United Community Banks Inc (UCBIO) 2004 Q3 法說會逐字稿

Good day and welcome to the United Community Banks' third quarter earnings release teleconference. Today's call is being recorded.

At this time I would like to turn the call over to Mr. Jimmy Tallent. Please go ahead, sir.

Good morning and thank you for joining United Community Banks' third quarter conference call. I'm Jimmy Tallent, chief executive officer of United Community Banks, and with me is Rex Schuette, our chief financial officer.

During today's call we will brief you on our record third quarter performance, a performance we're very proud of given the continued challenges in some segments of the marketplace and some quarter over quarter comparisons that deserve further comments.

Second, we'll update you on several key initiatives of our balanced growth strategy, including two recently announced acquisitions in the fast growing Atlanta market.

And finally, we'll reaffirm our earnings guidance for the remainder of 2004 and our outlook for 2005. Following our presentation we'll open the call to your questions.

But first I'd like Rex to review our forward-looking statement.

Thanks, Jimmy. The earnings announcement that we released earlier this morning is available on our website. Also, this call is being simulcast on our website in the investor relations section where it will be archived for 90 days.

During the course of this conference call we make certain forward-looking statements. These include all statements that are not statements of historical fact or statements regarding the intent, belief or expectation of United Community Banks and management with respect to trends affecting our operations, our financial, economic and market conditions, and our growth and operating strategies. Specifically, of course, earnings expectations and estimates are forward-looking statements.

During this call we may refer to non-GAAP financial measures. Our news release explains the difference between non-GAAP earnings measures and measures calculated under GAAP. We provide these non-GAAP measures because we believe they are helpful in analyzing core performance trends at United Community Banks.

We filed our news release on Form 8-K earlier this morning and we urge you to review the sections of our most recent Forms 10-K and 10-Q that describe the factors that may affect our future results of operations. Any forward-looking statements contained in this call or other public statements made by management should be considered in light of those factors.

Thank you, Rex. We just completed another excellent quarter at United Community Banks. In fact, every quarter in 2004 has been a record setter, coming, of course, on top of 2003's performance that also delivered record financial results. As the news release explains, for the third quarter total revenue compared to last year's third quarter increased by 11%, net operating income grew by 15%, diluted operating earnings per share increased by 10%, and return on tangible equity was 19.41%.

From my perspective, the third quarter's performance clearly illustrates the long-term effectiveness of our balanced growth strategy, as well as the diligence with which we monitor and control expenses. This diligence permits us not only to grow the business, but also to enjoy significant positive operating leverage as our revenue growth continues to outpace expense growth.

The quarter and nine months, as I suggested earlier, included some comparisons to last year that need to be highlighted. Looking at fee revenue, for example, we're comparing this quarter's results with the third quarter of 2003 when we experienced a record level of mortgage refinancing activity and related fee revenue.

And while total fee revenue for the third quarter of 2004 was down, the addition of new mortgage products and originators helped offset some of this decline. We also grew fee revenue for other products and services, including deposit accounts, that partially offset some of the decline in the mortgage fee revenue.

And when comparing operating expenses year over year, we added a new bank and four de novo banking offices during the last 12 months. The bank and the banking offices are meeting performance expectations, but, as with any new office, they're still in various stages where costs are exceeding revenues.

Overall we have more than offset the temporary startup cost while delivering consistent and strong operating results that provided double-digit growth in earnings per share. Keep in mind, too, that per share comparisons have been adjusted to reflect United Community Banks' three for two stock split which took place on April 28th, 2004.

Our record performance continues to be driven by the hard work and dedication of 1,450 community bankers in our 78 banking offices, talented people who consistently and effectively implement this company's proven strategy for profitability and growth. They are the people who truly enjoy and take pride in their work and the community banking model we've developed.

I don't know how many of you have seen the October issue of the U.S. Banker, but there's a colorful story on United Community Bank and some of the personal touch elements of our approach to customer service and the ways they're helping to drive our growth.

Let me take a few minutes to update you on our balanced growth strategy, which truly has been the key to our profitability and we believe will continue to generate strong growth for the remainder of 2004 and into the future.

