United Community Banks Inc (UCBIO) 2008 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 President and Chief Executive Officer Jimmy Tallent, Chief Financial Officer Rex Schuette, and Chief Risk Officer David Shearrow.

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 its 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 statement 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 thanks for joining our call today. I'll begin by discussing the key events and results of the third quarter. I'll be followed by David, who'll provide you with details about our loan portfolio and our credit metrics. And then Rex will provide more detail about the financials, margin, liquidity, and capital.

As we announced earlier this month, third quarter results reflect the impact that the volatile economy and housing market are having on us and all banks have. Despite our challenges, we made progress in several important areas, most notably selling some of our most impaired assets, strengthening our allowance for loan losses, and raising regulatory capital. While we had a difficult quarter, the Company remains financially sound.

First, let me summarize the key actions taken in the third quarter. We provided $76 million for loan losses. We charged off $56 million, disposing of some of our largest and most impaired loans, as I mentioned. We strengthened our loan loss reserve by $20 million, bringing it to 1.91% of total loans, and we wrote down our OREO balances by $8 million and continue to reduce our exposure to residential construction. All of this had a negative impact on third quarter earnings, but we believe firmly that the actions that we took were the right things to do. We dealt with the current challenges and strengthened our position for dealing with those challenges still to come.

Now, turning to operating results. We posted a net loss of $40 million for the third quarter, or $0.84 per diluted share. Total loans decreased $123 million from a year ago and $103 million from the second quarter of 2008 to $5.6 billion.

Our residential construction portfolio continued to decrease, ending the quarter at $1.6 billion, representing 27% of total loans. This is a decrease of $343 million from a year ago and $149 million from the second quarter.

The other areas of our loan portfolio, residential mortgage and commercial, grew $49 million this quarter. We continue to make progress in rebalancing our loan portfolio and reducing our exposure to residential construction.

Customer deposits increased $98 million from a year ago and decreased $217 million from the second quarter of 2008. During the third quarter we saw a decrease in customer deposits, some of which was seasonal and some of which almost assuredly reflected concerns about the banking industry. In response, we took proactive steps to build liquidity, which we'll actually cover in more detail in just a few minutes.

Non-performing assets increased to $178 million from $152 million in the prior quarter. Our net interest margin declined by 15 basis points to 3.17 on a linked-quarter basis. This narrowing of our margin was driven primarily by the growth in non-performing assets and by the pricing pressures that ongoing liquidity issues placed on customer deposits.

Capital remains strong, well above regulatory guidelines for well capitalized. We strengthened our regulatory capital by adding $30 million of subordinated debt and will close an internal trust preferred offering of $12 million by the end of next week.

Many of our actions this quarter reflect our belief that the decline in valuations and expected recovery time of this housing cycle may worsen. We believe that it is better to actively pursue sales now, as the return of better pricing is still some time away. That said, in some situations we are evaluating pricing and timing to gauge whether to hold some properties longer in anticipation of better returns.

We will continue to pursue our aggressive strategy of disposing of problem credits as quickly as possible. Our strong capital position enables us to absorb the higher level of charge-offs while preventing any compromise to our sound financial condition. We remain committed to the goal of being among the first banks to emerge from this down cycle.

With the rest of our discussion today, our goal is to provide further details about the information that we shared on October the 6th, and bring you up to date on our credit quality metrics, allowance build-up, liquidity, and capital strength. Now I'll turn the call over to David.

Thanks, Jimmy, and good morning. I want to go into some detail about the third quarter actions that we outlined for you a couple weeks ago on our charge-offs and loan loss provision, as well as our higher level of non-performing assets. I'll also touch on how the economic environment continues to affect our loan portfolio, and on the continuation of our aggressive stance on problem loan disposition and managing through this environment.

The down economic cycle continued to impact our credit quality, particularly within the Atlanta residential construction portfolio. As a result, in the third quarter we provided $76 million for loan losses and charged off $56 million in loans.

