United Community Banks Inc (UCBIO) 2007 Q3 法說會逐字稿

Good morning and welcome to United Community Bank's third quarter conference call.

Hosting the call today are United President and Chief Executive Officer, Jimmy Tallent; Chief Financial Officer, Rex Schuette; Chief Risk Officer, David Shearrow; and Gary Guthrie, President, Atlanta Region Real Estate.

United's presentation today includes references to operating earnings and other non-GAAP financial information.

United has provided a reconciliation of these measures to GAAP in the financial highlights section of the news release included on their website at ucbi.com.

A copy of today's earnings release was filed on Form 8-K with the SEC, and a replay of this call will be available on their investor relations website at www.ucbi.com.

Please be aware that during this call forward-looking statements may be made about United Community Banks.

Any forward-looking statement should be considered in light of risks and uncertainties described on page four 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.

At this time we will begin the conference call with Jimmy Tallent.

Thank you for joining us this morning.

I will begin with the highlights of the third quarter, Rex will follow to discuss the financials in greater detail, and then David will discuss credit quality.

With credit on everyone's mind, I've asked David to broaden his remarks in regards to the slowdown in housing and construction activities, the impact of this slowdown on our credit quality and non-performing assets, how we are actively managing these credits, and give an update on the Spruce Pine lot loans.

Now the highlights of the third quarter.

We're pleased with our earnings of $22.5 million.

This is $0.46 per share and a 10% increase from a year ago.

Excluding acquisitions, core loans grew 4% year over year and were down $46 million on a linked quarter.

This decline is the result of the environment and the related significant slowdown in housing and residential construction.

As our construction loans are being paid off, they're not being replaced by new loans due to the continued softness in the market.

Pay downs are actually good.

Our construction and land development portfolio has actually shrunk as a percentage of total loans, from 43% at the beginning of the year to 41% at quarter end.

Deposits have increased 16% year over year.

This is primarily due to acquisitions.

Non-CD customer deposits were up 9%, or $192 million, over last year.

This growth was offset by higher priced CDs coming off of our balance sheet.

On a linked quarter basis, total deposits decreased by $207 million, primarily due to this run-off in CDs of $127 million and a decrease in broker deposits of $39 million.

This decrease was intentional as we chose not to compete with other banks' higher rates to single product customers.

This decision was based on two primary reasons -- we expected lower loan growth, and we were at the beginning of a lower interest rate cycle.

On a linked quarter non-CD customer deposits were down $41 million.

We believe this is temporary.

The number of customer relationships continues to increase, and our customer satisfaction scores are at record highs.

Our net interest margin for the quarter was 3.89% which was five basis points lower than the second quarter.

The main driver was the impact of the rise in non-accrual loans.

As I mentioned earlier, our markets, and particularly the Atlanta region, are affected by the slowdown in housing and residential construction.

This environment has caused an increase in non-performing assets, which at quarter end were 77 basis points, or $63 million.

When we exclude the $23.6 million of Spruce Pine non-accrual loans, our NPAs were $39.8 million, or 49 basis points.

So for comparative purposes, we had 49 basis points at the end of the third quarter compared to 25 basis points for the second quarter.

This represents an increase of $19.8 million in the third quarter.

Now, David will provide more detail on non-performing assets, as well as an update on the Spruce Pine loans in just a moment.

We did not take any charge-offs on these loans in the third quarter.

Net charge-offs increased to $5.2 million as we deliberately took an aggressive approach on two credits to move them off the books.

We feel this approach was prudent and good business in this environment.

We also are aware that this environment is temporary and should be kept in perspective.

In the long-term, the outlook for our markets remains very favorable with a healthy economy, continued job growth, and strong demographics.

In summary, we had solid earnings performance year-over-year.

By proactively slowing our pace of new de novos and managing expenses, we have been able to produce strong core earnings even in the current economic environment.

Our operating efficiency ratio for the quarter was 55.3%, down from 56.6% last quarter, reflecting our focus to drive revenue to the bottom line.

Now I will turn the call over to Rex for the review of the financials for the third quarter.

Rex.

Thanks, Jimmy.

During the third quarter, net income totaled $22.5 million.

This was an increase of 29%, or $5.1 million, over the third quarter of 2006.

Diluted earnings per share rose 10% to $0.46.

Net interest revenue and fee revenue continue to be the drivers for the year-over-year increase in earnings.

Also, we continue to focus on controlling expense growth, as the current economic cycle has temporarily limited loan growth opportunities.

Tax equivalent net interest revenue was up 18%, or $10.8 million, over the third quarter of 2006 and totaled $71.7 million.

The net interest margin for the third quarter was 3.89%, compared to 3.94% for the second quarter of 2007, and 4.07% for the third quarter of 2006.

The key factor contributing to the five basis point decrease this quarter was the rise in non-performing loans and the related interest reversals and carrying costs.

Also, to a lesser extent, we had some DDA and loan balance attrition and the full quarter impact of the $50 million of BOLI investments we added in the second quarter.

Interest on these investments is recorded in other fee revenue and non-interest revenue.

Included in our earnings announcement are two tables to show loans outstanding, both by loan category and by market, for the past five years.

The tables provide growth rates for the linked quarter and year-over-year, both with and without acquisitions.

Total loans increased 20% year-over-year, including $800 million from the acquisitions of the Southern National Bank in the fourth quarter of 2006 and the First Bank of the South in the second quarter of 2007.

Excluding these acquisitions, core loan growth was about $190 million, or 4%.

The slowdown in housing and construction activities has had an impact on our loan growth.

