit was integrated into UCB
and as The Chinese American Bank acquisition closed. One of the
Companys long-term goals is to reduce the investment and
mortgage-backed securities portfolio to a range of 10% to 15% of
total assets.
Average total deposits increased $1.17 billion, or 18.8%,
for the year ended December 31, 2007, from the year ended
December 31, 2006, reflecting UCBs ongoing focus on
the generation of commercial and consumer demand deposits and
from the CAB and BDB acquisitions. In addition, UCB also had
$163.5 million in brokered deposits at December 31,
2007. Average interest-bearing deposits increased to
$6.64 billion for the year ended December 31, 2007, up
16.7% from the year ended December 31, 2006, and average
noninterest-bearing deposits increased to $767.6 million,
up 40.9% for the year ended December 31, 2007, compared to
the year ended December 31, 2006.
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The changes in interest income and interest expense for the
major categories of interest-earning assets and interest-bearing
liabilities, and the amount of change that is attributable to
volume and rate changes by comparing the years ended
December 31, 2007 to 2006, are as follows (dollars in
thousands):
Provision for Loan Losses. The
provision for loan losses was $20.2 million for 2007, as
compared to $3.8 million for 2006. Of the total 2007
provision, $14.0 million was recorded in the fourth quarter
of 2007. While the Company is not directly involved in sub-prime
lending activities, current economic pressures on housing and
land values in certain California markets such as the Inland
Empire, Central Valley and Sacramento area have impacted a
certain segment of the overall loan portfolio. Approximately 10%
of the loan portfolio is concentrated in these stressed
California markets, and the Company has noted an increase in
loan delinquencies and some migration to criticized credit
categories that are predominately related to construction
lending. Therefore, in the fourth quarter of 2007, the Company
increased its specific valuation allowances by
$4.4 million, and increased its economic surcharge factors
by $4.3 million, which included $3.3 million
specifically related to the construction portfolio. However,
year over year changes in loss factors did not materially impact
the provision for loan losses. The increase was the result of an
increase in classified loans and specific reserves on impaired
loans.
For the year ended December 31, 2007, net charge-offs were
$9.26 million, a decrease of $0.96 million from the
$10.22 million of net charge-offs for the year ended
December 31, 2006. Net charge-offs as a percentage of
average loans held in portfolio was 0.13% for the year ended
December 31, 2007, as compared to 0.17% for the year ended
December 31, 2006, a decrease of 4 basis points as
compared to 2006. The provision for loan losses was
$10.9 million greater than net charge-offs for the year
December 31, 2007, which resulted in a corresponding
increase in the Companys allowance for loan losses.
See Credit Risk Management for more information on
how we determine the appropriate level for the allowances for
loan losses and unfunded lending commitments.
Noninterest Income. Noninterest income
decreased by $17.6 million, or 40.7%, for the year ended
December 31, 2007, compared to the same period in 2006.
Noninterest income in 2007 included an $11.6 million charge
for realized losses on two of our REIT collateralized debt
obligations. Noninterest income in 2006 included a
$5.0 million acquisition termination fee from Great Eastern
Bank and $1.6 million of interest income related to refunds
from amended income tax returns. Commercial banking fees
increased to $14.9 million for the year ended
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December 31, 2007, compared to $12.0 million for the
same period in 2006. The increase reflects the growth in trade
finance activity, merchant card activity, other commercial
banking fees and fees from UCB Investment Services, Inc. Gain on
sale of multifamily and commercial real estate loans decreased
to $5.7 million for the year ended December 31, 2007,
from $17.8 million for the same period in 2006. The lower
of cost or market adjustment related to loans held for sale
reflects a $303,000 loss related to loans transferred from held
for sale to held in portfolio for the year ended
December 31, 2007, compared to a $76,000 recovery related
to previously recognized write down of loans held for sale to
market for the same period in 2006. Additionally, UCB had an
increase for equity losses in other equity investments to
$3.0 million for the year ended December 31, 2007,
from $1.1 million for the same period in 2006.
