United Community Banks Inc (UCBIO) 2008 Q1 法說會逐字稿

Good morning, and welcome to United Community Bank's First Quarter Conference Call. Hosting our call today are President and Chief Executive Officer Jimmy Tallent, Chief Financial Officer Rex Schuette, and Chief Risk Officer David Shearrow. Also participating this morning is Gary Guthrie, President of Atlanta's residential construction.

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 the company's Investor Relations page at www.ucbi.com.

Please be aware that during this call, forward-looking statements may be made about United Community Banks. Any forward-looking statements should be considered in light of 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 its website.

At this time, we'll begin the conference call with Jimmy Tallent.

Good morning everyone and thank you for joining us today for our discussion of the first quarter of 2008.

Despite a difficult operating environment, United achieved first quarter earnings of $0.34 per diluted share. At the same time, we continue to address the challenges of a downturn in the economy and a declining credit environment. We advanced several initiatives, especially those focused on growing core deposits and diversifying our loan portfolio.

Overall, we continue to pursue those strategies that will position us to successfully manage through this current business cycle as well as prepare us to take advantage of new opportunities when the economy improves.

Today's call's format will go as follows. I will share some key first quarter results. Rex will then go over our financials with an emphasis on margin and capital. Following Rex, David will walk you through our loan portfolio and also discuss credit. I will then provide some closing remarks and my outlook for the upcoming quarters.

Our first quarter earnings were solid given what we faced in this operating environment. We did see continued deterioration in our credit quality and as expected, a rise in non-performing assets.

We saw 3% growth in our loan portfolio driven by commercial lending. While residential construction continues to be a challenging market segment, our exposure continues to [stream].

The rest of our portfolio remains solid, but we will continue to closely monitor it and deal aggressively with problem credits.

Deposits increased $334 million from a year ago. However, excluding acquisitions, deposits were down $234 million from the prior year due to attrition of higher rate CDs where no other customer relationship existed. On a linked quarter basis, total deposits were basically flat when you exclude broker deposits.

We continue not only to keep our current core deposit customers, but also to gain new ones. Balances are lower, but our customers remain loyal and our satisfaction ratings remain at an all time high. This bodes well for us when the operating environment improves.

And now, for the first quarter. Diluted earnings per share was $0.34, down from $0.44 a year ago, principally because of margin compression and credit cost.

We had net growth in our loan portfolio of $39 million this quarter.

Our residential construction portfolio decreased $39 million primarily due to pay-downs and we were pleased to see commercial loans grow $90 million or 15% annualized.

Our net interest margin declined by 18 basis points to 3.55% on a linked quarter. Non-performing assets increased to $89.9 million and charge-offs were $7.1 million while we provided $7.5 million for the quarter.

Our charge-offs and NPAs were within the guidance that we provided, but obviously much higher than we would like. We will continue to see upward pressure on the level of charge-offs and NPAs throughout 2008.

Our capital ratios remain solid with all regulatory capital ratios above the well-capitalized level.

United's solid earnings base, depth of experienced management, location, and growing markets, and unwavering delivery of outstanding customer service has been fundamental to managing through these challenges and will continue to carry us forward.

Now, I will turn the call over to Rex.

Thank you, Jimmy. During the first quarter, net income totaled $16.1 million and was down 17% from a year ago due to margin compression, slower loan growth, and higher credit costs.

Diluted earnings per share was $0.34 for the first quarter compared with $0.44 for the first quarter of 2007.

For the first quarter, tax equivalent net interest revenue was $66.3 million, up $1.2 million or 2% from the first quarter of 2007.

Net interest margin for the first quarter was 3.55% compared to 3.73% for fourth quarter 2007 and 3.99% a year ago.

The two key factors impacting the 18 basis point decline in our margin from last quarter were competitive pricing and the higher level of NPAs. 13 basis points of this decline related to the impact of the Fed lowering rates by 200 basis points this quarter, and were not able to re-price deposits as quickly as our prime base loans, and 5 basis points of the decline related to the increase in the level of non-performing assets.

Deposit pricing continues to be very challenging as large banks and even local community banks have aggressively competed for liquidity by offering CD rates substantially above the wholesale rates.

Excluding acquisitions, we had core deposit balance attrition last year that was directly related to the economic cycle as customers had greater demand on their money to meet rising costs of fuel, food, and other household basics.

Although core deposit balances were lower year-over-year, we're able to grow the number of customer accounts by 6% from last year. Also, we had signs of improvement in the first quarter with a slight increase in core deposit balances on a linked quarter basis.

You may recall that we built up liquidity in 2005 and 2006 by growing customer deposits greater than loans, which enabled us to let non-relationship CDs run off in 2007 and be more selective in deposit pricing.

During the first quarter 2008, CDs were down $28 million on a linked quarter basis. We actively managed our wholesale borrowing and broker deposits with retail funding to maintain an appropriate level of liquidity as we balance interest sensitivity in this down rate environment. Based on current market expectations, it is likely that the Fed will continue to ease rates in the near term which will put additional pressure on our deposit pricing and further margin compression.

Turning to interest rate sensitivity, we continue to manage our balance sheet towards a neutral interest sensitive position. And during the first quarter, we added $150 million in investment securities to pre-purchase securities in this down rate environment as well as to hedge against the declining rates. We have not added derivatives this quarter and our total received fixed-rate swaps remain at $785 million and our interest rate floor is at $500 million.

At quarter end, our interest rate sensitivity reflects 190 basis point increase in net interest revenue over the next 12 months based on a 200 basis point ramp up of interest rates. This is up from the 130 basis point increase last quarter and the 150 basis point increase a year ago.

Also at quarter end, a 200 basis point ramp down in interest rates would cause a 140 basis point decrease in net interest revenue as compared to 150 basis point decrease last quarter and a 30 basis point decrease a year ago.

The effective duration of our investment securities portfolio was three years at quarter end, down slightly from 3.1 years at December 2007, and up from 2.3 years at March 2007. The average life of our investment securities portfolio is 3.5 years at quarter end as compared to 4.1 years at December 2007 and 2.9 years at March 2007.

