United Community Banks Inc (UCBIO) 2006 Q4 法說會逐字稿

Good morning and welcome to the United Community Banks Fourth Quarter 2007 Earnings Conference Call.

Hosting the call today is Jimmy Tallent, President and Chief Executive Officer of United Community Banks and Rex Schuette, Chief Financial Officer.

Please be aware that during this call Mr. Tallent and Mr. Schuette may make certain forward-looking statements about United Community Banks.

Any forward-looking statements made today should be considered in light of the risks and uncertainties described on Page 4 of the company's Form 10-K and other information provided by the company in its filings with the SEC and included on their website, www.ucbi.com.

Now we will begin the conference call with Jimmy Tallent, President and Chief Executive Officer of United Community Banks.

Mr. Tallent?

Thank you and good morning.

For United Community Banks, the past year was outstanding across several areas including earnings per share results which were above our long term goal; strong loan growth, which was more than funded by customer deposits; and, a significant expansion of our franchise in strategically important markets.

The fourth quarter was strong and a fitting conclusion to the year and I'll share a few of the highlights with you.

Diluted earnings per share totaled $0.44, a 16% increase compared to the fourth quarter of 2005.

Diluted earnings per share was $1.66 for the year of 2006, also up 16%.

Net income increased 21% to $18.4 million.

Organic loan growth for the year was 16%.

Also during the fourth quarter, core loans increased by $144 million, or 12% on an annualized basis and we also added $267 million of loans with the Southern National Bank acquisition which closed on December 1st.

Customer deposits increased by $213 million during the fourth quarter, which more than funded our loan growth.

Also, we added $286 million of deposits from Southern National.

Asset quality continues to be sound though our non-performing assets did increase by $700,000 from a year ago and increased $4.3 million from last quarter.

As I noted earlier this year, we have been at historic low levels of non-performing assets and the ratio to total assets was at 14 basis points during most of 2006.

At the year end, we were at 19 basis points, still below the December 2005 level of 22 basis points, and we continue to be well below our peer banks.

Finally, we ended the year with total assets of $7.1 billion, up 21% from a year ago.

In view of our passing the $7 billion mark on assets at year end, it is interesting to look back for just a moment at our growth over the past several years.

In 2002, we listed on the NASDAQ Exchange and ended the year with $3.2 billion in assets.

Since then we have added an average of nearly $1 billion per year in assets to this franchise.

This growth has been high quality in some of the strongest markets in the Southeast and across the country.

The growth has been achieved in combination with strong financial performance and consistent double-digit earnings per share growth.

And 70% of our growth has been organic, generated internally with outstanding service from our team of 1,900 bankers.

This growth includes expansion into new and existing markets that are strategically important and have strong potential to gain market share.

Here in the past 18 months we added 14 banking offices through de novo expansion.

Each of these offices was opened after first finding the right people to lead them in their respective communities.

We build new offices around bankers who live in and know their markets.

It is their experience and their customer relationships that serve our goal of each new office becoming profitable within 18 to 24 months.

Over the past 18 months these 14 new offices have generated customer deposits of $300 million and new loans of $320 million.

We also grow through selective acquisitions under this same philosophy of building around local bankers who can grow the business quickly with the support of United's resources.

On December 1, we completed the acquisition and conversion of the $370 million Southern National Bank in Northern Metro Atlanta.

In the process we added deposits of $94 million in Cherokee County and $192 million in Cobb County.

This increased our deposit market share from 15th to 9th in Cherokee County, which has nearly $3 billion in deposits.

It was also the seventh fastest growing large county in the country from 2000 to 2006 and over the next five years is expected to grow by another 34%.

We intend on becoming a market leader in Cherokee under the leadership of Steve Holcomb who was president of Southern National and has spent his 32-year banking career in the county.

We plan to open two new locations this year, doubling the number of our banking offices there.

Cobb County is the fourth largest of the 28 counties in the Atlanta MSA and was one of the 50 fastest growing counties in the country from 2000 to 2006, adding 85,000 people.