Noninterest Expense. Noninterest
expense increased $21.3 million, or 14.1%, for the year
ended December 31, 2007, compared to the same period in
2006. For the year ended December 31, 2007, personnel
expenses increased $9.4 million, or 10.6%, from the same
period in 2006 due to additional staffing required to support
the growth of UCBs commercial banking business, the
opening of new branches, the additional staffing resulting from
the Summit Bank, CAB and BDB acquisitions and the expansion of
UCBs infrastructure to support a larger and growing
organization. Occupancy expenses increased $5.0 million, or
31.0%, for the year ended December 31, 2007, compared to
the same period in 2006 as a result of the opening of new
branches and the operations of Summit Bank, CAB and BDB. Core
deposit intangible amortization increased $2.2 million, or
85.0%, for the year ended December 31, 2007, compared to
the same period in 2007 as a result of the additional
amortization of the core deposit intangibles associated with the
Summit Bank and CAB acquisitions. Other general and
administrative expenses increased by $2.3 million, or
14.5%, for the year ended December 31, 2007, compared to
the same period in 2006 primarily as a result of increased
advertising expenses related to UCBs expansion, market
promotions, merchant card expenses and foreign exchange losses.
Income Tax Expense. The effective tax
rate for the year ended December 31, 2007, was 34.1%
compared with 33.6% for the year ended December 31, 2006.
The effective tax rate for the year ended December 31,
2006, reflects an income tax benefit of $4.0 million
related to additional Enterprise Zone tax benefits realized in
2006. The effective tax rates are generally lower than the
combined federal and state statutory rate of 42.0%, primarily
due to federal and state tax credits and incentives, and
tax-exempt income.
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Currently, UCB comprises substantially all of the Companys
operations. In addition, no portion of UCB meets the thresholds
designated by generally accepted accounting principles for
separate segment disclosures. As a result, the previous
discussion of the results of operations and the subsequent
balance sheet analyses are applicable to UCB as well as to the
Company. See Note 32 to the Consolidated Financial
Statements for additional information on the Companys
segments.
BALANCE
SHEET ANALYSIS
Investment
Securities
UCB maintains an investment and mortgage-backed securities
portfolio (Investment Securities Portfolio) to
provide both liquidity and to enhance the income of the
organization. The Investment Securities Portfolio is comprised
of two segments: Available for Sale (AFS) and Held
to Maturity (HTM). UCBs AFS Investment
Securities Portfolio is recorded at fair value, with unrealized
changes in the fair value of the securities reflected as
accumulated other comprehensive income (loss). At the end of
each month, UCB adjusts the carrying value of its AFS Investment
Securities Portfolio to reflect the current fair value of each
security. The HTM Investment Securities Portfolio is carried at
amortized cost. At the time a security is purchased, UCB
classifies the security as either AFS or HTM. The securities are
classified as HTM if UCB has the positive intent and ability to
hold such securities to maturity.
UCBs Investment Securities Portfolio investments are
governed by an Asset/Liability Policy (A/L Policy),
which was approved by UCBs Board of Directors. The A/L
Policy sets exposure limits for selected investments, as a
function of total assets, total securities and Tier 1
capital, as well as the maximum maturity and duration limits.
The A/L Policy also limits the concentration in a particular
investment as a function of the total issue. Finally, the A/L
Policy sets goals for each type of investment with respect to
ROA, ROE and total risk-based capital ratio and also sets limits
for interest rate sensitivity.
Investments permitted by the A/L Policy include United States
Government obligations, United States Government sponsored
enterprises securities, municipal obligations, investment grade
securities, commercial paper, corporate debt and money market
mutual funds. Other securities include residual interests in a
CRE securitization, private-label residential mortgage-backed
securities, collateralized debt obligations backed by trust
preferred securities, collateralized loan obligation, FNMA and
FHLMC preferred stock, and interest-only strips from SBA loans.
UCBs Board of Directors has directed management to invest
in securities with the objective of optimizing the yield on
investments that appropriately balances the risk-based capital
utilization and interest rate sensitivity. The A/L Policy
requires that all securities be of investment grade at the time
of purchase.