Fee revenue was $14.2 million for the quarter, down slightly from $14.4 million for the first quarter of 2007. Service charges and fees on deposit accounts was $7.8 million, increased $560,000 or 8% from last year, due to growth in transactions and new accounts as well as higher ATM and debit card usage. Brokerage fees of $1.1 million were up $149,000 or 16% from a year ago. Our customer retention rates continue to be quite strong and we increased our customer base.

Mortgage loan fees were down $260,000 from last year as demand for mortgage loans continue to taper off reflecting the ongoing slowdown in the housing market.

Other fee revenue of $1.5 million was down $487,000 due to two special items in last year's numbers relating to a gain on the disposition of a lot that was held for a potential office location and the recovery of an overpaid interest claim on broker deposits.

Looking at operating expenses, they total $47.5 million for the quarter. This is an increase of $2.7 million or 6% over the first quarter of 2007 and a decrease of $1.8 million from the fourth quarter 2007. When you exclude the Bank of the South acquisition, total operating expenses were up only 2% year-over-year. We're continually balancing our expense growth with revenue growth and controlling discretionary spending where possible.

Our press release schedules show the changes by each expense category. Staff costs is the key driver of operating expenses. Total staff at quarter end was 2008, and we were down 20 staff from year end and up 68 staff from a year ago. The increase from last year was due to the bank acquisition in the second quarter.

Our efficiency ratio is 59% for the first quarter, which exceeded the company's long-term goal of 56% to 58%. The increase was driven primarily by higher legal costs and write-downs on OREO.

Now to discuss capital. We know that maintaining a strong capital position is always important but especially during these uncertain times. All of our regulatory capital ratios at quarter end were above the well-capitalized levels. Our tier one capital ratio is 8.8%, leverage ratio is 6.9%, and our total risk base capital ratio was 11%. Also our tangible equity to assets ratio was 6.73%.

Early this month the board of directors approved the second quarter 2008 dividend of $0.09 per share, which is the same level that dividends were paid in 2007. Even though the 26% dividend payout ratio was up slightly from last year, it is at a level and within a range that the board feels is appropriate based on our performance.

With a solid earnings base, we look to build our capital position going forward, especially during these challenging times for credit. If circumstances were to change, we have several alternatives identified to maintain our strong capital base.

Now, I'll turn the call over to David.

Thank you, Rex, and good morning. I want to talk about the first quarter increase in non-performing assets and charge-offs as well as changes in our loan loss provision. I'll also give you an updated perspective on how the economic environment is affecting our loan portfolio and how we are managing through this challenging environment.

As I reported in our last call, in the fourth quarter, we undertook a meticulous review of our entire residential construction portfolio with particular emphasis on the Atlanta region.

As a result of this review, and continued deterioration in the housing and construction markets, we aggressively took charge-offs and write-downs at year end. In addition, we determined it was appropriate to increase the provision for loan losses to bolster our loan loss reserve.

The resulting provision for loan losses in the fourth quarter was $26.5 million excluding the special provision for Spruce Pine loans in North Carolina. During my discussion, all the comparisons to 2007 will exclude Spruce Pine.

Uncertainty about the current economic cycle continues. So in the first quarter, we made a provision of $7.5 million, which was slightly above the $7.1 million in charge-offs this quarter.

As Jimmy mentioned earlier, in the first quarter, we saw a sharp rise, as anticipated, in non-performing assets. At quarter end, we had $89.9 million in non-performing assets compared to $46.3 million at December 2007. Non-performing assets included $67.8 million in non-accrual loans and $22.1 million in OREO. We did not have any loans accruing that were 90 days past due.

The ratio of non-performing assets to total assets was 107 basis points, which was at the upper end of the guidance we provided last quarter. This compared to 56 basis points last quarter and 20 basis points a year ago.

In terms of dollars signs, we had six non-performing loans greater than $2 million. The largest exposures were $8.2 million, $6.0 million and $4.3 million. Each loan was to a separate residential construction customer in Atlanta and the collateral consisted of houses and finished lots with no A&D exposure.

We had five exposures in OREO greater than a million dollars. The largest were $3.1, $1.5, $1.4, and $1.2 million. Each loan was to a residential housing development customer in Atlanta. Through April 23rd, $11.7 million of these non-performing assets were sold or under contract to sell or refinance, including three of our top four OREO exposures.

Segmenting our NPAs, the largest market concentration at year end was the Atlanta region at 66%. The largest loan category concentration was residential construction loans at 65%. Both of these concentrations are consistent with last quarter.

Net charge-offs were $7.1 million for the quarter compared with $13 million for the fourth quarter of 2007 and $1.5 million for the first quarter of 2007. The ratio of net charge-offs to average loans was 48 basis points, 87 basis points, and 11 basis points respectively.

While our charge-offs in the first quarter were down significantly from the prior quarter, it is a sizable increase over our historic levels. These charge-offs continue to be driven by deterioration of the residential construction and housing markets primarily concentrated in the Atlanta region. Atlanta comprised 70% of our total first quarter charge-offs consistent with last quarter.

Let me now provide you with updated information on our residential construction portfolio in Atlanta.

Of our $1.8 billion residential construction portfolio, the Atlanta region represents $844 million or 47%, which is down $20 million from last quarter and down $189 million from a year ago excluding the Bank of the South acquisition. We expect this trend to continue.

Of this $844 million, we had $355 million in houses under construction that included $76 million in pre-sold and $279 million in spec. The balance was dirt loans of $489 million. That includes $305 million in acquisition and development loans, $129 million in finished lots, and $55 million in land loans.

In terms of our risk management process, we are aggressively managing the entire loan portfolio. We continue to review, in detail, all of our credit exposures greater than $500,000. As I outlined last quarter, we hold quarterly meetings with executive management in all of our banks to review in detail the status of all watch list credits.

Residential construction in Atlanta is reviewed more frequently. In addition, Jimmy, Rex, Guy Freeman, our Chief Operating Officer, Glenn White, our President of the Atlanta region banks, and I meet with our workout team every week to review the status of all of our NPAs so that we can bring quick resolution to problem credits.