The strategy, as you recall, has two key elements. First, our primary key focus is on organic growth. Through the years more than 70% of our overall growth has been organic, driven by core operations that profitably grow the business and market share with a strong commitment to customer service and our community banking model. We define organic growth as our internal growth, as well as the growth from de novo offices.

During previous calls we've often called it "de novo with a difference", reflecting the fact that we don't just open an office when we see an opportunity in a market, but we open it when we see an opportunity to attract the right kind of community bankers who know that market and share our values.

The second element of our balanced growth strategy is selective mergers and again, the key is doing more than just using a merger to move into a market where we see an opportunity. It's also making certain that the fit is right and that we identify banks that share our passion for customer service and our commitment to community banking.

Underlying it all, of course, is a core belief that in everything that we do, we must maintain a constant focus on monitoring and controlling operating expenses to provide positive operating leverage. During the third quarter we hit on all cylinders as far as that strategy is concerned.

Looking at organic growth, we enjoyed strong core gains in total loans, deposits and net interest revenue. And we moved to augment that strong organic growth with two announced mergers in the metropolitan Atlanta market, expanding United Community Banks' presence in one of the fastest growing metro areas in the United States.

Let's take a closer look at some of the specific highlights of our third quarter performance. Now Rex will provide additional detail later in the call.

First, loan growth. Loan demand remains strong across all of our markets in the third quarter. At September the 30th, total loans were $3.4 billion, up 15% excluding acquisitions. That compares to a 14% increase in core loan growth for both the first and second quarters of this year. As our news release explained, United's provision for loan losses in the third quarter increased by $500 thousand from a year earlier and by 200 thousand from this year's second quarter. Credit quality remains a critical foundation for our high performance and growth, as does our strategy of securing loans with hard assets.

As Rex pointed out in July's second quarter conference call, the second quarter's loan charge-offs and related ratios were low in comparison to our historical experience. Over the last two years, net charge-offs have averaged about 15 basis points and, as we said three months ago, that historical level is more in line with our expectations for the remainder of the year.

Net charge-offs to average loans were 12 basis points for the third quarter, up from the second quarter but still below those historical levels, and the allowance to loans ratio remains steady at 1.27%.

Additionally, we saw a slight increase in non-performing assets as a percentage of total assets, up 3 basis points to 23 basis points at quarter end as compared to 20 basis points at September the 30th of 2003.

Now I'm very comfortable with these ratios and our credit quality remains very strong. I also recognize that we're coming off of a small base that can lead to fluctuations. That said, rest assured that we will never sacrifice credit quality for the sake of growth.

A second area I'd like to highlight is growth in our core deposits. Beginning in the first quarter of this year we launched a company-wide initiative to increase our deposit base. The rationale behind this effort is simple but compelling.

Our commitment to customer service, the cornerstone of our community banking model, has consistently generated customer satisfaction scores well beyond the industry's average. Those scores, compiled by a leading market research organization, are consistently in the 90 plus percent range compared to an industry average of about 75%.

Customers, those surveys told us, not only have a strong loyalty to United Community Banks, but they regularly refer friends and family to us. This loyalty and trust has allowed us to launch a refer-a-friend core deposit program. This, as well as other initiatives, has grown core deposits by $185 million in the first nine months of 2004, bringing in more than 29,000 new accounts.

And since the incentive isn't just a free gift for referring a friend but also the exceptional level of personal service customers know they can count on at United, we believe this represents sustainable core deposit growth.

Let me take a moment to talk about acquisitions. Atlanta has long been an area we've targeted for growth, but it's not just a metro area's growth that attracts us. It is also our belief that in a market undergoing significant banking consolidation, our community banking model and personal service can effectively differentiate us. And we need to have a presence with the right bankers in the Atlanta market to take full advantage of these growth opportunities.

Our approach is to identify institutions that share our community banking style and have a strong local franchise in an attractive market. Following the merger, we're able to bring the products, services and resources of a $5 billion bank to these smaller community banks, creating the best of both worlds. We provide the high customer service levels of a small community bank with the resources, products and technology of a much larger bank.