We have also been more selective for good quality credits, while facing more competitive pricing for those loans.

Acquisition and development activity in our markets has nearly stopped, although we continue to extend funds to committed projects that are nearing completion.

As Jimmy noted earlier, that is why the mix of our construction loans is down on a linked quarter basis to 41% of total loans.

Also on a linked quarter basis, the Atlanta region has experienced a decline due to the slowdown in residential construction.

Turning to deposits, we added $890 million in deposits through acquisitions over the past 12 months.

Over that same period total deposits increased $845 million, or 16%.

So, excluding acquisitions, total deposits were down $45 million, including broker deposits that were down $53 million.

So essentially customer deposits were flat year-over-year.

However, there is an upside to this and a positive change in our mix of customer deposits.

We had a healthy 9% growth in non-CD customer deposits, but this growth was offset by an intentional attrition of our higher priced customer CD accounts.

With the expectation of further Fed rate cuts in the near term we have chosen not to compete for these higher priced CDs.

We built up liquidity last year, and we have actively managed our wholesale borrowings and broker deposits as we balance interest sensitivity in this down-rate environment.

As Jimmy mentioned, we saw some attrition in core deposits from the second quarter.

We believe this was due to customer cash needs since we continue to see a rise in customer accounts, and our customer satisfaction scores continue to remain well above 90%.

With the Federal Reserve's recent 50 basis point rate reduction and the expectation of more to come, deposit pricing becomes challenging.

We have managed our balance sheet towards a more neutral position in terms of sensitivity.

At quarter end our interest rate sensitivity reflects a 30 basis point increase in net interest revenue over the next twelve months, based on a 200 basis point ramp-up of interest rates.

This is down from a 2.3% increase a year ago and a 1.7% increase last quarter.

Also at quarter end, a 200 basis point ramp-down in interest rates would cause an 80 basis point decrease in net interest revenue, which is down slightly from the 1% decrease last year and has not changed from the last quarter.

The effective duration of our investment securities portfolio was 2.7 years at quarter end, unchanged from June 2007, and only slightly shorter than 2.8 years at September 2006.

The average life of our investment securities was 3.3 years at quarter end, as compared to 3.4 years at June 2007 and 3.5 years at September 2006.

Fee revenue was $15.6 million for the quarter, an increase of $3.5 million or 29%, and was up in every category when compared to the third quarter of 2006.

Service charges and fees on deposit accounts of $7.9 million increased $941,000, or 14%, from the third quarter of 2006, due to growth in transactions and new accounts and higher ATM and debit card usage.

Mortgage loan fees showed a 10% increase over the last year.

However, fees declined from the second quarter as demand for mortgage loans began to taper off.

Brokerage fees of $900,000 were up 14% from a year ago, but down $300,000 from the last quarter when they reached a record level in the second quarter.

Even so, this quarter was the third highest for brokerage fees in the Company history.

Consulting fees totaled $2.4 million which was a record quarter and up 17% from a year ago.

The increase was primarily driven by the advisory services practice.

Looking at operating expenses -- they totaled $48.2 million for the quarter.

This was an increase of $6.7 million, or 16%, over the third quarter of 2006 and an increase of $480,000, or 4% annualized, over the second quarter.

Our press release shows the changes by expense category.

The key drivers of the overall growth in expenses were the two acquisitions, the 13 de novo offices opened in 2006 and 2007 and in the third quarter, the added costs of the new FDIC insurance premiums.

The two acquisitions accounted for about half of the year over year growth in expenses and added approximately $1 million in expenses when comparing the third quarter to the second quarter.

In addition, we have the impact of the new FDIC insurance premiums in the third quarter, resulting in an additional cost of $700,000.

In spite of this increase in the FDIC expense and higher OREO costs and legal fees associated with loan workouts this quarter, we were able to lower our marketing and printing costs, as well as keep our other expenses down to a very small increase on a linked quarter basis.

We are continually balancing our expense growth with revenue growth and controlling discretionary spending, where appropriate, to maintain a positive operating leverage.

Our focus on controlling expense growth resulted in a 55.3% efficiency ratio for the third quarter, down over 1% from last quarter and down 80 basis points from a year ago and was below our long-term goal of 56% to 58%.

All of our regulatory capital ratios at quarter-end are above our internal guidelines, which are set at 100 basis points above the well capitalized level.

And our tangible equity and asset ratio was 6.65%, well above our target of 5.50% to 6% and stable with last quarter.

During the second quarter the Board of Directors increased the level of our stock purchase program to two million shares.

During the third quarter we purchased 1.3 million shares at an average cost of $24.43 per share.

With our stock price at its current level and slower balance sheet growth, the Board authorized a further increase in a program to three million shares through December 2008.

We have an excellent opportunity to utilize the capital generated through earnings to further support our stock price and enhance shareholder value.

Now I'll turn the call over to David for an update on our loan portfolio and credit quality.

David?

Thank you, Rex.

I'll try to give some perspective on how the current economic environment is affecting our loan portfolio and what we are doing to address it.

We've talked to you in the past couple of conference calls about the buildup of lot inventory, particularly within our metro Atlanta markets.

The housing slowdown has created a challenging environment for builders and developers, and this clearly has had an impact on our loan growth and credit quality.

In the third quarter we saw a rise in both non-accrual loans and OREO.

At September 30th we had $39.8 million in non-performing assets, including $23.2 million in non-accrual loans and $16.6 million in OREO.

This does not include the $23.6 million in non-accrual loans in Spruce Pine, North Carolina, that Jimmy mentioned earlier.