We have also continued our intensified independent credit review examination process to include more targeted reviews in the Atlanta region and a lower dollar threshold of loans. Our stance on risk management centers on the quick identification of problems and equally quick resolution with full engagement and accountability by our entire management team.

In terms of credit outlook, we expect continued challenges over the next several quarters. While we pride ourselves on maintaining excellent credit quality, the housing slow down has created a difficult environment for builders and developers and this clearly has had an impact on our loan growth and credit quality.

We have continued to experience upward pressure in classified assets. Additionally, our past due loans at quarter end were 1.39% of total loans as compared to 1.20% last quarter. Real estate construction loans were 1.70% past due and accounted for 48% of total past due loans.

Based on these indicators, uncertainties about market liquidity and the legal delays which come from bankruptcy, we expect continued volatility and upward pressure on that level of NPAs during 2008.

As I mentioned earlier, based on our extensive portfolio review, we strengthened our allowance at year end in anticipation of continued softness in the residential construction portfolio during early 2008. In the first quarter, we provided $7.5 million to the allowance, which allowed us to maintain our allowance at 1.51% of loans. At quarter end, our allowance is adequate to conservatively cover any losses or risk identified in the portfolio.

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

Thanks, David. I'd now like to share some additional thoughts on the business environment. Without a doubt, 2008 will continue to bring challenges. There will be continued uncertainty about the economy and ongoing real estate issues.

We expect to see, first, the economic slow down continue throughout 2008; second, pressure on our margin from competitive deposit pricing and the cost of carrying non-performing assets; third, a surplus of residential lots and houses which will take time to absorb, especially the lots. This will put stress on the residential construction segment of our loan portfolio; and, fourth, higher credit costs during 2008.

That said, we also have many things that will sustain the company as we manage through the challenges of the next 12 to 18 months.

Our footprint contains many markets that remain relatively stable. While no one is completely immune to the current economic downturn, the tremendous population growth in these markets will eventually absorb the surplus real estate inventory.

Since 2000, our market has grown 21% with another 13% projected for the next five years. This is double the five-year growth rate for the United States.

In addition to many successful small businesses, there are 51 Fortune 1000 companies headquartered in our markets, 22 in Atlanta alone, all fueling strong job growth in cities and towns across our three-state region.

In regards to deposit growth, we have a number of initiatives underway, some new, some tried, and proven. Competition remains fierce, but our efforts will continue focusing on core deposits. We are testing several pilot programs with one already delivering positive results. A broader roll-out is being planned.

For loans, we are actively pursuing high-quality borrowers in all of our markets with a continued emphasis on increasing our small business and commercial lending to better diversify our business mix.

There are a lot of people opportunities right now in the banking industry and we continue to draw top talent. Recently, Chip Smallwood and Ken Palmer joined our company bringing additional leadership and expertise to our pursuit of the increased C&I lending.

Chip brings 20 years of experience and is president of the Tennessee region with his focus to double our assets in Tennessee.

Ken brings 24 years and is president of our Newnan, Rockdale, and Stockbridge banks with a focus to expand our C&I business.

They are significant additions to our management team as we pursue small business and commercial customers. We are already seeing very positive results. As I mentioned in my opening remarks, this quarter we had growth of $90 million or 15% annualized in our commercial lending.

We are really pleased with the efforts of Chip, Ken, and the other seasoned business lenders that we brought onboard recently. We will continue to closely monitor our loan portfolio. Early identification of stressed assets has always been critical and a central part of how we manage our portfolio.

Over the past few quarters, we have elevated these efforts even further as we move deeper into this credit downturn. We remain confident that our portfolio monitoring system will continue to quickly and accurately identify problem credits enabling us to aggressively resolve any problems. We will seek to preserve and build capital through retained earnings and other means.

Today, we have no new locations planned, but we will continue to accelerate our profitability focus on our de novos. While they are cumulatively profitable, of the 20 opened in the last three years some are not yet individually profitable due to their young age; however, we continue to see very positive results and we will maintain these strong efforts.

We continue to have great faith in our business model, more strongly than ever. While we will continue to make decisions to manage our expenses with a more aggressive posture during the current business environment, we must be equally careful and not lose sight of what got us here.

When the operating environment changes, and it will, I want this company to be able to take full advantage of the opportunities that lie ahead.

Now, let me talk about guidance. The principal reason we provided guidance last quarter, was that we did not want the market to misinterpret in any way our actions of the fourth quarter. Though they absolutely strengthen our position going into 2008, we did not want there to be a perception that everything problematic was behind us.

With the continued uncertainties in the housing and residential construction markets, and the related credit quality issues on the charge-offs and provisions, as well as the likelihood of continued rate reduction from the Federal Reserve, we feel that it's prudent at this time to discontinue providing earnings guidance until we see more clarity on the direction of these markets and the trends.

However, I will say this. For the next two or three quarters, due to the shrinkage in the residential construction loans, we expect loan growth will continue to be flattish, we expect our NPAs to increase with some lumpiness, we will see our credit costs rise, and we will continue to see pressure on our margins.

Managing in a downturn requires a different strategy. We are hunkered down. We will reduce costs where possible. We will deal aggressively with the problem credits. We are focused on growing deposits and liquidity and we will maintain a strong capital base.

While our company will continue to see slower growth in 2008, given the factors that I've just discussed we remain optimistic about our longer-term growth and success. We are confident in our ability to manage through the current business environment.

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

Thank you. (OPERATOR INSTRUCTIONS) We'll go first to Kevin Fitzsimmons with Sandler O'Neill.

Good morning, everyone. I'm wondering if you can just talk about how you feel about the reserve. I know you gave a lot of detail on the components of the portfolio and what led to the increase in non-performers. But I guess even if you exclude OREO out of the picture, because I know you mentioned OREO should have already been written down and you mentioned you've already sold some of that, I think $11 million or $12 million of that, if you just look at allowance to non-performing loans, you basically went from last quarter over 300% to now, I think, about 132%. So you had a dramatic rise in non-performing loans but the allowance, I think, some people may feel it could have been taken higher given the increase in non-performers. If you could just address and help reconcile us with that. Thanks.

That's a great question, and let me ask David, if he would, to go through that whole scenario with you.