As Jimmy noted, in the third quarter we saw a rise in non-performing assets to $178 million, compared to $152 million last quarter. Non-performing assets included $139 million in non-performing loans and $39 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 220 basis points. That compares to 184 last quarter, and 77 a year ago.

At quarter end, we had four non-performing loans greater than $5 million. The largest were $7.9 million, $6.5 million, $5.2 million, and $5.1 million. Each loan was to a separate residential construction customer in Atlanta, and the collateral consisted primarily of a mix of houses and finished lots. We had three exposures in OREO greater than $2 million. They were $5 million, $4.2 million, and $2.4 million, and each loan was to a residential construction customer.

We wrote down other real estate by $8.3 million, leaving OREO on the books at 57% of original value, which should enable us to expedite sales with minimal additional losses. Also at quarter end, we had less than $5 million of OREO on the books that we have held for more than 90 days.

Segmenting our non-performing assets, the largest market concentration at quarter end was the Atlanta MSA at 61%. The largest loan category concentration was residential construction loans at 76%.

Net charge-offs were $56 million for the quarter, compared to $14 million for the second quarter of 2008. Let me remind you of what led to the large amount of charge-offs. In the third quarter, United sold $66 million of non-performing assets. Among these, there were sales at the very end of the quarter that resulted in the disposition of 13 of our largest non-performing loans and assets, totaling $42 million. Additionally, we had verbal commitments to sell three non-performing assets totaling $18 million, which we wrote down in the third quarter to expected realizable value.

The losses on these 16 sales represented $33 million of the $56 million in charge-offs we took in the third quarter. Substantially, all of these properties were dirt lots and lots under development. Losses on these sales ranged from $0.30 to $0.70 on the dollar. The remaining $23 million of the charge-offs this quarter were across the board in other non-performing loans and OREO less than 90 days.

As we commented in our October 6th pre-announcement, charge-offs continue to be driven by deterioration in residential construction and housing markets, primarily concentrated in the Atlanta MSA. Residential construction comprised $50 million, or 90%, of our total third quarter charge-offs. Forty-six of this $50 million were in Atlanta.

Now let me provide you with updated information on our residential construction portfolio in Atlanta. Of our $1.6 billion residential construction portfolio, the Atlanta MSA represents $611 million, which is down $117 million from the second quarter and down $256 million from a year ago. We expect this trend to continue.

Of the $611 million in the Atlanta MSA, we had $276 million in houses under construction. The $276 million consists of $49 million in pre-sold and $227 million in spec. These balances were down $53 million from the second quarter.

The balance of the $611 million was dirt loans of $335 million. This includes $185 million in acquisition and development loans, $103 million in finished lots, and $47 million in land loans. These balances were down $64 million from last quarter.

In the third quarter, we saw a rise in our watch and classified loans. Our past-due loans at quarter end were 1.39% of total loans, compared to 1.10% last quarter and 1.39% at the end of the first quarter. Residential construction loans were 2.54% past due, up from 1.83% last quarter, and accounted for 50% of total past-due loans.

Also this quarter, we increased our allowance for loan losses by $20 million, to $111 million. This increased the ratio of allowance to loans from 1.53% last quarter to 1.91%. Our allowance coverage to non-performing loans also increased from 74% to 80%.

In summary, with $139 million in non-performing loans at quarter end, and a specific reserve added for new non-performers, a rise in our watch and classified loans, and an increase of $20 million to our allowance to bolster the reserve, we believe our allowance for loan losses is adequate to cover any losses in the portfolio at quarter end.

In terms of credit outlook, we expect to see ongoing challenges in the quarters ahead. Charge-offs will continue to be elevated as we work through our problem credit, but we certainly don't see a recurrence of the third quarter charge-off level in the immediate future. Our core earnings and strong capital position will support our ongoing strategy of aggressively moving problem credit off of our books, and will enable us to actively pursue options for disposition while remaining on solid financial footing.