With the Southern National acquisition, we increased our deposit market share in Cobb County from 14th to seventh.

We now have five banking offices in the county where total deposits are almost $10 billion.

In addition to exceeding $7 billion in assets, we had another major milestone for United in December: the opening of our 100th banking office in Commerce, Georgia, which is part of our North Georgia market.

Commerce is located in Jackson County just northeast of Atlanta and has a population of 55,000.

Also, it was one of the 50 fastest growing counties in the U.S. from 2000 to 2006 with growth of 33%.

And over the next five years, Jackson County is expected to grow an additional 27%.

This is an excellent market with great opportunities for us to expand our franchise.

We were fortunate to open this new office and, again, it was driven by people.

We had nine seasoned bankers that came to us from banks in that market and we now have our 100th office, a great ending to a great year.

And that's not all.

Later in December we opened our 101st office, located in Blowing Rock, North Carolina.

We were able to attract a seasoned banker of 25 years and his team in this market to start a loan production office.

In January it was converted to a full service banking office.

So we had a great quarter and a solid year and we're excited about the future.

I'll report more on that in just a few minutes but now I'd like to ask Rex to review the numbers in more detail.

Thank you, Jimmy.

As Jimmy mentioned, net income was up 21% as compared to last year for both the fourth quarter and full year 2006, and diluted earnings per share was up 16% for both the quarter and year as compared to 2005.

The increase in earnings for 2006 continue to be driven by strong revenue growth and the key drivers continue to be loan growth and margin expansion.

During the fourth quarter total revenue was up $10.8 million, or 18% from a year ago to $72.1 million.

For the full year 2006, total revenue was up 18% to $272.4 million compared to $230.8 million in 2005.

Taxable equivalent net interest revenue of $62.6 million for the fourth quarter increased $9.1 million, or 17%, from the fourth quarter of 2005.

For 2006, net interest revenue was $237.9 million, up 21% from $196.8 million in 2005.

Net interest margin was 3.99% for the fourth quarter of 2006 compared with 3.94% a year ago and 4.07% in the third quarter of 2006.

We benefited from rising rates over the past year which accounts for the 5 basis point expansion as compared to 2005.

As I've noted in prior conference calls, we were expecting some compression in our margin once the feds stopped raising short term rates.

This quarter, about 5 to 6 basis points of the decrease in our margin on a linked quarter basis was due to higher pricing of customer deposits.

The higher pricing related primarily to several programs that were initiated from August through November to generate deposits in our new offices that opened this year as well as selective other markets.

The programs concluded in the fourth quarter.

The balance of the decline was due to the impact of higher wholesale borrowings that matured in the fourth quarter.

We feel that our margin has stabilized at the 4% level and we expect to see an improvement of 4 to 6 basis points in 2007 relating to the run of this quarter of the more costly wholesale borrowings and swaps.

During the fourth quarter we reclassified loan origination fees that were previously included in net interest revenue with an offsetting amount of direct loan origination costs that were included in salaries and employee benefit expense.

As a result, net interest revenue and operating expenses, as well as net interest margin and operating efficiency ratio, decreased in the fourth quarter and prior periods.

This change had no impact on net income or equity in any period and has been reflected in the attached financial statements as well as the supplemental information that accompanies the press release so that all periods presented are on a consistent basis.

For 2006, the reclassification lowered our net interest margin by 24 basis points and reduced our operating efficiency ratio by about 200 basis points.

The trend between quarters and years, both before and after the reclassification, has remained relatively constant.

To assist you in updating your models, we have also included on our website at ucbi.com, under "Investor Presentations" within the Investor Relations tab, two schedules that summarize the annual and quarterly trends on a pro forma basis.

Looking at other drivers of net interest revenue, loans increased $411 million during the fourth quarter of 2006, which included $267 million of loans from the Southern National Bank acquisition.

Excluding these loans, loans for the fourth quarter were up $144 million, or 12% on an annualized basis.

For the year 2006, loans were up $978 million to a total of $5.4 billion, a 22% increase year-over-year.