Okay, yeah, Kevin. I think probably the best way to address that is take a second. Let's go back to what happened at the end of last year first because if you recall, in the fourth quarter, we went through and did a full scrub down and review of all of our problem credits, a real deep dive. And in the process of that, we ultimately charged off $13 million and we wrote-down $4 million that was in ORE. At the same time, we built our reserve up by $13.5 million at year-end and took the reserve up to 151 on total loans. And at that time, we gave guidance to you all that we thought our NPAs would rise, in fact, up to as high as 1% and that's roughly where we hit, slightly above that.

What you have in here when you think about the NPAs is really, at that time, the NPAs were seeing now at the end of the first quarter are really a reflection of what we had identified at the end of last year. Because, really, when you go through the process in the reserve process, you identify credit, you move it into the watch category, and establish a reserve at that time. Now it may continue to migrate from being a watched credit into NPA, and the amount you reserve against it may or may not increase depending on the type of loan that it is.

Let me give you a little bit more example how the reserve itself is calculated. When we go through each quarter, of course you start with kind of that grading mechanism and stratifying the whole portfolio. Then once we do that, we look at all of non-performing loans at the end of the quarter and all those that are non-performing we go through, if they're above a certain dollar threshold, we're doing a specific reserve on each individual loan looking at the specific collateral tied to that loan with a current market view of what we believe true liquidation value, net of liquidation costs with that loan to build it up.

The second piece of it is, is just on our general watch list categories, these are performing loans, we're actually building the reserve looking at historical loss experience weighted towards more recent loss experience that we've had here in the last year. Then the remainder of the portfolio is then allocated a portion of the reserve as well, again, based on historical experience.

All that said, there's also always--at the end of this past quarter, we always have some piece of unallocated reserve. In this past quarter, that was about 10% of our portfolio or about $9 million.

The point in kind of walking through all of that is that is when a loan moves from that watch category to non-performing status on an individual basis, it may or may not be greater reserve against it than it was when it was just in the pooled bucket of reserve. In other words, you may go into non-performing and find out as you looked at the specific collateral, it may or may not have a loss attached to it.

Okay, so David, just if I can--that I'm understanding you. So you're basically saying a lot of the increase in non-performing that we're seeing this quarter were loans that were already on the watch list back when you assessed the portfolio in the fourth quarter and increased the reserve? Is that a fair statement?

That's exactly right. We had, basically, anticipated those loans, some portion of those loans were going to move to non-performing status and that's exactly how we reserved against them in the fourth quarter. It was just a fulfillment of what we had already kind of established in the fourth quarter.

Can you characterize for us then what is the inflow to the watches looking like today? Because that's probably going to determine what we're seeing in future quarters. I assume it's going up since you're indicating NPAs are going to go up.

That's correct. We continue to see an upward trend in the watch list particularly in January/February and less in March. Our sense is, Kevin, that--in this market, it's difficult to tell how much more may move into watch list, but our scrub down is so extensive and we feel very conservative.

In fact, just to give you--I guess to verify that. We use an external loan review firm to look at our portfolio. They go around into various parts of our bank throughout the year. They just completed their review of our Atlanta Residential Construction book and in the process of that, we had no downgrades. Now that gives me some sense of confidence that we have probably very conservatively graded our portfolio and gotten in front of this thing in terms of--and that all ties, ultimately, back to the reserve.

Okay. All right. Can you--just one quick follow up. Can you briefly comment on what the interest level is from wholesale buyers out there in terms of properties, residential loans, lots, all the above, in terms of what the bid/ask is looking like and whether it's getting attractive for you to look at that option?

Yeah. The wholesale buyers are not attractive at this time. There's a lot of money that's out there. We get calls daily from all kinds of funds. We think that they're still--their bids are way low relative to what we've been able to get in the market from more local folks who are more familiar with our markets.

By the way, just to give you a perspective on velocity, kind of in the NPAs, kind of ties into your question, but we started off the quarter at 46 million in NPAs. During the quarter, we actually added $89 million. We ended at $89 million or just under $90 million. We effectively moved out $45 million of NPAs during the course of the quarter, which gives you an idea that the velocity is there, we do have buyers, but we're finding those buyers more to be a strategic local-type folks buying as opposed to the large institutional buyers.

Okay, great. Thank you very much.

We'll take the next question from Jefferson Harralson with KBW Asset Management.

Thank you. I just wanted to follow up on Kevin's question. On the $45 million that you moved out, can you comment on the pricing dated on that $45 million?

Well, yeah. Let me actually break it down a little bit for you first and then I'll give you a sense of pricing.

Out of that $45 million, you had $8.6 million, which is actual OREOs sold. We had $20 million that were just paid off. We had $9.9 million that were moved back to performing status. These are folks that were able to sell other assets, get current, and establish enough credibility and interest reserve if the case were necessary to show an ability to carry the loan going forward to enable us to put it back on performing status. The balance being kind of charge-offs.

In terms of liquidation price, like we've said before, it really is--it varies a lot depending on the particular piece of property. In the housing sector, completed houses, we've gotten out whole, had small gains, and we've taken losses say as much as 15%, even 20% probably on a worst case. On the land and lot side, the range is we're taking discounts, I would say, anywhere from 20%, 30% and maybe a worst case of 50% on losses.

Okay, that's helpful. I want to follow up on one more of just the reserving methodology. When would a charge come in? So how much of the NPLs, at $67.7 million, has already been charged down? You say that you've already set the reserve aside, but at what point would that reserve be converted into an actual charge off?

That depends. The timing of taking the charge off really depends on how quickly it's going to move to liquidation and how it's going to liquidate.

Typically what happens in our case is once a loan moves into non-performing status, we're moving it very aggressively. Just like I gave you the breakdown of the flow on NPAs before, most of this stuff is moved from non-performing to off the books and a realized loss within 90 days, maybe just over 90 days.

So, I think the--I guess to answer your questions, at the current point, it initially goes in a non-performing. We may not take the actual loss at that point in time, but that loss typically--we are going to reserve on it. The actual realized loss is probably going to occur in 90-plus percent of the occasions within 90 days.

Okay.