The biggest obstacle to this strategy is deterioration in pricing that we perceive, driven by the volume of foreclosed properties coming on the market from other banks. This could lead to additional charge-offs in the coming quarters. In addition, as Jimmy mentioned, given the current pricing environment, we may selectively choose to hold some NPAs that we believe are most likely to return to a more normalized value within a reasonable time period.

With regard to NPAs, the market challenges and legal delays that come from bankruptcy will likely drive continued volatility and upward pressure on the level of NPAs for the remainder of 2008 and into 2009. Nevertheless, our plan will not change. We'll continue to recognize our losses and work these problem assets off the books as quickly as possible. With that, I'll turn the call over to Rex.

Thank you, David. As Jimmy indicated in his opening comments, the key items that we'll cover this morning are highlights on earnings, margin, liquidity, and capital.

During the third quarter, we had a net loss of $39.9 million, or $0.84 per diluted share. The trends in fee revenue and operating expenses were commented on in our earnings release, and the changes by category are shown in the attached income statement. My comments today are focused on some of the key trends.

Fee revenue of $13.1 million was down $2.5 million from last year and down $2 million from last quarter. Most of the decrease from last year and last quarter was in mortgage loan fees, consulting fees, and other revenue. Mortgage loan fees declined as the demand for mortgage loans continued to taper off with weakness in the housing market.

In the third quarter of 2008, we closed 492 loans totaling $84 million, compared with 662 loans totaling $116 million in the second quarter and 549 loans totaling $101 million in the third quarter of 2007.

Consulting fees were down due to the weakness in the financial services industry that affected sales efforts and delayed consulting contracts.

Other revenue of $788,000 was down from last quarter and a year ago. The decline was primarily due to lower BOLI earnings, down $689,000 from last year and $436,000 from last quarter, and lower earnings on deferred compensation plan assets, down $328,000 from a year ago and $136,000 from last quarter.

We have been experiencing lower returns on our BOLI assets this year, and the outlook for future returns was disappointing based on the decline in the market value of our underlying assets that would be charged back to us over the next four years under our stable value contract. We were unable to negotiate terms that made sense to us over the long term with our stable value wrap provider. So at the end of the quarter, we surrendered our separate account BOLI policies with $64 million in assets.

Under our stable value contract, we had an opportunity to surrender the BOLI at our current book value, thereby avoiding any book loss on those assets. The resulting liability on the cumulative tax earnings was included in the determination of our effective tax rate for the remainder of the year, which reduced the amount of tax benefits from our third quarter operating loss. Our effective tax rate for the third quarter remained at 35%.

Looking at operating expenses, they totaled $57 million for the quarter. This was an increase of $7.2 million from last quarter and $8.8 million from a year ago. Higher OREO costs in the other expense category accounted for the increase from the prior quarter and last year. OREO costs, which include $8.3 million of write-downs this quarter, totaled $10.1 million for the third quarter, compared with $2.9 million last quarter.

We are controlling operating expenses across all categories, with many of them down from last quarter and last year. A key driver of our total operating expenses is staffing, and over the past 12 months, total staff was up only 14 people, most of whom were added in our special assets and credit administration functions.

Turning to our margin, for the third quarter, tax-equivalent net interest revenue was $58.8 million, down $12.9 million from last year and down $3 million from the last quarter. Net interest margin for the third quarter was 3.17, compared to 3.89 a year ago and 3.32 last quarter.

The key factors leading to our margin compression were carrying costs for the higher level of non-performing assets and higher funding costs to build liquidity. Carrying costs on NPAs accounted for about three quarters of the 15-basis-point decline from the second quarter. Our efforts to boost liquidity, which I will describe later, also contributed to the linked-quarter margin compression.