During 2004 second quarter we completed the merger with First Community Bank. Its five full service banking offices and $190 million in assets expanded our franchise to the fast growing south side of metro Atlanta. During the third quarter we announced two additional acquisitions that will further expand our franchise in metro Atlanta.

The first was Eagle National Bank, located in Henry County on the south side of metro Atlanta, and the second was Liberty National Bank Shares, located in Rockdale and Newton Counties on the east side of metro Atlanta. Eagle has assets of $64 million with two full service banking offices in Henry County, which was the fourth fastest growing county in the United States during the 1990s and is continuing that strong growth today.

Liberty has $180 million in assets and operates three full service banking offices in Rockdale and Newton Counties. Again, these are among the country's fastest growing communities. We expect to close both acquisitions during the fourth quarter of 2004 and we expect them to be slightly accretive to earnings during 2005.

By the end of this year we will operate eight community banks with 27 banking offices in the fast growing metro Atlanta market and have assets there of $1.4 billion. We will have a meaningful presence in this major metropolitan market and certainly be one of the largest community banks serving metro Atlanta. If you look at a map, we are fulfilling our strategy of expanding into the fast growing markets around Atlanta, mainly near or outside the city's perimeter.

There's no timetable, I might add, to complete the circle around Atlanta. These recent acquisitions certainly did fit into our long term strategy but there was an opportunistic element to them in that when these quality institutions began to weigh their strategic plans, our long term relationships again became invaluable. And as the opportunities become available in the future with the right people, we will look to further expend with selective de novo offices.

So in summary, we enjoyed a strong third quarter, another quarter with record financial performance despite some challenging conditions and comparisons to last year's results. And we continue to execute our growth strategy that we believe will create long term shareholder value.

With that, let me ask Rex to provide some additional details on the quarter.

Rex?

Thanks, Jimmy. For the third quarter, net operating earnings increased 15% to a record $12 million, up from 10.4 million in last year's third quarter. Diluted operating earnings per share was 32 cents, up 10% from the 29 cents we reported in last year's third quarter and equal to analysts' consensus. Total revenue on a tax equivalent basis was 50.1 million, up 11% from last year, and we achieved a return on tangible equity of 19.41% compared to 19.94% a year ago. All of those numbers are on target with the guidance we provided for 2004.

Now let me comment briefly on the increase in diluted operating earnings per share of 10% for the third quarter. To some extent, the numbers reflect some challenging comparisons that Jimmy referred to earlier, including the five de novo offices opened in the past 12 months, the decline in mortgage refinancing fees, and a higher provision for loan losses.

But there's also a rounding element caused by the stock split distributed earlier this year. If we take the EPS calculation out one decimal, the actual growth rate in operating earnings per share is 12% and that growth rate is consistent with the year to date results where we achieved a 12% increase in earnings per share compared to 2003. And finally, bottom line we are on track to hit our full year target of 12 to 15% growth in operating earnings per share, which is consistent with the $1.27 current year's consensus.

Now let's return to operating earnings and other key elements of our performance for the third quarter of 2004. Tax equivalent (inaudible) revenue for the quarter rose $5.9 million, or 16%, to 42.2 million from the same period a year ago. Recent acquisitions accounted for approximately 1.7 million of the increase, leaving our core growth rate at 12%. Interest margin for the third quarter was 3.99%, up slightly from last year and last quarter.

As I mentioned on previous calls, we have maintained on interest margin near the 4% level and have been doing so now for the past eight quarters. We expect to remain at this level through the fourth quarter of 2004 and our guidance for 2005 continues to be at the 4% level.

As our news release pointed out, our balance sheet is asset sensitive, which will allow us to benefit slightly in a rising interest rate environment. I will comment on the rate environment in a couple of minutes. Loan balances at the end of the third quarter were $3.4 billion, up 15% from last year, excluding acquisitions. Loan demand remained strong across all of our markets, providing significant growth opportunities.