Excluding acquisitions, loans increased $704 million, or 16%, for 2006.

Deposits increased $464 million during the fourth quarter, including $286 million from Southern National.

For the year, deposits increased $1.3 billion, a 29% increase.

Excluding the acquisition of Southern National and the two North Carolina banking offices in the third quarter, deposits grew by $970 million during the year.

Excluding acquisitions and brokered deposits, we more than funded our core loan goal of customer deposits, both for the quarter and the year.

Customer deposits increased by $213 million for the fourth quarter as compared with core loan growth of $144 million.

And for the year, customer deposits increased by $970 million as compared to our core loan growth of $704 million.

I will now provide additional detail on the $978 million increase in loans for the year, first by geographic region.

North Georgia had growth of $352 million for the year.

Metro Atlanta increased $441 million, including $267 million from Southern National.

Western North Carolina had growth of $105 million, including $8 million from the purchase of two banking offices.

Coastal Georgia growth was $51 million and East Tennessee increased $29 million.

As I mentioned earlier, loans increased $411 million during the fourth quarter and here's the breakdown by the markets: $44 million in North Georgia; $315 million in Metro Atlanta, including the $267 million from Southern National; $15 million in Coastal Georgia; $21 million in North Carolina; and $16 million in Eastern Tennessee.

Looking at the growth by loan categories, let's first review the year-over-year comparisons.

Construction and land development loans grew by $595 million, bringing the total to $2.3 billion.

Commercial loans increased by $234 million to $1.5 billion, and residential mortgages increased by $132 million to $1.3 billion.

Looking at the same category on a consecutive quarter basis, construction and land development loans increased by $269 million which included $192 million from Southern National.

Commercial loans increased by $96 million which included $43 million from Southern National.

And residential mortgages increased by $38 million which included $25 million from Southern National.

Next, let me update you on the interest rate sensitivity of our balance sheet at year end.

As noted in the third quarter conference call, we took several steps in the third quarter to reduce our exposure to a lower interest rate environment.

The key stems included terminating about $300 million of existing swaps and then adding $415 million of received fixed rate swaps with longer maturities as well as adding $500 million of interest rate floors.

As part of the restructuring, we had to amortize the cost of the terminated swaps over their maturity, for which most of the costs rolled off by the fourth quarter.

Also during the fourth quarter we added $110 million of swaps, bringing our total book of derivatives to just over $1 billion.

At year end, our interest rate sensitivity reflects a 1.9% increase in interest revenue over the next 12 months based on a 200 basis point ramp up of interest rates.

This is about the same percent as a year ago and down about 40 basis points from last quarter.

Also, our interest sensitivity model indicates that a 200 basis point ramp down in interest rates would cause a 70 basis point decrease in net interest revenue at year end as compared to a 1% decrease last quarter and a 6% decrease at the end of 2005.

As I noted earlier, we took actions in the third quarter to reduce the risk of the Fed lowering interest rates, which has benefited us significantly by reducing our risk of lower net interest revenue in a declining rate environment.

At quarter end, total prime daily loans were $3.1 billion as compared to $2.8 billion last quarter and $2.5 billion a year ago.

The investment securities portfolio effective duration was 2.7 years at year end as compared to 2.8 years at last quarter and 2.5 years at December 31, 2005.

Average length was 3.8 years at year end as compared to 3.5 years last quarter and 3.2 years a year ago.

Now turning to fee revenue for the quarter.

Fee revenue of $13.2 million was up $1.8 million, or 16%, from $11.4 million for the fourth quarter of 2005.

Service charges and fees on deposit accounts increased $448,000 to $7.1 million primarily due to the growth in transactions and new accounts resulting from our core deposit program and higher ATM and debit card usage fees.

Mortgage fees rose $416,000 to $2.2 million due to the higher volume of closed loans and favorable pricing of mortgage products.

During the fourth quarter of 2006 we closed $103 million in loans compared to $96 million for the same period last year.