We are focused on improving our margin through better loan pricing for credit risks, and when liquidity pressures recede, we expect to be able to significantly lower our overall cost of funds. In the near term, being asset-sensitive, we expect some margin compression to continue with the recent cut by the Fed of 50 basis points.

Turning to liquidity, pressures continued in the third quarter, with many institutions pulling back on their Fed fund lines. During the quarter, we proactively put a plan in place to come out of our purchased Fed funds position by the end of the third quarter and replace those funds with longer-term broker deposits.

We also saw some attrition in core deposit balances that we replaced with broker deposits. Replacing overnight funds and core deposits with more expensive broker deposits contributed to margin compression but significantly improved our liquidity position.

Now I'll turn to interest rate sensitivity. At quarter end, our sensitivity reflects a 3.2% increase in net interest revenue over the next 12 months based on a 200-basis-point ramp-up of interest rates. Our sensitivity also reflects a 2.7% decrease in interest revenue if rates ramped down 100 basis points, which includes the 50-basis-point reduction by the Fed announced earlier this month.

We're at a more asset-sensitive position compared to last quarter and last year. This is primarily due to the competitive pricing pressures that do not let us reduce customer deposit rates, and to our efforts to increase liquidity by replacing our overnight funding position with longer-term broker deposits.

We offset much of the impact on interest rate sensitivity by adding $120 million in receive fixed-rate swaps during the third quarter. We will continue to add swaps to bring interest sensitivity closer to neutral.

The effective duration of the investment securities portfolio was 4.1 years at quarter end, up from 3.8 years at June 2008 and up from 2.7 years at September 2007. The increase in duration this quarter was due to pre-payment levels being down, which appears to be more a result of the weak housing market than interest rate movements.

As we reported last quarter, we do not have any common or preferred stock of Freddie Mac or Fannie Mae.

Now to discuss capital. Maintaining a strong capital position is, of course, important. All of our regulatory capital ratios continue to be strong. At September 30th, our Tier 1 ratio was 8.66%, leverage was 6.69%, and total risk-based was 11.4%. Also, our tangible equity-to-asset ratio was 6.65%.

In analyzing our capital position for loss absorption at quarter end, our Tier 1 capital was $132 million over the well-capitalized level, and our total risk-based capital was $85 million above the well-capitalized level.

At the lower level for total risk-based capital, we could immediately absorb $130 million in credit losses and still remain well capitalized while keeping our allowance for loan losses at its present level.

With our solid core earnings base, strong capital levels, and a well-reserved allowance-to-loan ratio of 1.91%, we have ample room to absorb potential credit losses if we work our way through the current environment. However, we can't have too much capital in these uncertain times, so we continue to look for ways to raise capital that make sense for our shareholders.

In keeping with that thought, during the third quarter we added $30 million in sub debt, which qualified as Tier 2 capital. Also, as Jimmy mentioned, we will close $12 million of trust-preferred securities through an internal offering by month's end.

We are also currently reviewing the terms of the Treasury Department's TARP proposal to purchase preferred stock. As we understand it, at 3% of risk-weighted assets we could add up to $180 million in Tier 1 capital. This significant capital injection would strengthen our capital ratios from 250 to 300 basis points.

Now I'll turn the call back to Jimmy.

Thanks, Rex. As we move into the last quarter of 2008, let me stress this point one more time. We firmly believe that the actions that we took in the third quarter strengthen our ability to continue managing through this cycle and support the long-term success of United Community Banks. We have been tested, as have banks everywhere, and to this point I believe we have passed the test. Our solid capital position, solid level of allowances to loans, and steady results from our core business franchise should help us resume growth when the economy improves.

As Rex mentioned, we may further bolster our resources by participating in the Treasury Department's program. Currently, our capital levels are solid, but as we've said before, you cannot have too much capital in this operating environment.