Does that kind of give you a--?

It's very helpful. Thank you.

I'll take the next question from Adam Barkstrom with Sterne Agee.

Hey, guys. Good morning. Hey, I want to shift gears a little bit and maybe get back to Rex. Want to see if you can give us some color. I saw a nice bump in tangible book for the quarter. I guess all of that really having to do with the OCI adjustment mid-quarter. I wondered if you can give us some color on that, give us some color as to what is in your portfolio, and I'll have a follow up after that. Thank you.

The portfolio at quarter end was just slightly over a $1.5 billion.

We're having a mic problem. Hold on a second.

Okay.

Just use this one. We're going to trade out mics. Hang on just a moment, please.

All right.

I think we're fine now, Adam. Sorry about that.

Yep. I hear you fine now, Rex.

Okay. At quarter end, we were at $1.5 billion, at quarter end. As I mentioned in the call comments, we increased that about $150 million. The makeup of the categories, it's primarily agency depth, mortgage backs, and CMOs is the bulk of what we have there. We have about $230 million in whole loan CMOs. That's probably the area in particular where if you had questions about risk, that's where the risk would be.

We don't have any CDOs or sub prime type loans within those categories. When you look at the $230 million that we have in whole loan CMOs, those are aged very well; they go back about four or five years when we put those on. They are all triple-A rated. The FICO scores are 742. Additionally, the loan to value on those is about 51%, so that's been holding in. Again, we see that portfolio performing very well.

From a risk standpoint within the portfolio, we really have very little risk that we see. We scrubbed the portfolio very well making sure if identified anything that related to CDOs or any type of product that's in there, or again, anything relating to [Alt-A] paper or sub prime within the portfolio.

So it's a very clean portfolio.

Okay. So the agency debt piece, that's really where the big OCI bump came from, right?

Yes, that's a big part of it.

Okay. And then I wanted to come back. I was a little uncertain. I thought you said during the quarter, this is on credit, $11.7 million in credits were sold.

Well, no. The point of that was we actually have $11.7 that have either been sold or are under contract to sale or have been refinanced since the quarter end. The point was that we're continuing to have pretty good activity, just under $12 million since quarter end that we've already got either under contract or refinanced to go out of here.

Okay. And then one last thing. If you could give us some more color, just from a methodology, from your own internal methodology perspective, and maybe just give a couple of examples, without names. But the $9.9 million that you had returned to current, give us some sense, I mean what kind of modifications were put in place, what kind of extra collateral requirements do you require? Just give us some sense on that.

Well, an example would be a borrower who is gone late on us. They're past due and we put them on non-performing because of that. Perhaps we're asset rich. Keep in mind, particularly in the real estate business, a lot of these folks made substantial amounts of money over the last ten years and a lot of them were investing in other pieces of property either for future development or for other purposes, personal reasons. So what you find, some of these cases, are these folks have been going through the liquidation process so we may have had someone that was late with us, we had to put them on non-accrual, they subsequently were able to liquidate out some of their other holdings to create some liquidity, which brought us current, and established their financial positions such that they would qualify to go back on performing status.

Okay.

Keep in mind, as David indicated earlier, we have zero loans in the 90 days past due and accruing.

Right.

Some banks do continue accruing and some of our credits probably would be equal to some of the ones that they do that they continue on accrual because they do have strong collateral underneath but are just past due. So when they hit 90 days, from a policy standpoint, we pretty much put everything on non-accrual over 90.

I was going to ask you relative to some of your competitors, what is your thinking there, just take an extra conservative look at those?

Well, we just think it's the appropriate way to look. I can't really speak to the other banks. We just think it's the right way to do it.

Right. Okay, great. Thanks, gentlemen.

We'll go next to Kevin Reynolds with Janney Montgomery Scott.

Good morning, gentlemen. I think I've got a question for each of you if you'll humor me for a second. I guess probably I'd like to start with Rex if it's possible.

You mentioned on the call, or in your prepared remarks, that you had something to the effect of multiple tools to manage, to protect the capital levels or to maintain strong capital. I just wondered if you could sort of outline those for us and then perhaps if they were ever needed down the line, what your preferences would be in terms of things like would you prefer a dividend cut over a capital raise, etc, and then what types of capital?

All right. Kevin, we model our pro forma capital on a regular basis looking out over the next two years and do it with a lot of rigor. Underneath it, the basis, we have a very strong core earnings base and a relatively low dividend payout ratio right now. As we look at earnings through the next couple of years, we look at that in various extremes from what, again, either charge-offs or write-downs, etc, could impact it. And really try and look at that to look at some worst case scenarios to see when and if there would be any capital needs from that standpoint.

As I mentioned in my comments, we're coming into the quarter again with very strong capital ratio. So as we look at that, we have a very strong base, we have very good quality capital. When you look at it and compare to peers, we've not used tier one capital to a great extent at all. There's only a little over $40 million we have outstanding in trust preferred today. We could actually increase trust preferred another $130 million, which would raise our tier one and total capital ratios by 200 basis points.

I think when you look at it from a priority standpoint, we would look at--probably right now we'd want to add tier one capital. There is a market out there still. It actually is cheaper today than sub-debt. Sub-debt would probably be next. And then next we'd probably look at either common or convertible would be another component. We've looked at all these. We have a plan in place already. Again, looking at our capital ratios, if we see those ratios declining or getting anywhere close to our well-capitalized level, we're going to be taking action. Again, if need be, we'll reevaluate our dividend payout ratio, also our dividends paid.

Okay. Just along those same lines, could you estimate how much, I mean on either ratio, or any of the ratios, could you estimate approximately how much capital you have in dollar terms above the well-capitalized threshold?

I'm trying to think. We haven't done that computation--if you look at from a pure sense of looking at what our earnings are, we're going to look at that real quick here, what our earnings are right now, and what is projected out there in consensus and in the models, I mean we could increase our provision number probably in the range of $70 million-plus and really not even dip into our capital from that standpoint.

I think we have a lot room with our core earnings base to get us through. And as we look at the year, and then continue to build capital is what our expectation right now is, that we don't see in our models that the likelihood we're going to be having a loss quarter due to, again, provisioning or charge-offs at this time.