I'll update you on Spruce Pine in just a moment.

The ratio of non-performing assets to total assets, excluding Spruce Pine, was 49 basis points, which is above our historical range of 20 to 35 basis points.

In segmenting NPAs, the largest market concentration of non-performing assets at quarter-end was the Atlanta region at 65%.

The largest loan category concentration was residential construction loans at 40%.

In terms of dollar size, the largest single exposure in non-performing loans was $2.6 million in construction loans to one builder.

The largest credit in OREO was $4.1 million, with our next largest at $1.9 million.

The good news is that $6.9 million of NPAs are already under contract-to-sell or refinance in the fourth quarter, including the $4.1 million credit.

Net charge-offs were $5.2 million for the quarter.

The ratio of net charge-offs to average loans was 35 basis points, well above the 15 basis points we reported in the second quarter, and the 11 basis points we reported a year ago.

Of the $5.2 million, two credits accounted for a total of $3.6 million, equal to 24 of the 35 basis points this quarter.

We had no other single charge-offs greater than $400,000, which is more typical of our range of charge-offs each quarter.

With the size of the individual non-performing credits at quarter-end we do not foresee any charge-offs as large as we have experienced this quarter.

The level of charge-offs increased this quarter as we deliberately pursued a strategy of aggressive liquidation to move credits off our balance sheet quickly.

Because of this strategy we expect charge-offs to remain above our historical range for the next few quarters.

We believe this strategy to move out problems quickly simply makes good long-term business sense.

Most of the foreclosures that were transferred to OREO in the third quarter were residential real estate properties.

Historically, we've been able to turn such properties at a fairly rapid pace.

There is still demand for foreclosed properties, although the uncertainty and the duration of this economic cycle have caused us to take some larger losses in order to insure quick disposal.

It's no secret that Georgia is ranked very high among the states for foreclosure activity.

This is having an impact on the real estate market and on banks that are real estate lenders.

On the other hand, Georgia law is very favorable to banks when it comes to foreclosures.

Foreclosures can be completed within 45 days as opposed to six months to a year in many other states.

This quick foreclosure process allows us to more aggressively resolve problem credits.

Now I'd like to give you a little more detail on our real estate construction portfolio, particularly in Atlanta.

Of our $2.5 billion real estate construction portfolio, the Atlanta region represents $1.2 billion, or 50%.

Of this $1.2 billion, residential construction totaled $940 million, with $440 million in houses, $311 million in acquisition and development, $135 million in finished lots, and $53 million in land loans.

In terms of our risk management process we are aggressively managing our entire loan portfolio.

We have reviewed in detail all of our larger credit exposures and do not see any major issues that have not already been identified.

We hold quarterly meetings with all of our banks to review in detail the status of all watch list credits.

These meetings are attended by all of executive management.

Weekly, Jimmy, Rex and I meet with our work-out team to review the status of all of our NPAs to bring quick resolution to problem credits.

We have also intensified our independent credit review examination process to include more targeted reviews in the Atlanta region.

All of these processes and our intense management focus have been part of the culture at United for years.

We believe in quick identification of problems and equally quick resolution with full engagement and accountability by our entire management team.

Furthermore, let me say that after six months with United, I am convinced, more than ever, that we have the right credit team and bankers with the talent, experience and commitment to work successfully through the current economic environment.

Now I'll speak to the adequacy of the allowance for loan losses.

We review our allowance quarterly, based on the current risk identified in the portfolio.

Although charge-offs exceeded our allowance for the third quarter, the allowance remains adequate, and excluding Spruce Pine, the allowance was 1.28% of loans.

The allowance coverage on non-performing loans was 3.3 times.

Both ratios compare very favorably with our peers.

Regarding the Spruce Pine lot loans, negotiations are continuing.

We've been in contact with all the borrowers or their counsel.

At September 30th the majority of these loans were past due.

However, $5 million remained current.

We expect to begin the foreclosure process during the fourth quarter, as necessary, if these ongoing negotiations fail to produce an acceptable outcome.

Our strategy for the Spruce Pine lot loans continues to be to work with those borrowers who work with us and recognize their obligations, to participate with the other banks and the North Carolina Attorney General and the FBI in the discovery process and to aggressively pursue all avenues of collection on these loans, including law suits, even if a portion of the loan is charged off.

As Jimmy noted earlier, through the third quarter we have not charged off any loans relating to Spruce Pine.

Based on the status of our negotiations and mediation we would expect to take the majority of the charge-offs during the fourth quarter.

We continue to believe that the $15 million special provision taken last quarter is adequate.

With that, I'll turn the call back over to Jimmy for closing remarks.

Thanks, David.

In summary, we were pleased with the 10% earnings per share growth for the third quarter, especially in this environment, and we are pleased at how we have managed expenses for the quarter.

Even with a slight decrease in non-CD customer deposits this past quarter, we're still up 9% year-over-year.

We realize we still have a lot of work to do.

We're not pleased with the increase in non-performing assets or charge-offs, but I am confident our exceptionally strong risk management team has the experience and skill to work through the cycle.

They've done it in the past, they will do it again.

In light of the challenging environment and uncertainties in the housing and construction markets, it is difficult to predict future loan growth in the near term.

Last quarter we expected loan growth for the remainder of 2007 would be within the range of 4% to 8%.

However, given these uncertainties, we anticipate that loan growth during the fourth quarter will be between our current pace and the lower end of our targeted range.

And because of these uncertainties we will wait until our January earnings conference call to update our outlook for 2008 loan growth and earnings.