Given this, we held a meeting with our Board of Directors earlier this morning, and I recommended that we apply for the maximum amount available to us, and the Board concurred. I base this recommendation on our evaluation of many factors, such as the environment, opportunity, cost, and availability, and we determined that the Treasury's program is the most cost-effective source of capital available. Higher capital levels would provide us additional resources for addressing near-term challenges and pursuing longer-term opportunities that will fuel growth.

I've said we're being tested, and the test isn't over. As we look to the quarters ahead, we expect to see ongoing credit challenges. Charge-offs and NPAs will continue to be elevated as we work through problem credits. Our core business franchise and strong capital position will support our ongoing strategy of aggressively moving problem credits off of our books, and will enable us to actively pursue options for disposition while remaining on solid financial footing.

We are firmly committed to two objectives. The first is to emerge from this down cycle as quickly as possible. And the second is to position this organization to take advantage of new and growing business opportunities when they present themselves, as they will in time in the markets in which we serve. With that, I will ask the operator to open the call to questions.

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

Good morning, guys.

Hey, Kevin.

Good morning.

I was wondering if you can give a little color on the loan sales, Jimmy, just in terms of -- I know the dollar amount you sold. But can you give us roughly what kind of sense on the dollar those went for and, on a related topic, whether you are seeing more buyers coming to the table? I know Colonial yesterday talked about the phenomenon that, earlier in third quarter, there was more activity, more buyers interested in loan sales, and then it just dried up after all the turmoil in September and that they're starting to return now. So I was wondering if you're seeing the same phenomenon.

Kevin, the range was from $0.30 to $0.70 on the products that we sold. These were pretty much across the footprint in Atlanta. Again, the pricing depends on several factors, but certainly the location is being critical.

As far as buyers, we felt by getting aggressive last quarter, and certainly with the people that we were talking with, we were able to bundle this together. And at the end of the day, I think we probably averaged about $0.06 on the dollar.

I'm not so sure that we're seeing additional buyers now. One of our motives to move forward third quarter is two concerns. One is, will there be more buyers, or less? And second is the seasonality. Traditionally, as you go into the winter months, you just see less activity, so we wanted to take advantage of that while we had it. We hope we'll see more buyers, but at this point I would say that that's not the case.

David, would you like to comment, please?

Yes, I was just going to, Kevin, maybe give you a little bit more color, too, on everything that we sold. Jimmy was speaking predominantly to the $42 million that we sold. But if you look at the total $66 million that we sold for the quarter, the average loss is about $0.41 on the dollar. But if you broke that down, we've -- on the housing front, completed housing, we continued to lose roughly $0.15 on the dollar on housing, and continued that. And that's pretty consistent over the last two quarters, so we really haven't seen much deterioration there.

It's on the land side that continues to be a challenge. And depending on whether you're talking about a contained subdivision in one of the better counties or you're talking about an outlying lot, you can get to a fairly wide range on what you might realize.

Okay.

Hopefully that helps.

Yes, that's helpful. Thanks. And Jimmy, you guys mentioned TARP and that you've met with the Board and very interested in applying for it. I'm just interested in what you're hearing out there. I'm assuming you've had conversations with some of your regulators, and I know there's more questions than answers right now. But are you hearing anything in terms of how the selection process goes? And based on what you're hearing, do you -- how do you feel about your chances of getting approved? Thanks.

Yes. There's -- certainly, the regulators, I think, are probably reaching out to banks. I think, from my understanding, they're reaching out to the banks that they feel have the capital strength. It's my understanding that kind of the pecking order is those banks that, again, I think, driven by the CAMEL rating, and the 1 or 2 probably will get whatever they ask for, which again gives us confidence in our request. I understand 3 may be a percentage; 4, there may not be any. And I think also another condition is that it must be a publicly traded company.

But we feel confident today that we will be able to obtain that. I know they're moving fairly aggressive because of the limited amount they have, the $125 billion.

Okay, great. That's helpful. Thank you.

(Operator Instructions). And we'll go next to Jennifer Demba of SunTrust.