Let me break down the 520 million increase in loan balances at quarter end versus a year ago, first by geographic region. North Georgia had growth of 151 million, metropolitan Atlanta had an increase of 203 million, which includes 79 million from the acquisition of First Community Bank in (inaudible), western North Carolina had growth of 100 million, coastal Georgia was up 24 million, and east Tennessee had an increase of 42 million.

Looking at consecutive quarters, total loans increased by 100 million, or 12%, on an annualized basis. Here's the breakdown of that growth by market; 35 million in north Georgia, 38 million in metro Atlanta, 12 million in western North Carolina, 3 million in coastal Georgia and 12 million in east Tennessee. This strong growth, which came from all of our markets, reaffirms what we've long said about United Community Banks' unique footprint and, as Jimmy pointed out, we're able to focus our expansion in areas that clearly strengthen that footprint. We're located in some of the highest growth markets in the U.S., markets where census estimates call for continued high growth throughout the balance of this decade and we believe much longer.

Looking at our growth by loan categories, let's first review the year over year comparisons. Construction and land development loans grew by $310 million, bringing the total $1,188,000,000. Commercial loans increased by $103 million to $1,037,000,000. Residential mortgages increased by $111 million to $1,073,000,000. Looking at the same categories on a consecutive quarter basis, construction and land development loans increased by $82 million and residential mortgages increased by $22 million.

Next, let me update you on the interest rate sensitivity of our balance sheet at quarter end. We are asset sensitive by approximately 4% on net interest revenue based on a ramp up in interest rates of 200 basis points over the next 12 months. That is about the same as last quarter, and about 2% up from a year ago.

Our asset sensitivity is up from last year since we continued to add prime daily floating rate loans. These totaled approximately $1.8 billion at quarter end, up from $1.2 billion a year ago. Currently, we have less than $50 million of prime daily loans with floors, so nearly all of our prime based loans will benefit if rates continue to rise.

Overall, we target and manage our interest rate sensitivity to be within a range of neutral to 3%, taking into consideration the interest rate environment, economic conditions and overall balance sheet structure and liquidity. We focused our prime based lending and managed our interest rate sensitivity through interest rate slobs (ph).

We currently have outstanding $640 million of received big (ph) slobs (ph) up about $300 million from a year ago. This increase is helping to lower our interest rate sensitivity by partially offsetting the growth in prime daily loans. During the fourth quarter, we will continue to lower our sensitivity within the neutral to 3% range.

With our current asset sensitivity, we will benefit from future Fed increases. This will improve our margin and net interest revenue slightly, allowing us more flexibility to price deposit and fund our loan growth internally. As part of our third quarter's balance sheet management activities, we incur pre payment charges that reduced other fee revenue by approximately $400,000.

This related to the early retirement of $11 million of fixed rate federal home loan bank advances. We replaced these funds with lower floating rate advance which more closely match the rate characteristics of a prime based, floating rate loan we put on during the third quarter.

Offsetting these pre payment charges were security gains of approximately $400,000 related to the sale of $15 million of investment securities that were part of the same overall balance sheet management strategy. Moving to fee revenue, for the third quarter, total fee revenue was $9.9 million, down $500,000 from a year ago due to the decline in mortgage refinancing activities.

Mortgage refinancings, as you recall, were at record levels last year. Mortgage loan and related fees for the quarter totaled $1.7 million, down $1.4 million from a year ago, but up $200,000 on a consecutive quarter basis. Excluding mortgage loan and related fees, the remainder of total fee revenue was up 11% over last year's third quarter. For the quarter, we're able to grow fee revenue in other products and services.

Service charges and fees on deposit accounts were $5.6 million, up $550,000. About $200,000 was due to the recent acquisitions, but the remainder came from growth in transaction volumes and new accounts reflecting the success of the core deposit program mentioned earlier.

Consulting fees of $1.4 million were up more than $300,000 or 31%. During the third quarter of 2004, we changed service providers for processing broker transactions. During this conversion period, transaction volumes dropped temporarily. As a result, brokerage fees were down about $100,000, or 16% from the third quarter of 2003. Transaction volumes are returning to the pre conversion levels and we expect brokerage fee revenue to return to these earlier levels as well.