We, and many other banks, have had a rise in non-performing assets and net charge-offs related to the slow down in residential construction.

Keep in mind that United has been at very low levels for several years, and even though we are above our historic ranges, we are still well reserved with strong coverage ratios.

We could likely see a few quarters at these levels, but we are confident that we will manage through the cycle and back to our historic ranges.

As I have commented in the past, and as you have heard from David, we will continue to aggressively dispose of problem credits.

Additionally, as David has noted, we are confident of our structure and processes, including early identification to resolve these credits very quickly.

We have been candid today about the impact of the economic cycle on our business, but I want to be equally candid about the positive aspects of our business and our markets.

We are well reserved at 1.28% of loans.

Even with the rise in non-performers, our ratios still compare very favorably to our peers.

The economic growth in our footprint is among the strongest in the country.

Job growth today in metro Atlanta is 55,000 and is projected to be even higher in 2008 and even higher in 2009.

The national population growth over the next five years is expected to be 6.3%.

Compare that with seven counties in the Atlanta MSA.

These seven counties are expected to grow by a minimum of 20%.

United has banks in all seven of those counties.

In fact, we are the largest community bank in the MSA.

When the housing market turns around, and it will, as people continue to move into this region, we are where we want to be.

And very importantly, we have the right people in place to manage our way through these challenges.

Also, and always very important, we have built this bank around outstanding community bankers who know and understand their markets.

We remain focused on the core thing that made us successful -- people, service and quality.

This focus has served customers, employees and shareholders very well historically, and we are confident it will continue to serve them well into the future.

With that, I will ask the operator to open the call to your questions.

Yes, sir.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Mr.

Kevin Fitzsimmons of Sandler O'Neill.

Please proceed.

Good morning, guys.

Hey, Kevin.

Good morning, Kevin.

I was hoping you could give a little color on what the delinquencies and what -- and/or what the watch list did linked quarter.

You gave a lot of color about NPAs, but that always is a good indicator what's coming beyond.

And then secondly, and maybe it relates to how those look, Jimmy, what gives you the comfort right now, I mean, things are very uncertain, as you mentioned, but what gives you the comfort that this is only a few quarter type of thing, where we might be at these kind of levels of non-performings?

Is there something out there, or are you just looking more at historical trends?

Thanks.

Kevin, let me ask David to address the watch list and the past dues, and then I'll address that question next.

David.

Yes, Kevin, good morning.

With regard to thirty day past due trends, we did see a little bit of a climb here in this past quarter.

We have an internal goal of 1% of past dues, thirty days and over.

We climbed up to 83 basis points so that was still well under our goal.

Into the second quarter, just for perspective, we were at 60 basis points, and a year ago we were at 63 basis points, so you can see we're up a bit this past quarter but still within our acceptable range.

On your question about the watch list -- we don't -- we don't disclose the details of our total watch list, but I will tell you this -- that we saw much more of an increase in watch list at the end of the second quarter of '07, and coming into the third quarter we saw our watch list climb by approximately $15 million over the end of the second quarter.

We -- we've had in place a very intensive review process to look at our potentially challenged in-watch credits, including a quarterly meeting that we do with all of our banks to review their portfolio in detail.

And I think, as a result of that process, we feel pretty comfortable we've identified the challenges we've had, and new ones are getting surfaced quickly.

So, that's where we're at right now.

Hopefully, that answers your question.

Okay.

Thank you.

Kevin, in regards to your question about the short-term impact as well as what gives us optimism in the near future -- I think, really boils down to two things primarily.

One -- where we are today is not so much a demand issue as it is a supply issue.

When you look at our footprint in the geography, we are still where people want to live, work, play and retire.

We're continuing to enjoy population growth, maybe not to the degree we've seen in the last couple of years, but that will turn around.

Job growth is very encouraging, with the 55,000 jobs year-over-year, so we think that will continue and certainly all those indications.

Assuming that does come true, and we feel that would be the case, then that will go a long ways of correcting the supply issue.

Jimmy, just one quick follow-up -- assuming things stay where they are, that we don't have this reversal in inventory, that new construction still stays at a stand-still, do you feel you have a good handle on how your builders are doing, in terms of which ones may succumb to pressure over the next three to six months, or which ones you feel are just going to be fine?

Kevin, we do -- certainly we've got a review system that we've had in place for a long time.

The larger builders that we bank in the metro Atlanta market, and Gary Guthrie's in charge of those, he and his team -- what we see today -- we are -- we feel pretty dog gone good about.

These people -- because we don't bank everybody -- we bank a select few -- these people have been through these times before.

They still have good liquidity.

What we've seen is they're still making money, and I think that is important -- certainly looking at it today and within the next six months.

If the thing continues to slow down 12 months from now, then certainly that's going to create even more stress, but we look out over the next six months, and I don't want to try to sugar coat this, because it certainly is not what we would like, but we do see that it's very manageable for our Company.

Early identification -- early detection -- we think is so critically important.

Quite candidly, that's one of the reasons, I think, we saw the NPAs spike this quarter, followed by the spike in charge-offs, because we are aggressive.

We think it is prudent to move these weaker credits out as quickly as possible.

Okay.

Great.

Thank you.

And your next question comes from the line of Adam Barkstrom of Sterne Agee.

Please proceed, sir.

Hey, gentlemen, good morning.

Good morning, Adam.

Good morning, Adam.

Sorry, I had you on speaker there.

Does that sound better?

Yes.

Oh, good, good.