Good morning.

Good morning.

Hi. Looks like when you look at your detailed credit quality in your press release, you had more of an increase in non-performers in other markets outside Atlanta, specifically Gainesville, north Georgia, western North Carolina. Can you just give us some color on what you're seeing outside of Atlanta? I know your primary stress point is still Atlanta, but --

Sure, Jennifer. This is David. You're right. We are seeing more pressure in the outlying markets, obviously not to the magnitude we've had in Atlanta. It is more concentrated in construction in those markets as well. If you looked at some other leading indicators -- past-dues and watch -- we're seeing a little bit of creep there as well. So there is a little more stress in those parts of the portfolio, but in terms of overall magnitude of losses and NPAs, obviously we still are highly concentrated in Atlanta.

And the loan sale that you completed in the third quarter, is that bulk or is that kind of individual sales?

It was really a couple transactions that I would call bulk-type transactions. They were obviously separate pieces. On that, we did kind of an internal auction, so to speak, among investors we have. We put together a package of what we thought were our largest and most severely impaired credits, and we shopped it to a wide range of investors that we've been working with, and it went to the best bid. And that's how we ultimately made the sale.

Is there any inclination to go through a broker in the future and outsource that a bit, or do you think you'd still be likely to do it yourselves for a while?

We are -- have a toe in the water with a couple different groups on the brokerage side to perhaps widen the investor base from what we've got. And so, yes, we're looking to explore that. We're looking, Jennifer, for really any avenue that we can move this stuff out quickly. And so we've had good success handling it ourselves, but we think it makes sense to broaden the spectrum of investors.

Okay. Thanks so much.

And our next question comes from Christopher Marinac with FIG Partners.

Yes. Jimmy, as you know, the opportunity competitively for you has changed a lot in the last 90 days, and I'm curious if you could sort of go talk about beyond the credit issues in front of you. What are some opportunities or maybe ways to organically seize the moment in Atlanta and other markets from a deposit and new loan perspective?

That's a great question, Chris. And I think certainly we have plans. We have actions in place to try and take advantage of the opportunity that exists. Really it's in the heart of our footprint in western Carolina as well as the Atlanta and north Georgia.

But what we have to do -- I feel, at this point, we've got to really look at where we are as a company. We clearly understand our challenges. We've got a balance sheet that is shrinking because of our construction lending coming down, expense base remaining flat, which is kind of exaggerated because of the credit collection efforts, along with a margin compression.

But when we look beyond that, certainly with the pricing opportunities that we see in the near future on the loan side, hopefully the liquidity will get better. We want to be in a position to truly take advantage -- number one, let's take care of our own business today, our own challenges today. But certainly we don't need to lose sight of what I feel is the second best opportunity that we'll ever see within this company.

Great, that's helpful. Thank you very much.

We'll go next to Brian Rohman of Robeco Investment.

Hi, good morning. Thanks for taking my call. Question. A couple of questions, though. I just want to challenge you for a second here. You characterized yourself as having passed the test. There are a lot of bank stocks that aren't down 60% from their highs, that are down minimally, so I'm not sure what passing means.

But you said actions taken should aggressively deal with problems of the past. I believe you said something similar in the fourth quarter. Can you just discuss that?

Brian, as far as the word "passed the test," really that was in context of our actions to go ahead and try and dispose of what we felt was the most impaired problems. Again, that's [thematics], not that we're declaring victory by any --

Okay, 'cause it sounded that way.

Well, that's not the intent, and I apologize if that was interpreted. What was the second part of your question?

Well, several questions. But actions taken to aggressively deal with problems -- or should aggressively deal with your problems. Didn't you make a similar statement in the fourth quarter? Didn't you take what you thought was a true-up reserve then?

Well, I'm not so sure. I think -- since the fourth quarter of '07 versus where we are today, quite honestly, I think the world's changed significantly since then.