Okay.

The excess capital is, I guess, about $60 million, a little over $60 million on tier one capital.

Okay, okay.

Above the well-capitalized.

Gotcha. All right. And then, David, to ask a question of you again. I'm probably not smart enough to understand all of the stuff you went through, but to just kind of step back and look at it from a conceptual perspective. The guidance on the call was for elevated NPAs and charge-offs or, I'm sorry, upward pressure on NPAs and charge-offs for the rest of the year. I think I heard you say that the reason there was no reserve build this quarter was because a lot of what moved into the recognized status was already taken care of to some extent in a prior quarter through loan reviews.

But if we're projecting upward pressure on NPAs and charge-offs as we go forward, and with the past due trends that we saw, I think you said going from 1.2% to 1.9% of total loans, are we implicitly, if we're not building reserves now in anticipation of the later part of the year, are we implicitly assuming that the behind the scenes past dues actually get better from here?

First of all, let me correct you on the past dues. They went to 1.39% not to 1.9%. So we went from 1.2% to 1.39% on past dues.

But, in essence, you're question I think, again, I kind of went through how we boil up the allowance. To move from a watch credit to an NPA does not automatically mean that you have to reserve a higher level against it. It could be that you actually would reserve less when it moves to NPA because that's when we do a specific reserve and we look at the actual collateral securing that particular loan and either increase the allocation to it or decrease it depending on the collateral that we believe we have in a liquidation, net of liquidation cost.

So each quarter, at the quarter end, we're working through that process to boil up, from the very bottom up, our allowance at that point in time. While watch increased during the early part of the quarter, those numbers are baked into the reserve at the end of this quarter.

Also, I'll tell you that when you talk about loss, excuse me, about watch credits, we are seeing--while we had seen more inflow, we have also seen outflow. I could give you an absolute--roughly about $10 million a month right now on our watch, we've been seeing here in the last couple months, pay down. That's a good offset to some of the increase. While we have some coming in new--some of these, particularly in the construction side, the builders have been able to liquidate, particularly on housing, the housing component. It's the land piece that's taking longer. There's greater dollars in a completed house than there is in a lot. So we're getting some positive movement at the same time.

Okay. I guess the final question, and I'll hop off for others, would be to Jimmy. You said in your press release, and I think eluded to it in the comments if I'm not mistaken, to the fact that you're cautiously optimistic for essentially better, some strength in Spring and Summer selling season in the housing market, and that that may help to alleviate some of the stress that's out there.

What happens if that doesn't come to pass? And I don't mean if we get worse from here necessarily, but if we just don't see an improvement from current levels.

Well, to begin with, Kevin, improvement to some of these builders is not defined back to what the levels were a year ago. For example, we have one that comes to mind that's got, I think we have 65 houses financed, he's got 16 under contract. His business will continue, but if the thing just absolutely came to a stop, then certainly we're going to have more challenges. I don't think there's any question about that.

Kevin, one other thing on the reserve if I could quickly before you jump off, because I didn't want to leave you with--when we go through this each quarter, and we're looking at the grades, if we see continued deterioration in our portfolio, we're going to be quick to call those loans as being troubled and we're going to increase our provision appropriately.

I don't want to leave you with the wrong impression that we just expect this to go down. If we do see further deterioration, we're going to provide for it in the reserve in the future quarters.

And, Kevin, I would also add an add-on comment there. We're erring on that side, that really things do get worse. I mean that's our whole approach to the environment that we're in today.

Okay. Thank you very much.

We'll take the next question from Jennifer Demba with Robinson Humphrey.

Good morning. David, you said that you weren't seeing any issues in other parts of your portfolio commercial real estate, commercial industrial. I was wondering if you could elaborate on that? My second question, your head count came down sequentially, I'm just wondering where you guys envision that going this year.

Okay. On the credit question, the whole commercial side of our business is holding up very well. In fact, just like, really it's interesting, the last two quarters, from a past due perspective, our commercial past dues have declined sequentially each of the last two quarters, the 30-day past dues. If you look at our NPAs and charge-offs, that would follow suit. We just don't have the challenges there yet. Now having said that, so much of the economy is tied to housing. We're concerned about it; we're keeping our finger on the pulse and watching it and monitoring it closely. Really, it's held up very well to date.

The residential mortgage piece of our business, we have seen our past dues climb a bit in that segment. It still is holding up very well, but I think with the rising cost of gas and food, it is impacting the consumer and so we have seen a little bit of a slippage there. But all in all, it's held up to date fairly well.

Jennifer, in regards to the head count, I think where we're seeing that more or less flat line is a result of our de novo expansion. Of course, we have none today on the table and would be unlikely that you will see any throughout 2008.

With the 20 that we've been able to put in place over the last three years, they now have reached that level of basically full employment within that investment that we've made. Fortunately, cumulatively they are profitable. We still have a handful that because of their young age, that it's not making any money yet.

That's one of the reasons I think you'll see our headcount continue to be relatively level.

One more question. I've heard anecdotally that the competition for commercial and industrial loans is quite heated right now. Can you give us some thoughts on that?

I think that's probably true. We've been very fortunate to attract some high quality folks, tremendous experience, and they're operating with our bank, today, in the markets that they've been in for quite honestly for decades.

We fortunately, and we don't take this lightly, have a reputation that people like to work for this company. We're not going out and stretching and trying to make something happen that's just not there. We're not going to get into the C&I business with lenders that don't have long term experience. But, you know, it's just like Chip and Ken, I mean they could have chosen anywhere they wanted to go. They wanted to join an organization that has a business model like ours and they can absolutely make a difference.

We'll be very meticulous. We'll probably add anther couple of C&I lenders there in the Atlanta market, probably one in the Knoxville market. We're able to get the top quality lenders.

Thanks.

We'll take the next question from Michael Rose with Raymond James.

Good morning. Could you guys discuss in a little bit more detail, give us some of the examples of the deposit products that you're planning on introducing?

Michael, it's not really the products as far as those being different than what we've had in the past. It's more the process. We have done a number of initiatives over the years to grow and drive core deposits. These initiatives, some of them have worked very well, some of them have not worked as well. Of course those have been discontinued.