Hey, curious, just -- Rex, if you could -- you talked about some of the targeted deposit run-off, and I guess to fill that gap you also talked about -- kind of -- managing that on the borrowing side.

Wonder if you could give us a little more color on the structure and types of borrowings used there, just because it's such a noticeable jump there, linked quarter.

If you're looking at our wholesale borrowings, in particular, again since we're heavily weighted asset sensitive, from the standpoint of our prime base, that is, priced at the prime rate, most of it underneath is, again, fairly current that we do it at a -- Fed funds has been the biggest increase when you look at it on a linked quarter and our repo agreements.

That's probably a little over $230 million of the linked quarter increase in our wholesale borrowings.

We do have a smaller amount of structured financing that we go out from one to three or four years, and that really only increased by about $10 million or $15 million on a linked quarter basis.

So primarily we've funded again, since most of the loans coming on are at prime daily, we'll fund it to match fund it from an interest sensitivity standpoint.

Okay, and then I guess a portion of those funds were used to purchase additional securities.

I'm just curious if you could give us a little color on where do think the investment portfolio kind of goes from here?

I mean, you're kind of projecting continued, flattish loan growth -- certainly deposit trends are going to remain challenging.

Do you think investment balances will kind of remain kind of flat here the next couple of quarters or a little heavier reliance on that to generate some spread income?

It is up about $300 million when you look at it year-over-year.

Again, if you again look at it either on average assets or total assets, you'll see that it's around 17% of our total assets, so we really have not leaned too heavily on the securities portfolio.

We've been able to price on the market this year, in particular, to get a little higher on the band when we've acquired the securities.

And, again on a linked quarter basis, it's only up around $30 million or $40 million so we've not put too much on in the second quarter into the third quarter.

And it might go up a little more, but I don't see it really going significantly higher as a percent of total assets.

Okay, okay.

And then tell us what scares you a little bit.

Certainly the focus on the Atlanta construction market is certainly well founded, but -- also curious -- I mean, we're seeing in the news every day the drought situation, and certainly a lot of the -- a lot of your market areas -- vacation homes on lakes, etc.

How is that affecting your business?

What are your thoughts on that?

How are we looking at that going forward?

Just wonder if you'd give us some color there, Jimmy?

Well, Adam, it's certainly a concern of all of ours.

I would have to make this remark, and I mean this in the context in which I say it -- where we're located truly is the head of a stream, and so we're going to have water.

It may be less than what we are accustomed to -- no one knows the duration of the drought.

Fortunately, we had rain yesterday and last night and today, but I still think that it's going to have very little impact as far as the desirability to locate in a lot of these markets.

But water is a major issue, probably a bigger issue in the Atlanta market for drinking purposes than for recreation purposes in western North Carolina and north Georgia.

Yes, I guess, I mean -- up here where I am we see - watch CNBC all day flip the pictures of dried out lakes, boats sitting in the mud, boathouses sitting on dry land, and it just seemed like from our analysts' day tour that we saw a lot of those types of properties up in your north Georgia markets, and those lakes -- I mean that's not affecting vacation property sales or anything of that nature, that you're seeing?

Adam, I would explain it this way.

What you're seeing on CNBC is not the lakes in our general area, maybe Lake Lanier, but we have the TVA lakes, we have the Georgia Power lakes.

Georgia Power lakes now are really right at a full pool.

One of the TVA lakes here in the county next door to where we're at today -- last week we saw a lake lot sale for $1.5 million cash deal.

So I don't think it's having any impact at this point.

All right, gentlemen, thank you.

Thank you.

Thank you.

And your next question comes from the line of Jennifer Demba of SunTrust Robinson Humphrey.

Please proceed.

Morning.

Morning.

Questions for David.

David, you said about 65% of your non-performers are from Atlanta.

Can you give us a sense of the rest of the non-performers and where there may be concentration geographically?

Sure.

I could give you a little bit more color around that.

Total non-performers -- yes, 65% are in the Atlanta region.

The next biggest spot, of course, would be north Georgia at 18% and then Tennessee at 9.5%, North Carolina at 5.5%.

And the coast is still really -- we're seeing it's very strong -- only at 1 -- a little over 1%.

Okay, and how about the composition -- looking at the non-performers another way -- how many of them have come from acquisitions versus not?

I'd -- that -- that would be a tough -- I don't have that information readily available.

It would take some work around that, Jennifer, mainly because when you think about timeline -- when an acquisition was done and how long does it take before it's become a challenge --

Right.

I'm not sure -- we could work on that -- that'd take quite a bit of effort, I think, to pull that.

Okay.

One more question for Rex.

Rex, can you kind of give us a thought on where you think the margin might be going in the next few quarters, given, it sounds like loan growth is going to be pretty weak, and you might perhaps have higher non-performing assets from here?

Yes, Jennifer, I think we thought that question would probably come up.

We've come down, as you've noticed over the past two quarters, about five basis points on a linked quarter, and that probably will level off in the range of probably 385 to where we're at today.

I think on the non-performing assets our expectation, as David indicated, probably will stay around the same level so we have that pretty well blended in right now from the standpoint of a run rate.

We hope it is.

And I think in the context with the mix -- the mix is pretty well in also that I mentioned earlier on investment securities probably being the biggest piece of mix when you look at it year-over-year.

The impact of having investment securities versus loans, as you're indicating, Jennifer -- that is somewhat blended in right now.

So we could see probably, over the next quarter, two to three -- or two to four basis point attrition, possibly, in our margin -- again, with that mix and again, DDA is a big part of it also, if we can continue to hold DDA, then that will help.