Okay.

(Multiple speakers) --

And none of this was apparent at the time?

Not the rapid decline, no.

Okay. Fair enough. Couple of other questions. In north Georgia -- I think Jennifer Demba raised the issue. Is real estate deteriorating in those markets as well?

We have seen some creep into those markets, yes, but not anything to the degree that we have been experiencing in the metro Atlanta market.

Okay. Deposits. I'm just looking at the release. Obviously, there are people in this call who know this company better than I do. But all the growth year-to-date has been basically been in ostensibly higher-cost CDs. Are the costs of those starting to come down at all?

Not currently. With the liquidity issues, Brian, we feel that it's very important that we retain this customer base. And with the liquidity market as we've experienced over the last several quarters, from the very large banks to the small community banks, all the access they have has been primarily to the retail deposit side. We can't lose this core customer base. As a result of that, it certainly continues to put pressure on the funding.

Now, the action that we took in the third quarter is to try and put ourselves in a position for liquidity current as well as what we see in the near term. There is an expense associated with it. We felt that was a good solid business decision, though we do hope that we see the liquidity markets thaw. Our pricing can come down and certainly would make a significant impact quickly on our margin.

So right now -- I'm just looking at the release, the margin analysis. You're not really -- what you're saying is, on the time greater than $100,000 and brokered, where you're paying over 4% in the quarter, you're not seeing relief at this point?

No. No. I do feel, though -- I would say this. I do believe that we may be seeing high tide. But when you have banks such as Wachovia that has been advertising 4.5%-plus all over our footprint, as well as community banks, it is a challenge, but hopefully we'll see that subside.

Okay. A couple of other questions. You said you hope this is a peak in net charge-offs. You said you sold some properties for anywhere between $0.30 and $0.70 on the dollar. We'll be generous; we'll average it at $0.50. In your provisioning, what sort of charge-off expectations are you putting in as it relates to the disposition values for property?

I'll address that question. This is David Shearrow. On the provisioning, the way we build that provision, if a loan goes to non-accrual and it's over $500,000, we're doing a specific reserve against that particular loan based on current liquidation value of that particular credit. So it's going to be very much reflect real-time what we're seeing in the market --

So it's that 30% to 70% range that you've had on actual dispositions?

It would depend on whatever that particular --

Of course it does, sure.

Yes. So it could be reserve 90% if we thought it was just an absolute disaster. On the other hand, it may be -- we might have collateral that covers the loan 100%. So it truly is -- when you get to that level, it's case by case, what collateral do we have, where is it, what's the current liquidation value less liquidation expenses, is kind of the process.

The balance of the portfolio is reserved, again, based on historical loss experience. And so that's a running average-loss experience, and so that's how it gets built up. And it's based on credit grade, all the way from our past credits all the way down through our watch and classified loans.

Okay, last question. I could keep you here for hours. I know I've asked you this in the past. I don't think you've written down goodwill yet. Is that a quarterly review, semiannual review, annual review?

Brian, this is Rex. It's done primarily annually, but we do look at it quarterly, and back with our accountants also. We don't believe at this time we have impairment that it -- again, the volatility we still feel is temporary, and we look at it again with our franchise and look at our deposit base and look at our quarter earnings as we look going forward. So we do look at that. We keep it under monitor every quarter, looking at it from that standpoint. And, again, we do a very formal annual review that's coming up in the fourth quarter looking at it also.

All right. Thank you very much for taking my questions.

We'll go next to Bill [Wait] of SMC Capital.

Hi, guys. Thanks for the call. I was wondering if you could comment both on your participation in and your thoughts about the FDIC's program for demand deposit insurance. I mean, it's up to -- well, it's unlimited on that one. And then the guarantee on a new short-term debt, either one of those things you're going to take advantage of or utilize? And also just some general thoughts about them.