Now let me comment on operating expenses. Total operating expenses for the third quarter were $31.3 million, an increase of $2.6 million or 9%. That's 2% below the 11% increase in total revenue we reported for the quarter. This 2% positive operating leverage drove our 15% increase in operating earnings.

Maintaining positive operating leverage, that is controlling operating expenses at levels below our revenue growth, has long been a key contributor to our strong financial performance. A key example this year is that we have been able to absorb the cost of five denovo offices while still producing a positive operating leverage.

This was further challenged by offsetting a higher provision for loan losses and lower mortgage fee revenue and we still delivered strong earnings performance. Let's review the key components of operating expenses for the third quarter. Salary and employee benefit costs of $19.6 million increased $1.6 million or 9%.

More than half, or approximately $850,000 of this increase resulted from acquisitions. The balance of the increase in salary and benefit costs were due to normal merit increases, offset in part by lower incentive compensation associated with the slow down in mortgage refinancing activities. At quarter end, total staff of approximately 1,450, an increase of 134 over last year.

Looking at the increase in staff levels, more than two thirds of the increase, or 93 staff members was due to our acquisitions and new denovo offices. Let me break down the increase of 134 further. We added 50 staff for the merger with First Community Bank. We added 13 staff for the acquisition of three banking offices in Western North Carolina and 35 staff were added for the five denovo locations.

Looking at the remainder of the increase, what you would call core staff growth was up about 3% as compared to last year. Staff was added to support business growth across all of our markets. Keep in mind, core loan growth was up 15% over the same time period. Communications and equipment expense totaled $2.8 million for the quarter, an increase of $500,000 or 22% due to the acquisitions and our investments in technology to support business growth and further enhance operating efficiencies.

Advertising costs of $1.1 million rose about $350,000, primarily due to the cost of supporting our successful core deposit initiatives that I mentioned earlier. All other operating expenses were flat compared to a year ago, except for the amortization of intangibles of $450,000 which was up $100,000 related to the recent acquisitions.

Now let's review credit quality, a priority that Jimmy touched on earlier. The third quarter's provision for loan losses was $2 million, up $500,000 from a year earlier and up $200,000 from a second quarter of 2004. The allowance to loan ratio was 1.27%, down slightly from the 1.29% a year ago and at the same level as last quarter's 1.27%.

Net charge offs for the quarter were $1 million as compared to $1.1 million a year ago. Net charge offs to average loans were 12 basis for the third quarter, down from 15 basis points for the third quarter of 2003 and up slightly from last quarter's 10 basis points. As indicated during our second quarter conference call, we anticipate that the remainder of 2004 and next year we could experience net charge offs in the range of 12 to 15 basis points closer to those historic levels but still well below industry averages.

Non-performing assets of $10.5 million were up $2.5 million from a year ago. Keep in mind that loans have increased over $500 million from a year ago. The current year's total include $9.1 million of non-performing loans and $1.4 million of oreol (ph). Non-performing assets, as a percentage of total assets were 23 basis points at September 30, 2004 compared to 20 basis points at September 2003 and 19 basis points at year end 2003.

Our allowance to non-performing loan coverage was 476% at quarter end compared to 518% in September 2003 and 583% at year end 2003. Even though non-performing assets have increased this quarter, both the level of assets and ratios are well below our peers and national averages.

So again, while we have some up and down movement in the level of our non-performing assets, and to some extent are due to our small base and further due to the historical levels of non performing assets, our credit quality remains strong and our outlook for continued strong credit quality is excellent.

At quarter end, all of our capital ratios for regulatory purposes are above the well capitalized level. As some of you know, our internal guidelines are 100 basis points above these regulatory, well capitalized levels. Our average tangible equity to assets for the quarter was 5.76%, up slightly from last quarter.

We actively manage and monitor all of our capital levels and we are comfortable with our capital ratios at these levels. To summarize, our third quarter's performance and financial condition reflect the continued record levels we're achieving at United Community Banks.