The principal initiative today, it's basic blocking and tackling. The pilot programs that we have in place today in two banks, and they are a little different one from the other relative to the plan. But we have elevated a person in one of our banks almost to the level of a senior credit officer and that would be the way that I would ask you to think about.

Their whole focus is totally orchestrating, growing core deposits, not just themselves, but it's orchestrated throughout the entire company or the entire bank, down to the branches with accountabilities and so forth.

Again, it's just amazing what we are seeing because they're focused, they're identified, they follow up, and they execute. Again, it's not something that's a major silver bullet or a new revelation, it's just basics.

So that's kind of what we have done. You will probably see that role out in that basic form throughout the company throughout 2008.

Great. And can you discuss the incentive structure for this new type of role? Is it materially different than what it has been in the past?

It's not materially different. One of the enhancements to that is certainly it's got an individual incentive, but it also has a branch incentive. We want a whole team effort with it. Everybody is involved into the process.

Okay, great. Thank you.

I'll take the next question from Al Savastano from with Fox-Pitt Kelton.

Hi, guys. How are you? I'm wondering if you could give us some color on the residential construction portfolio in terms of how much is classified and of that, what percentage is classified in the Atlanta region?

Al, I'll answer that. First of all, we don't disclose our classified assets in total or by particular region. Having said that, there's certainly a significant portion of our Atlanta residential construction book would be classified. At the same time we also have some that are very strong in that mix. If you were to look at our total classified list, for the company as a whole, the majority of our classified loans would be located in Atlanta and they would be in residential construction.

Okay, thank you.

I'll go next to Matt Olney with Stephens, Inc.

Yes. Most of my questions have been answered. I wanted to do one follow up on the issue of C&I lenders. I was trying to get a head count of maybe the lenders you had before the Gwinnett acquisition and maybe a headcount of C&I lenders to date to get a perspective of how much that's changed over the last year.

Matt, prior to the First Bank, we had zero C&I lenders. When First Bank came on, they've got six. What we have added since then is seven. When I say seven, I'm talking about the specific lender as well as the support people that's underneath them. We will probably add two or three more during 2008.

It sounds like those won't just be in Atlanta. They could be in some other markets, as well?

That's correct. Knoxville is a market that we very much want to put a C&I lender there. Certainly since Chip Smallwood is on board he's been in that market a long time. He's got a lot of experience as a general banker but certainly with the C&I and there's a--the Coast, probably we have talked about getting one for the Coast, the Savannah market in particular.

Again, let me reemphasize, we're not taking a lender that's been focused on real estate and all of a sudden they become a C&I lender. We understand the risk in C&I lending, we want people that have been experienced for a number of years and preferably having operated in the market that they are going to operate for this company. So, again, you've got an existing customer base and seems like that has been a winning combination for us.

And switching gears a bit, Jimmy, you last quarter on the conference call gave us an update on the Atlanta housing inventory numbers. I didn't know if you have an update on those numbers through the end of the first quarter or not.

We do. On the housing, Matt, it increased from 10.7 months to 11 months so it's basically flat. The lot inventory increased from 55 months to roughly 72 months but you've got to really drill into that to see why that significant difference. There was only 1,500 lots added during the first quarter. Again, that is a reflection on the number of starts.

Again, if you look over the last five quarters, fortunately the starts are way below the closings and that gap continues to widen. If you look at the last 12 months I think the starts have declined about 35%, the closings have declined about 10%. But it still has a long ways to go before it gets healthy.

Very helpful. Thank you.

I'll take the next question from Brian Roman with Robeco Investments.

Good morning. Guess you got everybody on the sales side done. Couple of questions. Atlanta market, are you still experiencing job growth?

We are. On an annualized basis I think it was 22,000 jobs. And that's down about half from a couple of quarters ago which is not that surprising but it's still very solid, very positive. And then if you drill in to see that the types of jobs, it appears as though that should continue. And certainly, those folks that are projecting that feel the same today.

So you think there will be job growth?

That's best (inaudible) as well as the projections.

Net interest margin, a lot of banks I talk to feel as if once the Fed is done the net interest margin will start to rise and that is not, I believe, what you indicated at the beginning of this call that there's kind of some further trending down as we go through the year? Could you just elaborate on that, please?

Yes. As I mentioned in the call, the expectation is that the Fed is probably going to continue right now. Futures has it one more decrease at 25.

So if that's on the table, then that's what we're dealing with. This explains your projection.

In the context of further margin compression you have to keep in mind, I think, also that in the first quarter we all saw a 200 basis point drop in rates. And, again, underneath it from a pricing standpoint your prime base loans price immediately, again, your fixed rates are going to take a little longer to re-price and the same with our CD portfolio in particular. And, again, we're not able to pull down rates, especially with the last 75 basis point decrease and wanting to retain deposits to be able to pull down the CD rate. Again, primarily driven with the fairly significant gap out there between the one-year future LIBOR rate and looking at where the retail rates are at right now.

CD broker rates are probably 100 to 120 over that rate which really is a driver. Most of the banks are looking at an alternative from a wholesale side. So we don't have a good wholesale side to go to to lower the rate other than, again, going directly back into, let's say, Federal Home Loan Bank which is collateralized. So we want to, again, build liquidity at this time. It's important to us. Focus on growing customer deposits and, again, very competitive pricing.

As I mentioned in my comments earlier that not only just the large banks are still extremely competitive but the local banks are very competitive in the market today. And we still see that pressure continuing that, even with the 200 basis point drop we had in the quarter, ideally most banks would hope that the pressure comes off some time in the second and third quarter that they can now lower some of those rates that they weren't able to lower in the first quarter and get back some of the margin compression.

I'd like to make a comment. It sounds like your CD pricing is more competitive than some other banks I've spoken with. Last question I have for you is you have--you identify in your press release loans in coastal Georgia, if that's what you call them, about $372 million. And I am hearing about some weakness in markets in coastal areas in the Carolinas. Can you talk to the economy and what you're seeing NPA trends in your Georgia markets, the coastal Georgia markets?