Consulting fees were up $430,000 from a year ago, reflecting strong growth in the risk management and strategic services practices.

Other fee revenue includes a $620,000 gain from the sale of a tract of land that was offset by $200,000 of [OREO] write-downs and $260,000 of investment securities losses.

Next, operating expenses totaled $42.5 million for the quarter, up 5.5 million, or 15% from the fourth quarter of 2005.

The acquisition of Southern National added approximately $670,000 in expenses, including $132,000 of non-recurring integration charges.

Salaries and employee benefit costs of $26.5 million reflected an increase of $4.4 million, or 20%, from the fourth quarter 2005 due to the increase in staff to support our expansion and business growth.

At year end, we had staff of about 1,940, up 235, or 14% from a year ago.

121 staff members, or about half of that increase, came from the two acquisitions and the seven de novo offices that were opened during 2006.

Higher healthcare costs and the expensing of stock options which began in 2006 also contributed to the increase in salary and employee benefit costs.

Communications and equipment expenses of $4.1 million reflected an increase of $525,000 due to further investments and upgrades in technology and equipment to support business growth and additional banking offices.

Occupancy expense increased $133,000, to $2.8 million, reflecting the cost of operating additional banking offices.

Postage, printing and supplies expense rose $209,000 to $1.6 million, reflecting higher postage costs for business growth and marketing campaigns.

And professional fees increased $251,000 to $1.3 million, reflecting the costs of various corporate initiatives.

As noted earlier, the reclassification of loan fees also impacted our operating efficiency ratio which lowered them by approximately 200 basis points for 2006.

Therefore, we have adjusted our long-term goal to be in the range of 56 to 58%.

Previously it was 58 to 60%.

Our operating efficiency ratio of 55.93% for the fourth quarter compared to 56.46% for the third quarter and 56.61% for the fourth quarter of 2005.

The efficiency ratio was 56.35% for the full year of 2006 as compared to 57.77% for 2005.

Now let's look at credit quality.

For the fourth quarter, the provision for loan losses was $3.7 million, up $200,000 from a year earlier, and equal to the third quarter of 2006.

Net charge-offs for the quarter were $1.9 million compared to $1.3 million for the third quarter of 2006 and $1.8 million a year ago.

Net charge-offs to average loans were 15 basis points compared to 16 basis points for the fourth quarter of 2005 and 11 basis points for the third quarter of 2006.

Non-performing assets at year end of $13.7 million were $700,000 higher than last year end and $4.3 million higher than the third quarter.

At year end, non performing assets included $12.9 million of non-performing loans and $1.2 million of [OREO.] There were no loans 90 days past due and accruing interest at year end.

Non-performing assets as a percentage of total assets were 19 basis points at year end compared to 22 basis points at December 31, 2005 and 14 basis points last quarter.

The current level of non-performing assets is at the lower end, and in fact, below, our long term experience of 20 to 35 basis points and we could have some volatility in future quarters since we are at historic low levels.

Turning to capital at quarter end, all of our capital ratios were above the internal guidelines, which are 100 basis points above the regulatory well-capitalized level.

This concludes my comments and I'll now turn the call back over to Jimmy.

Thank you, Rex.

I believe we can attribute the strong performance that Rex has just described, primarily to our successful operating model and our balanced growth strategy coupled with our unique footprint in some of the fastest growing markets in the country.

Our operating model is to conduct ourselves not as a $7 billion bank with 101 locations, but as 26 community banks.

Decisions are made and the service is provided in each and every bank by people who know their customers and their markets and who are known and respected there.

Earlier, I discussed our balanced growth strategy with most of our growth being organic from existing offices, but organic growth also comes from our de novo expansion with the right people in the right markets.

And further, we will expand our franchise through selected acquisitions when the desired market with the right banking team and pricing all fit together.

The United footprint is as attractive as any in the country.

About 80% of our assets are in Georgia which is home to 24 of the 100 fastest growing counties in the United States since 2000.

Seven of those 24 counties are in our north Georgia market and we're in all seven of those counties and have added six offices over the past 18 months.