Okay.

Thank you.

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

Please proceed.

Thanks.

Good morning.

Hello, Chris.

I wanted to ask about some more drill down on the past dues.

David, you had mentioned the 83 basis points on the past dues.

How could we break that into buckets between CNI and CRE and also construction of those past dues?

Well, I don't have that readily available, Chris.

We'd have to do some work around that number to break it out so I'd have to get back to you on that.

Do you have any sense -- would the proportion have been the same as we know it was last quarter?

I'm sorry -- could you repeat that?

Would the proportion of what's in construction versus other past dues be the same as last quarter?

I would say yes.

Okay.

Okay.

That's great.

And then just -- I guess just a general follow-up on -- from a credit perspective.

What -- what is, I guess, your thought about the risk that there are borrowers who are fully paid and fully accruing today that those become not -- not -- not in healthy shape, come February or March?

This is kind of looking out to first quarter '08 trends.

Yes, I think right now, Chris, we're -- what I would tell you is -- I mean, obviously we're still in the midst of this slow market, and so we feel like we're going to be -- from our standpoint -- that our credit quality is probably going to look pretty similar here for the next couple quarters.

So certainly there's probably going to be some more that are going to go non-performing, but at the same time we are, as we stated, very aggressively moving out those that are already on our books as non-performing.

So -- our -- based on what we're seeing in the pipeline right now, it's possible we could have some level of increase, but we don't see a flood of new non-performers over the next quarter or so.

Now, if this thing continues for multiple quarters through the end of '08 and '09, that'll be a different story, and we'll have to look at that as those times develop.

Sure, I understand.

Last question -- in terms of the loans that you either may sell or are looking at selling in the environment now -- what is the range of bids that you're seeing as you put things out for sale?

The range of -- the range of discount, is that what you --

Correct.

Is that your question?

It's all over the board right now, as we sell properties.

To be honest with you, sometimes we've taken heavier discounts than others, but on the other hand, here a week or so ago, we had a pretty good gain on a piece we had just taken in within the last six months.

So, it's -- I would tell you that in general our losses are heavier than they had been historically, and that's why you see our overall charge-offs up, and I would expect that to continue for the next quarter or two, but it's hard for me to answer in general what is the level of discount because it's very project specific.

Okay.

Very good.

Thank you for the color.

And your next question comes from the line of Mr.

John Pandtle of Raymond James.

Please proceed.

Thank you, and good morning.

Hello, John.

First question, Rex, relates to the margin.

Can you isolate the impact on a basis point in terms of the increase in NPAs?

The -- as we indicated, the NPAs in the quarter is probably very close to a five basis point impact.

Okay.

We have a little bit of the mix in DDA impacting also, which is maybe another two, and that probably is offset by about two -- the benefit we have from First Bank of the South coming in for a full quarter.

So there's a little bit of mix in those numbers.

Okay.

Separately, I wanted to ask about the commercial real estate portfolio.

You had a slight decline in outstandings second to third quarter.

I was wondering if you could give us some color on where you're seeing some of the softness in that portfolio in terms of growth.

John, let me answer that, and then David may want to add on.

Principally, that was a couple of larger credits that simply just paid off, not a problem, not an issue.

Certainly that hurt to lose those outstanding balances, but I don't think that's indicative as to what is to come.

Okay.

David, did you want to add any color to that?

No, I think if you break it down and look between, in terms of categories, it really was a mix of both income producing real estate -- slight decline there as well as a small decline in CNI, just to give you a little color.

Okay.

And, then do you calculate the average life or the average maturity of the construction and land development portfolio, where it is today versus maybe second quarter or a year ago?

We do not do an average overall on the portfolio.

No, we don't.

We look at them very much on a case by case basis, -- very -- on a very micro level.

Okay.

I guess what I'm getting to -- maybe another way to address this -- we have the outstandings here.

What would be the undrawn or unfunded commitments?

What's -- do you have that total?

For the portfolio?

We do have -- I don't know that I have that in my hands right at the moment, and I would tell you that part of the challenge in answering that question is that there's -- a lot of the lending that we do is done on a guidance non-committed basis --

Okay.

-- where we establish lines of credit, and frankly, we're not -- and oftentimes, particularly in the builder community it supported spec building.

Well, of course, we're not do -- there's not a lot of spec building going on right now, and so, while we may have commitments in place, it's not all that relevant because we're not really funding under them.

On the other hand, then we do have other credits where we do have committed exposure.

So there's two ways to look at that.

I don't have those numbers right in front of me to answer your question, though, specifically.

Okay.

Thank you.

And your next question comes from the line of Ms.

Catherine Mealor of KBW.

Please proceed, ma'am.

Thanks.

Good morning.

Hi Catherine.

I just have a follow-up question on the loan growth.

While I wasn't surprised to see the decline in the construction loan balances, I wanted to see if you could give a little more color on the decline in the CNI portfolio and your expectations for growth in that portfolio going forward in light of the strong CNI team you acquired in the recent Atlanta acquisition.

Well, Catherine, the decline in the CNI in the commercial side is principally two sizable credits that paid off -- sold assets paid the debt off -- or we actually would have seen an increase in that.

Certainly, our focus is to help diversify our loan portfolio, moving [A&D] in construction from 41% downward and replacing that with commercial and CNI.

You know, quite honestly, the challenge that we're facing today is -- there's more running out of the A&D in construction than we're able to book -- to replace that -- plus getting that growth.

But that's not all bad -- that's by design.