Core loan growth and credit quality remains strong. During the third quarter, we achieved our stated goals of sustained double digit growth and operating earnings per share and a return on tangible equity above 18%. And we remain solidly on track for 2004 to achieve operating earnings per share growth within our targeted range of 12 to 15%.

Now let me turn the call back to Jimmy.

Thanks Rex. We've said it before on these conference calls, but to us, the story at United Community Banks remains the effectiveness of our balanced growth strategy and its ability to generate quality earnings and sustainable double digit growth in earnings per share.

We believe that our community banking model is a key differentiating factor and a competitive advantage of markets where personal service and local decision making are quickly disappearing with our industry's ongoing consolidation. We start with a unique footprint. Some of the fastest growing markets in the United States where we have a strong franchise and a significant opportunity to grow.

We use our balanced growth strategy to capitalize on that footprint; leveraging for example our community banking model and the high levels of customer satisfaction we've achieved to grow core deposits, loans and fee revenue. And to attract like minded community bankers to join us and establish successful denovo locations.

That's the organic side of the equation. And then we capitalize on that organic growth by identifying banks and bankers who share our beliefs and want to bring their institutions into the United Community Banks family to provide their customers the best of both worlds, community banking and the resources of a $5 billion organization.

That's the selective merger side of the equation. During the third quarter, we have successfully instituted several major initiatives to further both elements of that growth strategy. Underlying it all, we took care of business on the expense side and diligently maintained credit quality assuring that the growth we achieved was profitable and high quality growth.

It's a simple block and tackling approach to this business and when over 1,450 community bankers carry it out in a disciplined step by step process throughout the year, it produces record financial performance, which as you know, we're committed to providing to our shareholders.

As Rex pointed out earlier, we're very comfortable that we'll achieve our long-term goals of sustained double digit growth and operating earnings per share and a return on tangible equity above 18% for 2004. We expect earnings per share growth within our targeted range of 12 to 15% and we're comfortable with the average of estimates of $1.27.

We anticipate and for the balance of the year core loan growth will continue in the range of 10 to 14% over 2003 and that our net interest margin will remain near the 4% level. Looking to 2005, there will be more blocking and tackling, more organic growth and likely additional selective mergers where those mergers fit in with our growth strategies and our business plans.

For 2005, we are offering the following guidance. Core loan growth between 10 and 14%, net interest margin near the 4% level and a continuation of double digit growth and operating earnings per share between 12 and 15% while reinvesting for the future. As Rex explained, we are well positioned for additional increases in short term interest rate and we should benefit slightly if and when they occur. And our credit quality, capital ratios and other measures will remain among the strongest in the industry.

With that, I'll thank you for your continued interest in United Community Banks and now I would like the operator to open this call for your questions.

Thank you, if you would like to ask a question, please press the star key, followed by the digit one on your touch tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, if you'd like to ask a question, please press star one at this time. Our first question comes from Jennifer Demba with SunTrust Robinson Humphrey.

Good morning, I was wondering if you could talk about the sequential increase in non-performing assets. Was that driven by your most recent acquisition or where there any large loans in that?

Jennifer, that is principally one credit, it's a loan that has been with our company almost five years. They've kind of had some financial problems because I think more of the industry that they have been in, they have now chosen to file bankruptcy and of course we're in the process of liquidation.

Now, that credit is a little over $2 million, we have aggressively charged that down. We don't think there will be any additional loss, if it is, it will be very insignificant. But when you look at our NPA, let me just provide a little additional color to that. The NPAs that are $100,000 or greater are a total of 19.

And of those, 14 of those are less than $200,000, three of those are less than $350,000. We have one that's about $750 and then the largest one I've just told you about. That 11 also is secured with real estate and does have equipment on there as well.

Right, thank you. One follow up question. The sequential increase in personnel costs in total. I'm assuming that was mainly driven by the first community acquisition and has that operational conversion been completed yet?

Let me have Rex answer that for us Jennifer.