And 14 of the 24 counties are in Metro Atlanta and we are in 12 of those 14 counties.

In the Metro Atlanta MSA, we have added 6 offices over the past 18 months with two of those through the acquisition of Southern National.

United continues to be the largest community bank in the Metro Atlanta MSA.

We have $2.1 billion in assets with nine banks and34 offices and more to come.

In Tennessee we're in the growing industrial corridor along Interstate 75 between Cleveland and Knoxville.

We continue to look for growth opportunities and in the third quarter of 2006 we formed our 25th community bank in Cleveland, Tennessee.

Also, we have continued to expand our markets in North Carolina and along the Georgia Coast, places where growing numbers of people life, vacation, and retire.

Over the past 18 months we have opened three offices in North Carolina, one of those through an acquisition, and opened a new office in Savannah within our coastal Georgia market.

We feel privileged to be operating some of the best mortgage in the country and the Southeast.

Our plan has not changed and we will continue to add the right bankers in the right markets as opportunities become available.

However, as we grow and expand the franchise, we have an equal focus on growing annual earnings per share by 12 to 15%.

Our overriding focus is the shareholders.

Our goal is to build value and grow our franchise while delivering on our promise of performance now and for the years to come.

Now let me talk for a moment about our guidance for 2007.

Our outlook continues to be for growth across all of our markets but at more normal levels with some slowing of the economy.

We anticipate earnings per share growth within our long term goal of 12 to 15%.

We believe core loans will grow within our normal range of 10 to 14% during 2007.

And we expect our margin will stabilize and have a slight improvement in 2007 as Rex discussed a little earlier.

In summary, we're very pleased with a record-setting fourth quarter and the year 2006.

We had strong loan growth that was more than funded by the growth in customer deposits.

And we had substantial growth in our franchise, while exceeding our earnings per share goal.

Assuming that the economy continues to perform well, we look to 2007 with confidence and enthusiasm.

I'll now open the call to your questions.

Thank you. [Operator Instructions]

Your first question will come from the line of Kevin Fitzsimmons with Sandler O'Neill.

Please proceed.

Good morning, guys.

Hello, Kevin.

Good morning, Kevin.

I was wondering if you could, two quick things.

First, if you could, Jimmy, give an outlook on construction lending.

We've heard from a number of banks that they're definitely seen signs of it slowing and it seems like it's still growing very nicely for your franchise, so I wanted to just see, maybe by market, how that's holding up and if you see that changing any time soon.

And then secondly, you mentioned select acquisitions.

I was wondering if, with this environment, it's putting a lot of stress, or probably will put stress on some of the smaller, more spread dependent banks.

Are you getting a sense that there may be more opportunities than you've had, maybe in the past year, and what you're seeing in terms of pricing in terms of potential opportunities.

Thanks.

Kevin, thank you for the question.

Let me start, I guess, with the construction lending question first.

When you look at the Metro Atlanta market and, again I think that's one that everybody probably is focused on.

You know, we use the word "slowing" and that's probably an accurate term but maybe normalized might be even a better term.

When we look at the housing, the inventory in the north and south of Atlanta -- actually, the housing inventory decreased slightly in the fourth quarter.

We continue to see good and solid population growth.

Our job growth in metro Atlanta in 2006 was over 51,000 jobs, so, again those dynamics continue to support, I think, the construction lending.

Certainly there is some softness in some of the markets, but generally speaking, I guess I would categorize it as more of a normal environment.

The one thing that we are looking at in the Atlanta market is lot inventories.

Lot inventories actually increased to a high point on north and south Atlanta, so certainly we're continuing to focus on that.

But when you look at all the geography and if you break that down into, say, our five regions that we often talk about, we found it to continue to be very consistent.

Again, we have a lot of people -- this population and retiree migration continues to exist.

People moving into the West and North Carolina, and North Georgia,on the coast of Georgia.

We're just privileged to be operating in some of the very best markets, we feel, in the entire country.

We continue to watch construction lending.