The CNI is as excited as we are with the opportunity.

We also are very disciplined in the -- in our credit approval process.

We can grow CNI for the sake of growing it, but that's a high risk kind of business, and we got excellent folks managing this.

We will see that continue to gain momentum over the next few quarters but to see a large spike in it on the short term -- I don't think that will happen -- but our overall strategy, again, is to see our A&D in construction continue to decline through pay downs, commercial CNI to increase to replace that, and that will occur over time.

Okay, good.

Thanks for the color.

And your next question comes from the line of Terry Maltese of Sandler O'Neill Asset Management.

Please proceed.

Hi guys.

Hello Terry.

A couple quick questions.

Could you repeat -- the buyback number in the third quarter was 1.3 million shares?

Yes, Terry, that's correct, a little over 1.3 million.

Okay.

So, where is your tangible equity now -- I mean, I know where it is -- where is it in relation to -- where are you guys comfortable with number being, and then -- sort of, maybe, combined you can answer -- is there any reason to think -- I mean, the stock is lower than where you bought it in the third quarter -- is there any reason to think the buyback should slow going forward as opposed to accelerate?

The tangible equity asset ratio is about 6.65% at quarter end, that's consistent with the last quarter, and again, our guidance on that that we've looked on the past, Terry, has been, probably in the 5.50% to 6%, we're comfortable.

Again, being above that at 6.65% gives us some room, as you mentioned.

We increased the authorization from two million to three million shares.

You could probably see us easily looking at acquiring another 300,000 to 700,000 up to two million and see how the quarter progresses.

So, we are going to continue with the buyback, and again, we have three million authorized through December of 2008.

Okay, great.

Thank you.

You're welcome.

And your next question comes from the line of K.C.

Ambrecht of Millenium.

Please proceed.

Hi.

Thank you very much for taking my question, a few for you.

The -- can you kind of go through -- I'm a little confused how the provision can kind of not cover the net charge-offs this quarter, even though the NPAs are up eight times, year over year.

So I guess I was trying to figure out -- when you say you only expect a few more quarters of deterioration, what inning would you say we're in?

In terms of the inning, that's a hard one for us to call at this point in time.

As it relates to our reserve adequacy itself, it's really a pretty mathematical process that we go through in calculating our reserve, and if you look at our overall -- the ratios of our reserves at 120 -- if you net out (inaudible), and you look at the 120 -- 1.28% to the loans coverage of the allowance, and then you look at a coverage on non-performers of 300 and -- 3.3 times, we're very well reserved relative to our peers.

It is a very granular mathematical process, as I mentioned, and it will evolve over time.

But based on where we're at today, we do feel like, if we needed to, we could actually sustain charge-offs running somewhat above current provision levels for a quarter or two and still be adequately reserved.

Okay.

I mean, so -- but you expect a few more quarters of this, I mean, does that mean like we're in the 8th inning, and credit is almost about to get better or --

Well, I can't tell you about the economics in terms of when the market's going to turn.

We're hopeful we'll see a turn in '08, but at this point in time we're really looking more at the short term.

Can you give us a sense on your maturing interest reserves for your builders?

How do you look at that?

Do you have a lot of -- do you have a lot of projects that are being -- that are almost completed and that the builders have kind of been working off of the interest reserves?

Well, in all development lending it's pretty much standard practice to build an interest reserve into a construction project.

We have been going through, on an ongoing basis, taking a detailed look at each of our builders' projects to see where we are, and it varies across the board, depending on sales absorption and when the project was started.

We have had occurrences where we have run -- basically, the project has come to completion -- we've run out of interest reserve, and in most of those type cases we have, at this point in time, we've been either looking for the sponsor to -- to come up with money out-of-pocket through other sources, or, in some few instances, we've looked for borrowers to pledge additional collateral that would enable us to lend additional monies to the borrower.

We have not -- and will not -- increase interest reserve based on existing collateral on a project.

Gary is from our Atlanta residential -- he's our regional president in Atlanta for real estate, and he might want to add to that comment.

Well, David, I think you covered most of it.

We certainly are looking constantly at A&D loans and the adequacy of the interest reserve and, as you said, when the reserve is exhausted, we're drilling further into the credit to the guarantors and underlying financial strength of the borrower to see if they have capacity to carry it.

So far we feel good about --

Can you -- can you give us a sense of -- I'm trying to get a sense of when these maturity -- when --these projects mature, like is there a big cliff where --

No.

-- hundreds of millions are maturing next year or --?

I mean, the loans have been made over a long period of time so there's no common trigger date that will occur.

I know, but the loans -- the construction projects will be completed though, right?

Well, I mean, they'll be completed at different times and at different rates, depending on the type of project and when the loan was made, so I guess -- I think you're asking me if there is any -- any date at which all these loans will mature, or the projects will all be finished --

Yes, I was just trying to get a --

Yes, there is no common date, no.

Okay.

And then the guidance for this year -- are you kind of adjusting backing out Spruce Pine 9% to 11% core growth in '07.

If we include Spruce Pine, you're probably going to be around $1.60 run rate this year.

Should we expect similar kind of growth rate, 9% to 11%?

For next year, '08 over '07?

You're talking fourth quarter '07, K.C., or are you talking about '08?

I'm talking about 2008 versus 2007.

Today we're not prepared to give the earnings guidance for '08.

We'll do that in January at our conference call.

This Company takes a lot of pride to create double digit earnings growth for our shareholders, and our history demonstrates that.

Giving you a high level at 2008, given the -- the -- the -- what we're looking at today, with the softer loan growth, the credit environment, that would be a real challenge for '08.