Hi Jennifer, yeah, the sequential increase was primarily due to the Fairburn acquisition. And we did in the third quarter, we have converted late in the third quarter, so they are on our systems and applications now.

Right, thank you.

Our next question comes from Christopher Marinac with FIG Partners.

Yes hi guys, good morning.

Hi Chris.

Good morning, Chris.

Wanted to ask you about your capital needs in 2005. If we look at acquisitions aside, I just wanted to look at the core business, do you still feel comfortable funding the 12 to 15% EPS growth which is with your own internal funds?

Rex, you want to answer that?

Sure. Chris, we're comfortable, as I noted in the conference call, Chris, with our capital levels where they are currently and ratios. We actively monitor that. We do have two acquisitions as Jimmy indicated that are closing in the fourth quarter. That will have a little bit of pressure on probably our total capital ratio but not in the context of total equity.

And we might look at issuing sometime early next year, that would cover the total capital needs. And for equity, I think we're pretty comfortable right now with our equity needs right now going into next year and we monitor that actively so it's somewhat dependant on market conditions that could impact that also in the mark to market.

I guess on the same point, do you find the acquisitions that you've looked at on your radar screen perhaps may solve your capital needs on the common side just by virtue of buying excess capital. Are any of them out there, are any markets, just in general interesting to you as a way of getting a cash cow, high capital to solve that issuance?

Chris, that's certainly one avenue to increase our capital. To answer your question, at this point, we have not, certainly as we do any additional mergers, having 100% stock transfer would sort of add to that. But as Rex was saying, ideally, I guess within our company, 6%, our comfort range is 5.5% up to that 6.

We watch this very, very closely. We're intimately aware and knowledgeable of where we are and certainly issuing additional capital is always the option. And we have the EPS dilution that we also review. So this is something that we're managing and monitoring on a daily basis within this company.

Great, that's helpful, and Rex, just one quick follow up on the slide in the yield curve that has been out there the last several weeks. To what extent is that a hassle for you in the near term and any sort of thoughts on how you've managed it in the past before and any strategies you have in the future?

You're talking about the client obviously in the five and ten year curve and we have a little bit of narrowing of a gap out there. I think in the short term it really doesn't impact us as our lending is primarily prime-based. We do have some fixed in there which is relatively short term on a fixed basis.

So that has an impact that is at all significant from that standpoint and we have put out I think I noted also some swaps over the past quarter which has helped again to lower our asset sensitivity. I think where it does hit us a little bit, probably, is in the turnover of the investment portfolio. As you have maturities that obviously impacts us as we go, obviously having a slightly lower rate on that curve, but it isn't significant for us.

Great, thanks again, guys.

Thank you.

Thank you.

We'll go next to Scott Alaniz.

Hi guys.

Hi, Scott.

Morning, Scott.

One question. With respect to your core deposit program, could you talk a little about the type of competitive response you have seen and if that competitive response has changed any over the course of 2004?

Scott, I think most all banks seem to - in the last few months, focused on growth of core deposits. I know we continue to hear and see that. We're especially pleased with where we are year to date with $185 million of growth in that sector. I think banks are beginning to realize the only way to - the largest contributor managing the margin is lower than that deposit cost and I am sure we'll continue to see a lot of competition in that arena.

And what is your plans for core staffing growth in 2005? Would it be similar to the 3 percent figure I believe was cited earlier?

It would probably be somewhere in that 2-3 percent - again, growth continuing up to 10-14 percent as we have commented in prior calls. We watched that very closely as far as adding staff and again we think just a modest increase is all we need in the next year right now.

Terrific. Thank you.

Our next question comes from Jefferson Harralson with KBW.

Good morning.

Hello, Jefferson.

Good morning Jefferson.

You guys comment on what you're seeing out there in terms of loan demand in your different markets? Can you talk about commercial real estate versus CNI and the small amount of consumer that you do?

Our loan demand has been fairly consistent throughout this entire year, Jefferson. Our commercial, though we have had good growth, maybe not quite as strong as we would have expected, construction lending on residential properties continued to be very strong, again, let me make a comment about that.