We understand the risk in that but, again, it's something that we have done for many, many years and we still feel very strong in regards to that lending.

Now to your second question, in regards to acquisitions, I guess I would summarize that by saying that we here at United continue to keep our heads down.

We grow the business, truly, one customer at a time.

We have been very fortunate to have a number of bankers that have joined up with us, which really has led to a lot of the de novo expansion over the last 18 months.

As far as acquisitions, we have identified the overall geography of where we would like to see this company.

If and when that right bank with the right management team, the right market, the right distribution and certainly at the right price comes along, we would be very interested in partnering up.

We have looked at a number, over the last four or five quarters, and pricing is an issue, but even more than just the pricing, and you've heard me say this a number of times -- a single bank with a single location, for example, in Gwinnett County that has heavy real estate loans, large CDs that is the funding source, is just not something we're interested in.

Again, we will continue to stay very disciplined, certainly if those metrics all come together that we have talked about a number of times, we would be very interested in expanding the franchise within that piece of geography.

Did that answer your question?

It did, Jimmy, and just if we assume, like all things, equal, say, I know it's hypothetical, but say, it was that right management team, it was that right price, , what are the top 3 or 4 markets that are kind of highest on your radar screen in terms of where you'd like to get into, either add on or enter?

Well, I think, we've talked about Metro Atlanta.

We've talked about [Gwinnett County, which is certainly a hole in our market and may be the best county of the 28 in that MSA.

That's an area certainly where that corridor of West and South Carolina, the Interstate 85, the Greenville/Spartanburg/Seneca, that area there.

Those are two areas, certainly, if there was an opportunity in North Georgia or even western North Carolina, but we have been able to de nova that with people.

For example, the last expansion in Blowing Rock.

This is a 25-year veteran with a regional bank that has spent his career in that market.

In addition to the fact, he's been mayor eight years.

You know, it's rare to have those kind of continued opportunities.

We're humbled by it but we're even more dedicated to making sure that we can bring these people in, we can afford those folks and still be able to expand the franchise while earning 12 to 15% earnings per share growth.

Okay, great.

Thank you, guys.

Your next question will come from the line of Jennifer Demba with SunTrust Robinson Humphrey.

Please proceed.

Thank you.

Great year.

Thank you.

Two questions.

First of all, the increase in non-performing assets.

Was that related to a single loan and can you give us any color behind that?

Jennifer, great question and yes, principally, it was.

Let me talk about our NPAs for just a second to kind of set the table.

We have been very fortunate for a long, long time to operate with very low NPAs and of course we have established our guidance many years ago whereby that range would be from 25 to 35 basis points and when you look back over the last 5 years, at year end, it has been it a low of 17 basis points, as high as 25 basis points.

Of course there's always a handful of credits that we have our eyes on and once we determine that we need to liquidate then we certainly get aggressive to resolve that particular loan.

So you see a lot of volatility, lumpiness in our numbers from time to time.

Our absolute intention is to continue to operate at the low level.

In regards to our increase in the fourth quarter was a principally a single loan, about $3.1 million, a customer that has banked here for over 10 years, because of some changes in his life led us to liquidate.

We fought it through the bankruptcy.

It actually had an auction within the bankruptcy court last week.

They've auctioned off two of the four pieces of collateral and those two will not only pay our principal, pays our interest, and pays all legal costs and that loan or that sale is to be closed March 1st.

So that's what actually increased our NPAs in the fourth quarter.

Okay.

And my second question is: You've had about $2 million in consulting fees the last couple of quarters.

Should we consider that a good run rate here going into 2007.

Jennifer, Rex.

I think that's probably a reasonable run rate of what we're looking at going into 2008.

They've had a strong pick up in the second half of 2006 and again, sales are off to a strong start in the first quarter, so that's probably a reasonable run rate.

Okay, thanks a lot.

Your next question comes from the line of John Pandtle with Raymond, James.

Please proceed.

Okay, thank you.

Good morning, guys.

Hello, John.

Hi, John.

I have a couple of questions.