Let me take part of that big question, Bill. As far as the deposits, what we have seen with the actions of the Fed in increasing the insurance, and certainly lifting on the, in essence, the business accounts to a total insured, has certainly created a calmness that we did not see two weeks ago. So we feel very fortunate. We're very appreciative for those particular actions.

We've reviewed some of the other alternatives and programs. The principal one right now has been the TARP, the preferred stock. The other programs, as far as asset purchases and so forth, I know they're still really developing that, I think, as they go along. Probably we'll have something on that sometime next week. But certainly want to communicate, and that's what we're trying to do throughout our footprint to our customer base about the insurance.

Okay. And potential for short-term debt? New short-term debt?

There probably -- Jimmy, I'll answer that. There probably is a little bit there with respect to short-term debt. But, again, we're still working, and we'll need to go back to the FDIC on that as to what qualifies. Again, with the maturity having to be by June of next year, it limits a lot of companies that didn't have maturities hitting in that time period. And, again, it also impacts, potentially, Fed funds purchased and some other pieces of the balance sheet that we're looking at also.

Okay, great. Thanks.

We'll go next to Jefferson Harralson of KBW.

Thanks, guys.

Morning, Jefferson.

Morning, Jefferson.

Just wanted to ask you a question about your tangible equity ratio. It's very strong, clearly, but the addition of the max of TARP program does elaborate a little bit, and the losses obviously come -- as you take losses, it comes out of that first. So does the addition of TARP money allow you to accelerate losses or the tangible equity ratio still -- or somewhat of a constraint in that? And would you look -- even though you're -- with TARP money, from the regulatory standpoint, you have way more than enough capital. But would you ever look to bolster that common tangible equity too, or does it just not matter as much if you're so overcapitalized on the regulatory front?

I think we're assuming the TARP money is awarded to us. We feel very comfortable with where we would be.

As far as our strategy relative to disposing of the assets, Jefferson, you'll see a continued strategy as we have been doing over the last several quarters. We did mention, as David and I both said in our prepared remarks, that we will look at select properties that we feel have excellent locations, would be one of the very first to rebound, and possibly make a business decision to hold onto those for a relatively short period of time, hopefully.

But as far as that strategy of disposing of the assets, it'll continue as it is, and I think our capital should be plenty sufficient.

All right, guys. Thanks.

(Multiple speakers) have any comments?

I think, Jefferson, when you look at the ratios in particular on our risk-based assets, that's going to bump those by about 300 if we did the 180, as you were commenting, and I think you've done the math also. So since it's 3% of risk-weighted assets, it moves those up about 300 basis points. And then on the leverage end, tangible equity to asset, it moves it up probably about 240 to 250, in that range.

Okay. Thanks a lot.

And we'll go next to Jeff Davis of Wolf River Capital.

Good morning. A question for the group, and Jimmy, I think you just touched on it. But in terms of TARP and asset purchases, what are you all -- beyond non-agency mortgage-backed securities and home mortgages, what do you expect to be included in the TARP? And where I'm headed is, do you believe it may ultimately include construction loans? If so, would you be a seller into it under those terms, or parameters?

Jeff, thank you for the question. We're anxiously awaiting clarification. Certainly we're going to look across the broad spectrum of what that will include. The securities, those type things, obviously we don't have on our books. Selfishly, I would like for them to have a strong interest in dirt or construction loans, and if it was a fair price, absolutely we would look at it. But I think we're going to have to wait probably till the end of next week to find out the details.

All right. But you're not hearing either way whether it will or will not include construction loans, dirt loans?

That is correct. I have not heard either way.

Thank you.

And with that, we have no further questions in queue at this time.

Let me say thank you for being with us this morning. We sincerely appreciate your interest in United Community Banks. If there are other questions, we certainly encourage you to give us a call. Again, thanks so much. I hope you have a great day.

That does conclude today's conference. Ladies and gentlemen, we do appreciate your participation, and you may disconnect at any time.