But as far as giving guidance, we'll do that in January at our conference call.

Okay.

Thanks.

And your next question comes from the line of Jennifer Demba of SunTrust Robinson Humphrey with a follow-up.

Please proceed.

Thank you.

David, how much of your non-performing assets are other real estate owned?

Total other real estate owned was $16.6 million at the end of the third quarter.

Okay.

And -- question -- do you have a sense of how stale the inventory is on your -- on your construction and development non-performers?

On average?

In terms of -- I guess I'm -- you talking about the age of, say, houses?

Yes.

We do have full details, and, of course, it varies from -- from builder to builder.

Gary, I don't know if you can add some color.

I don't -- we don't have the specific numbers here in front of us, but Gary might be able to give some color on it.

Jennifer, are you asking about the non-performers or just the construction portfolio in general?

Both.

I don't know that we tried to age the non-performers, but we definitely track the age of the existing construction portfolio on a monthly basis, and we generally track it under 12, 12 to 18 and over 18 months.

I don't have the percentages in front of me.

What we did see for several quarters was and what we would expect to see, and that was an aging of the portfolio to some extent.

I would tell you probably in the last couple of quarters we've seen it taper off, and the migration through those categories has really kind of stabilized and maintained fairly constant.

Back -- back on the -- as far as it relates to ORE, Jennifer, we don't have very much that's very old in -- in -- as far as in inventory of OREO, and that's pretty easy just to tell in terms of we've just had this ramp-up this year so it's really not very aged at this point in time.

I would go as far as saying, I know we don't have anything that's older than two quarters, probably one quarter, and Jennifer, to give you even more color, if you look at the non-performing in OREO that we have talked about today, we have now $7 million of that amount that's either sold or under contract that should be sold within the fourth quarter.

Okay.

Thank you.

Your next question comes from the line of John Pandtle from Raymond James with a follow-up.

Please proceed.

Thanks again.

On the construction and land development portfolio can you give us a sense of how much of that represents completed, but unsold properties?

And then, also, kind of a related question -- I mean, is it possible on in-progress properties to give us a sense of what percentage -- percent of completion -- how far along those properties are?

I think I'll try and give you some color, to answer your question.

With regard to our total real estate construction portfolio, if you look at just on the house construction side, we had a total of $810 million in houses that were in construction or completed.

Out of that, $536 million of that $810 million would be classified as a spec, so $275 million of that would be sold.

They are in various stages of completion, and I couldn't give you an average easily, in terms of the level of completion.

Another point I think that's worthy of note, though, is if you look at -- from second quarter to the third quarter we've actually seen a decline in our total houses under construction, from $909 million down to the $810 million.

The spec to sold ratio is -- is -- is pretty close in both quarters, but you can see it's starting to tail down, which meets with what -- exactly what we're seeing occurring in the market in general -- starts have slowed, closings have exceeded starts now for a couple quarters, and so we're starting to see the cycle move through on completed housing.

Okay.

Thanks again.

And your next question comes from the line of Kevin Fitzsimmons of Sandler O'Neill with a follow-up.

Please proceed.

Hey, guys, I just wanted to clarify your comments earlier about non-performers staying roughly at this kind of level.

I would assume you're talking about the non-performing ratio excluding Spruce Pine.

And then you also mentioned that, I believe, next quarter -- fourth quarter is going to be when you anticipate taking all, or virtually all, the charge-offs related to Spruce Pine.

How should we think about non-performing levels?

Are they going to be -- is Spruce Pine going to be a thing of the past after the last quarter -- it's just going to be removed, either in terms of losses, or the non-performers are going to get moved off, or are we -- do you anticipate for at least a couple quarters having a portion of that non-performing -- those non-performing assets kind of persist?

Thanks.

Kevin, in regards to Spruce Pine, the fourth quarter we will take a significant charge -- what we have been waiting is a lot of conversation with the individuals with their attorneys, we've looked at mediation, there's a number of things that are going on so we felt it was just prudent to wait until we had the facts.

We feel we'll have most of those facts in the fourth quarter, and as a result of that, you'll see a significant charge taken with Spruce Pine.

To give you a little color on the NPAs going forward, and let's exclude Spruce Pine -- I think I can be a little bit more accurate there.

We're 49 basis points.

What we feel over the next couple of quarters -- we could see that number go up slightly, we could see it come down slightly.

Do we anticipate a huge increase above that number over the next quarter or two?

No.

We have -- all of our reviews, our research, moving credits out, continue to work just as we planned, but it's not a science.

We just can't say it's going to be X, but what I do believe is you'll see a similar continuation -- could be a slight rise, could be a slight decrease over the next two quarters.

Okay, great.

Thanks, Jimmy.

And your final question comes from the line of Ms.

Jennifer Demba of SunTrust Robinson Humphrey with a follow-up.

Please proceed.

Sorry, I meant to ask this before, but my mind went blank.

How much of your non-performers are A&D?

Hold on a second, Jennifer.

Total non-performers that are in A&D would be 12.6%.

That includes Spruce Pine?

That does not.

Spruce Pine's not an A&D.

Right.

Okay.

Thank you.

You're welcome.

At this time I would like to turn the call back over to Mr.

Tallent for closing remarks.

Please proceed, sir.

Well, we want to thank you for your interest in being with us this morning.

We certainly appreciate your calls, and certainly if you have other questions, please don't hesitate to call David, Rex, or myself.

We look forward to talking with you in January and hope all of you have a great day.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.