Two thirds of that category are individuals building their own home, maybe a second home, maybe a primary home, but we feel good going forward that our loan growth will still continue to be in that 10 to 14 percent range.

We do have one additional factor that we are beginning to see is it seems like in the last 30 days and the results of the terrible storm in Florida we are having a very strong interest in property in all of our markets from people out of Florida, some relocating permanently into these markets so we are certainly keeping an eye on that.

That's interesting. And can you comment on the new bank you have added into the United Community fold over the last year or so. Are they adding to your growth rate or is it taking longer than you thought for them to snap in?

Did you say the new banks, Jefferson?

Yeah.

Yes. They - the banks on the coast, the banks up in Tennessee are right on target with where we wanted those to be. In both cases we have added strength from a management standpoint. Tennessee for example had an abundance of the deposit that - loan to deposit ratio when we merged the bank we've been able to strengthen that and I think their loans are up over $40 million since the merger.

On the coast we did lose some loans early in this year but those loans were just payoffs from sales that were kind of unexpected, but that has continued to build back and we're pretty optimistic about what is occurring in both of those markets and certainly being in a position to take advantage of those.

Being on the coast in Brunswick, St. Simon's, allowed us the opportunity to expand in Savannah as the Tennessee bank also afforded us the opportunity to expand in Athens, Tennessee. So we're pleased at this point.

And lastly, in the Atlanta area, as you add more girth in the Atlanta area, have you found that it improved your ability to hire talent from other banks and if so what is the market for bankers from maybe a SouthTrust or other banks in the Atlanta area?

Well, we are very optimistic as we have widened our distribution in that metro area. We do see continued opportunities. We felt that was absolutely necessary in order to continue to attract the quality bankers and maybe take advantage of the opportunities that are presented to us with some of the mergers that's going on.

We are currently in talks with various people from some of those larger banks. It really seems, at least in our shop, for that to have - that burner has been turned up in the last two weeks and we have several people that we are talking about that we are excited about the opportunity to bring them on board with us.

All right. Thanks a lot.

We'll go next to David Sharp (ph) with FTN Midwest Research.

Good morning, gentlemen. I was wondering if you could also go into a little bit of greater detail as far geographically speaking the competitive market from the deposit and loan time when you look at the Atlanta area going up into the North Carolina and Tennessee area. Are you finding competition and pricing, competition from the larger competitors or smaller ones? Just give some more greater detail if you could.

David, we have found that competitive environment across the board. If we had to, I guess, identify one sector that we feel sometimes paces way above market rate on the deposit side, it's principally the new de novo banks. The larger regional banks from time to time will come up with what we call the blue-eyed special but generally speaking that has not been an issue. All the way across our footprint, whether it be the coast, whether it be in the mountain area or metropolitan Atlanta seems to be consistent, but we also understand that we just have to out-bank them.

And from that you mean from a relationship side, not necessarily pricing?

That's correct.

If I could ask one follow-on question as far as your appetite for M&A. Would pricing remain - with the last two deals that you've done being in maybe around the 20 percent premium (ph) deposits and around two and a half to three times book. Is that sort of the benchmark as far as - or do you look at it more on an accretion-dilution side?

Well, David, what we say is we want any merger to be slightly accretive in year one and certainly we looked at the different multiples of deposit and earnings and book and so forth but we take a point in time, we take what we see that a bank brings to the company but we also look forward over the next three years and we've got to determine what we can do under our banner with that bank and we also have to be totally confident that that merger will add to earnings per share growth.

So we don't really look at it specifically based on either one of those measurements but more an aggregate as well as what we can do with the bank going forward.

OK. Well, thank you very much, gentleman.

And we have no further questions at this time. I would like to turn the conference back over to management for any additional closing remarks.

Well we would like to thank all of you for your interest and investment in United Community Banks. We are very please, of course, with the third quarter. We are very optimistic at our fourth quarter and looking into 2005. Again, thank you for your support and interest and we hope all of you have a great day. Thank you.

This does conclude today's teleconference. Thank you for your participation. You may now disconnect.