Sure. I'd be glad to do that. The Coast is experiencing some slowness occurring and we've expected that. Although, having said that, it's held up exceedingly well to date. If you look at our NPAs, the Coast only makes up 6% of our NPA totals and when you look at, from a regional perspective on past dues, the Coast other than--we had a little bit of a spike in our past dues at quarter end due to two specific credits that have now been resolved. But if you back those out, really, our past due trends on the Coast are below most of our other markets.

So I guess what I would tell you is that we do see some slowness down there. Clearly, residential construction activity has slowed somewhat but it's not been anywhere affected to the extent that say the Atlanta region has. It's held in there pretty well to date.

Thank you very much.

We'll go next to Wilson Jaeggli with Southwell Partners.

Thank you. Could you tell us what your 30 to 89 days past dues is right now?

Well, we don't provide that information on a daily basis. I can give you the quarter end.

Yes. I'm sorry. That's what I mean.

We were at 1.39, net 1.39% at quarter end.

1.39%. And where were you at year end?

1.20%.

1.20%. I think you probably mentioned those ratios. I missed that. Where do you stand on your stock buyback, program?

On the stock buyback, we've stopped that in the fourth quarter so we're not looking to purchase any stock at this time. End capital is important to retain capital.

I can certainly understand that. Just as an overall question here, your NPAs to total loans are about 1.5%. And other people who compete in the entire Georgia market, whether it's Sutton Trust or Colonial or others, have substantially higher ratios than you do. I know all banks aren't the same and certainly have different portfolios but they will have ratios maybe three times what yours is at 1.5%. Could you help us explain the differential there that you might see from your competitors?

Well, I can't speak to our competitors. I think the really important thing that you take away when you look at United is Atlanta represents 40% of our book. 60% of our loan book is outside the greater Atlanta market where--and most of the challenges that we are experiencing are concentrated in Atlanta in residential construction. But we've got a big part of our company is in the North Georgia mountains, North Carolina and the Coastal regions and we just aren't seeing--I mean, we are seeing some softness but it's just not anywhere that kind of magnitude. So when you put that in context, if you're looking at a bank that is more heavily concentrated in Georgia or in some cases I've seen some Georgia and Florida. I think you're looking at a different animal altogether than when you look at us.

I see. Thank you very much.

We'll go next to Nate Redley with [Flexoy] Capital.

Hi. I was just wondering if you guys could say how many loans you have that are on non-accrual that are less than 90 days delinquent or still in the interest reserve period?

That are on non-accrual?

Yes. That you've moved to non-accrual either because of deterioration in the collateral value or you're just not confident that they won't--

Well, I don't know that I have that right here handy. It would be a small amount if we did.

And can you talk a little bit about your FAS 114 methodology for specific reserves and just how you guys go through that process when you decide to move something to non-accrual?

Sure. Once we move a loan into non-accrual, we're doing the FAS 114 on impaired loans. We're defining our impairs as those loans greater than $500,000 that aren't consumer purpose loans. And so we go through a process of evaluating the specific collateral on that particular loan, might be based on an appraisal or it might be based on what we know is actual market value because, to be honest with you, the appraisal industry is lagging real-time market valuation.

So we go through piece by piece on that collateral, put a valuation on it, sum that up, net off what we believe are going to be collection costs, and that comes up with what we think we can collect on the loan and the difference is the reserve.

Okay. So do you guys get--every time a loan moves to non-accrual, do you get a new appraisal or do you typically just haircut the old appraisal or--?

The answer is we do not get an appraisal on every loan that moves to non-accrual. We do, on occasion--frankly, as I said, we're finding the appraisals not to be all that much help yet because they are not reflecting current market value and so we're taking a more aggressive posture. And we have an in-house appraiser who helps opine on this.

But more importantly is, we're moving this stuff very quickly. And I spoke earlier the fact that most of what we get back we're moving out within 90 days. And so we pretty much know what's going on in the market. We're committed to continue to move this stuff off the books quickly and if we believe we need to cut the price or write down the asset more severely to move it, that's what we do. So that's kind of the process.

Alright. And then your comment on the appraisals lagging, is that sort of across the board or in specific markets or what's the--?

Well, the way appraisals are done is they're looking at historical pricing on product over the last, depending on who the appraiser is, it could be the last 90 days, it could be at last year. And I'm not saying all appraisals are bad. I'm just saying they are not as close to it as we are on a regular basis where we're trading this stuff. The real value of an asset is not what an appraiser thinks but it's what you can sell it for. And that's--I think our folks are a lot closer to it and that's kind of our approach.

And then could you just talk a little bit about the loss severity trends that you're seeing especially over this sort of last 6 to 9 months?

I think I commented earlier about that. On the completed housing side, we've had gains on houses we've taken back and we've lost as much as 15% to 20%. And then on the land and lot side, we've been anywhere from say 10%, 15%, 20% losses and as bad as 50% write-off.

Alright. That's it for me. Thanks a lot for taking the call.

We'll go next to Brett Villaume with FIG Partners.

Most of my questions have been answered. I just have one other. I believe you stated that 48% of NPAs were commercial real estate. Is that correct? Or past dues?

No. We were talking about the residential construction as, I believe, 47% of the total past dues. That's in terms of dollars.

I was just wondering if you could give me some color on what the other categories listed in your press release of loans by category, what those would be in NPAs?

You want the NPAs by type?

Yes, please.

Okay. Hang on a second. In terms of type, residential construction NPAs would comprise 65% of our total. Commercial mortgage 5%, residential mortgage 23%, commercial construction 3% and non-real estate 3%.

Okay. Thank you very much.

And we have a follow-up from Matt Olney with Stephens, Inc.

Hey, one more follow-up, David. Do you have the percent of NPAs from your North Georgia market?

Yes. North Georgia NPAs, 17%.

Right. Thank you.

And that does conclude the question and answer session. At this time I'd like to turn it back over to the speakers for any additional or closing remarks.

Well, let me just say thank you for your call and your interest in United Community Banks. And we certainly look forward to discussing second quarter results in July. Hope you have a great day.

Thank you. That does conclude today's conference. We thank you for your participation and you may disconnect at this time.