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The amortized cost and market value of the Investment Securities
Portfolio at December 31, 2008, 2007 and 2006, were as
follows (dollars in thousands):
As of December 31, 2008, the amortized cost and the market
value of the AFS Investment Securities Portfolio were
$3.00 billion and $2.96 billion, respectively. The
total net of tax unrealized loss on these securities was
$21.7 million and is reflected as accumulated other
comprehensive loss in stockholders equity. The difference
between the carrying value and market value of securities that
are held to maturity, aggregating a net gain of
$3.8 million, has not been recognized in the financial
statements as of December 31, 2008. Additionally, certain
securities that UCB holds have unrealized losses that extend for
periods in excess of twelve months. These securities are
comprised primarily of CDOs, mortgage-backed securities and
municipal securities. The unrealized losses associated with
these securities are from changes in interest rates due to an
increase in risk aversion subsequent to purchase. The unrealized
losses would decline should the required yield or interest rates
fall to the purchased yield and as the securities approach
maturity. Investment securities available for sale with
unrealized losses were determined not to be other-than-temporary
impaired due to indicators associated with these securities that
the Company evaluated. Indicators that the Company evaluated for
these securities include the amount of decline in market value
below the amount recorded for these securities and the severity
of the decline. Other factors that were considered in
determining whether these securities were not other-
than-temporary impaired include the length of time to which the
market value has been less than the book value, any recent
events specific to the issuer, the economic conditions of its
industry, review of the collateral associated with the
securities, and the Companys intent and ability to hold
the investment for a period of time sufficient to allow for any
anticipated recovery. Also, in the pricing of investments using
the Companys internal model, the Company stress tested
cash flows in each scenario.
CDOs with an amortized cost basis of $15.3 million and
carrying value of $12.6 million at December 31, 2008,
include securities backed by REIT TPS and pooled bank TPS which
are included in our available for sale securities. The
unrealized losses on these securities have occurred as a result
of rising defaults and delinquencies in the subprime residential
mortgage markets, coupled with rating agency downgrades of a
large number of subprime
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residential mortgage-backed securities, which in turn led to
continued credit spread widening and ultimately resulted in
declines in the valuations of these types of securities and
certain indices that serve as a reference point for determining
the fair value of such securities. The carrying value at
December 31, 2008, reflects the cumulative
$15.9 million other-than-temporary impairment charges that
we recognized on our pooled bank TPS CDOs and which have been
reflected in our results of operations for the year ended
December 31, 2008. At December 31, 2007, the carrying
value reflected an $11.6 million other-than-temporary
impairment charge that we recognized on two REIT TPS CDOs.
Mortgage-backed securities consist primarily of securities
guaranteed by FNMA, the Government National Mortgage Association
(GNMA) and the Federal Home Loan Mortgage
Corporation (FHLMC), as well as certain
collateralized mortgage obligations. These securities are
collateralized by residential mortgage loans and may be prepaid
at par prior to maturity. The unrealized losses on our
mortgage-backed securities resulted primarily from changes in
interest rates due to an increase in risk aversion subsequent to
purchase. The unrealized losses will decline as the required
yield fall to the purchased yield and as the securities approach
contractual or expected maturity.
The municipal securities are issued by states and their
political subdivisions in the U.S. These securities
predominantly have ratings of AAA, AA, or A. These securities
either have bond insurance or guarantees that originally
supported investment grade ratings of AAA or AA. With the recent
Nationally Recognized Statistical Rating Organization
(NRSRO) downgrades of monoline insurers, we have
seen the ratings of our municipal bonds decline, but in no case
are the bonds rated below BBB, although some are unrated.
Nevertheless, in managements opinion there have not been
any material deteriorations of the underlying municipal credit
quality that would contribute to other-than-temporary
impairment. The unrealized losses on our municipal securities
resulted primarily from the lack of market liquidity in the
third and fourth quarter, changes in interest rates due to an
increase in risk aversion subsequent to purchase and to a lesser
extent the uncertainty surrounding the monoline insurers. We
expect that the unrealized losses will decline as interest rates
fall to the purchased yield and as the securities approach
contractual or expected maturity.
On a quarterly basis, the Company makes an assessment to
determine whether there has been any credit or economic events
to indicate that a security with an unrealized loss in the
Companys investment portfolio is impaired on an
other-than-temporary basis. The Company considers many factors
including the severity and duration of the impairment, the
intent and ability for the Company to hold the debt security for
a period of time sufficient for a recovery in value, recent
downgrades in external credit ratings and other current events
specific to the issuer or industry.
Monoline insurers provide credit enhancement to capital market
transactions. The current economic and credit market environment
has severely affected the financial strength of some of these
financial guarantors. The Companys exposure to monoline
insurers is limited to municipal bonds that are insured by
monolines and the senior commercial mortgage backed securities
(CMBS) bond from our 2007 commercial real estate
loan securitization. At December 31, 2008, municipal bonds
insured by monolines had an amortized cost of approximately
$383.9 million and the senior CMBS bond had an amortized
cost of $308.3 million. There were no losses related to
these exposures that needed to be reflected in the results for
year ended December 31, 2008. Furthermore, the monoline
insurer for the senior CMBS bond was AAA-rated by
Standard & Poors and Aa2-rated by Moodys
as of December 31, 2008.
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