The first relates to deposit growth which, now, for several quarters, has exceeded loan growth which is, as you know, pretty rare right now in the industry.

I was wondering if you could give us some color on the percentage of loan growth in the quarter that comes from some of your older markets versus de novo markets that you've entered in the past two years or so.

Well, I think our loan growth, as we mentioned earlier, John, I believe it's about $320 million of that growth has come from the 14 de novos over the last 18 months.

But we continue to see that loan growth throughout our markets.

It's been very consistent.

Typically in the de novos, it seems like the loan side will grow faster than the deposit side because there is a ramp up period in making sure we have all the infrastructure such as buildings and so forth because many times we'll open in just what we call an LPO arrangement but our overall loan growth has been very consistent throughout the five areas as far as our geography.

Certainly it has been helped through our de novo expansion and, again, that's another reason for that de novo expansion.

Growing that franchise, getting great bankers, and also the relationships that they have banked for many years.

Okay.

And then as a follow-up, if you look at your EPS guidance, the 12 to 15% growth for 2007, what does that assume in terms of de novo activity and, just, I guess, for academic purposes, if you didn't do any de novos in 2007 -- what would that EPS growth look like?

Well, let me address the '07 expansion first.

We're looking today, John, at three to four new de novos in 2007.

This could be adjusted either way with one or two expansions.

Again, that's a function of the earnings.

Keep in mind, though, of those 14 that I had mentioned earlier, not all of those are profitable.

So what we continue to do, those are measured every single month with the CEO that's in charge of those particular locations to expedite to the break even point and then getting profitable.

Again, we will not take our eye off the ball on our earnings per share guidance.

We understand how important that is, but also when we're able to do that and be able to expand the franchise by finding key bankers that want to come to work for us.

We look at that as investing for the future, so '07 three to four, and, again, as far as the actual cost of that, Rex, would you want to comment on that piece?

Yes, John, as Jimmy indicated, we constantly look at the de novos and the status and monitor their targets throughout the year, and again, having 14 ongoing at one time within 18 months of start up is pretty aggressive, but again, as Jimmy indicated earlier in this talk, that is all driven by the people.

So when we can add it, we'll add it.

But we keep sight, again, on where their earnings are and how much we can absorb and what we can take out as far as new de novos.

It probably runs, you know, this past year, in the $.05 to $.07 range of what we basically reinvested in '06 earnings with respect to the de novos that were in progress.

Okay, great, thank you.

Your next question comes from the line of Christopher Marinac with FIG Partners.

Please proceed.

Thanks.

Good morning, guys.

Hello, Chris.

Hi, Chris.

I was looking at the reclassification information that you put on the website and I was just kind of curious.

When you look back, you know, many quarters in the past and even in some of the annual numbers, is there any reason kind of why the margin could not get back to the 380, 370,360 level.

Is there anything mechanically that you can just kind of remind us that you've done over the last several years to kind of ensure that you don't get down that low again?

When you look at it, again, looking at '04 to '05, we increased the margin by about 14 basis points and, again, that increased another 20 basis points from '05 to '06 up to our current level which is about 4.05 for 2006 for the year and I think from that Standpoint, Chris, our expectation is we can hold it around that range right now in a flat rate environment with what our assumptions are right now and we should maintain it in the 4-405 range going into 2007 also.

But Rex is that a function of the funding advantages of some synthetics that you've done or is it the loan mix a lot different than what he would have had three or four years ago.

I think again, 3 or 4 years ago, when you saw us back at the 380 range which was probably about 4 to 5 years ago.

When you look at the history, it was really driven at the time that we were just putting on deposits at the upper end of the curve in the market and we were pricing it, when you look at market watch, we were probably in the top third in all those markets at that time and we really got the CEOs to focus on that, understand the margin, what the impact is to them, and the bottom line and now we have 26 CEOs that really understand pricing with respect to their deposits and their loan pricing and have targets by market with respect to what the spreads are and in looking at budget.

So I think that part has made a big difference from three or four years ago to where it's been in the last two to three years, I would say, where the margin has been in that upper band.

Okay, great.

And then one other question, I guess, on the credit quality front.

Jimmy, are you seeing anything different in terms of, I guess you call them "out of towners," on the development front, any slow-down of new newcomers to the markets in terms of overbuilding from a supply perspective?

As far as the builders, Chris?

Yes, sir.

No, I don't guess we have, at least with the folks that we're dealing with.

What we are seeing this time, and Gary Guthrie, who runs our real estate lending, we see a lot of self-discipline, particularly from the track builders.

I think there's probably some of the track builders that probably have dirt on their balance sheet, land to be developed down the road that at this point would prefer not to have.

I think we have seen some of that being sold off.

But at least with the people that we're banking that would be considered more of a track builder, we see a great deal of self-discipline.

Certainly we continue to watch and monitor these very closely.

I think the area where the weakness will be identified first would be those smaller builders that are building and speculating on one, two, three houses.

Certainly in a metro market that doesn't have the buying power.

Probably have limited liquidity and quite honestly, that's not a group that we have banked in Metro Atlanta.

Now that's pretty typical when you look at some of our other markets but in, say, North Georgia, but that has never been an issue.

Okay.

Good, Jimmy, thank you for the color.

Yes, sir.

[Operator Instructions] Your next question will come from the line of Jefferson Harralson with KBW.

Please proceed.

Thanks.

I have a follow up, I think, on Kevin's question about construction lending.

Have you seen a trend downward in the originations?

I know the loan growth has been good as you're filling up commitments from past projects.

But have you seen any trends in the originations of the construction product?

Well, I think, we're probably more of a kind of a hold, at least, again Jefferson, the people that we are dealing with -- I think it's a fair statement to say that things have slowed but at least with the people that we're doing business with, that's principally that beginner home.

That's still fairly robust.

But I think, again, this go-around seems to have a discipline from developers that maybe we've not seen before, and that's encouraging.

Okay.

I was going to follow up with some color on the Cleveland-Tennessee group and how they're progressing since you've brought them over.

Great.

They are doing very, very well.

They're still in a strip center, corner building.

They're moving out into a modular unit in just the next few days.

We've got a great team there.

They also closed the year as far as deposits, $36-$37 million.

Their loans now are headed toward $16 million and if you've ever wondered if this is a people business, if you'd see the premises, you'd understand.

What they've done is somewhat phenomenal.

We'll get these people in the right facilities because we have a strong focus on that during 2007 and I'm just very, very proud of Mickey and Duane and their team.

That's great to hear.

Thanks a lot, guys.

Thank you.

And you have a follow-up from the line of Jennifer Demba with Robinson Humphrey.

Please proceed.

Can you hear me okay?

Yes, Jennifer.

Yes, I just wanted to ask -- you rolled out that cash deposit incentive last summer.

I'm just wondering what kind of results you're seeing thus far.

Jennifer, are you talking in regard to the lender?

Yes.

That has continued to do well for us.

It's not been setting records.

Again, as I said, there's just not a silver bullet out there.

I wish there was.

But we have spent a lot of time in what I would call the "infrastructure" in providing the relationships of that customer to our lenders and a very concise, easy format.

That is now completed but to go one step further, we do have the oversight every month whereby we're providing back to the CEOs any type of a loan relationship that does not have a deposit and so we've got just a tremendous focus.

It is absolutely [inaudible] today.

I can't say that it's been the silver bullet, but I am still very optimistic about the program.

Okay.

Thanks, Jimmy.

At this time there are no more questions in the que.

I would like to turn the presentation back over to Mr. Jimmy Tallent for closing remarks.

Thank you for joining us.

Again, we are pleased to report another record quarter and a terrific year in 2006.

We know we could not have accomplished what we have without the hard work and the dedication of our 1,900 bankers, our loyal customers, and certainly our shareholders.

We're looking forward to another great year in 2007 and we'll report to you again in April.

Hope you have a great day.

Ladies and gentlemen, this concludes your presentation. [Operator Instructions]