United Community Banks Inc (UCBIO) 2008 Q4 法說會逐字稿

Good morning and welcome to United Community Banks' fourth 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.

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 relays 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 will begin the conference call with Jimmy Tallent.

Good morning everyone, and thank you for joining our call today.

I will begin by discussing the key events and results for the fourth quarter.

I will then be followed by David, who will provide details about our loan portfolio and an update on our credit.

Rex will then share more detail about our financials, margins, liquidity and our capital.

The fourth quarter was difficult and disappointing.

Let me get right to the heart of things and summarize the key events.

We provided $85 million for loan losses.

We had loan charge-offs of $74 million.

We strengthened our loan loss reserve by $11 million, bringing it to 2.14% of total loans.

We saw non-performing assets increase to $250 million, up from $178 million in the prior quarter.

Our margin decreased to 47 basis points to 2.7%.

All of this, of course, had a negative impact on fourth quarter earnings.

We posted a net loss of $46.7 million for the fourth quarter, or $0.99 per diluted share, with a full year loss of $1.35 per diluted share.

Total loans decreased $224 million from a year ago and $125 million from the third quarter of 2008 to $5.7 billion.

Our residential construction portfolio continued to reduce in size, ending the year at $1.5 billion, representing 26% of total loans.

This is a decrease of $117 million from the third quarter and $350 million from a year ago.

The other areas of our loan portfolio, primarily residential mortgage and commercial, were flat for the quarter, but up $126 million for the year.

Customer deposits increased $457 million from a year ago, and $266 million from last quarter.

Of the $266 million, $250 million was from municipalities.

Our net interest margin declined by 47 basis points to 2.70% on a linked quarter basis.

Obviously, we're disappointed with the margin.

But it came as no surprise as the majority of it was driven by our decisive actions to build liquidity, which Rex will discuss in full detail in his comments.

Though we saw sharp margin compression this quarter, we feel we have reached the bottom.

We have taken positive actions and already seeing improvement in our spreads.

Capital was bolstered by our sale of $180 million in preferred stock to the U.S.

Treasury in December, and the closing of an internal trust preferred offering of $13 million at the end of October.

Capital ratios at year end continued to be solid.

Now I will turn the call over to David.

Good morning.

I will be sharing some detail about the fourth quarter actions we took regarding charge-offs and loan loss provisions, as well as our higher level of non-performing assets.

I will also touch on how the economic environment continues to affect our loan portfolio, and on the continuation of our assertive stance on problem loan disposition and management 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 fourth quarter we provided $85 million for loan losses and charged-off $74 million in loans.

As Jimmy noted, we saw a rise in non-performing assets this quarter to $250 million compared to $178 million last quarter.

This was primarily the result of continued deterioration in the Atlanta housing market and softened demand from buyers, given the economic turmoil during the quarter.

The economic stress significantly altered investors' projected timing for a recovery, and negatively affected pricing beyond our expectations.

As a result, we chose to sell less OREO until the market demonstrates more stability.

We have also begun to see a rise in NPAs outside of Atlanta and in other parts of the portfolio as well.

Non-performing assets included $190 million in non-performing loans and $60 million in OREO.

We did not had any loans accruing that were 90 days past due.

The ratio of non-performing assets to total assets was 294 basis points.

This compares to 220 last quarter and 56 a year ago.

At quarter end our four largest non-performing loans where $30.9 million, $11.2 million, $7.5 million and $7.0 million.

Each loan was to a separate residential construction customer, and the collateral consisted primarily of a mix of houses and finished lots.

While placed on nonaccrual, the largest two exposures are each actively building and selling homes, and steadily reducing our exposure.

The largest exposures in OREO were $3.6 million, $3.1 million and $2.2 million.

Each loan was to a residential construction customer.

They also were written down to net realizable value.

Please keep in mind that our $60 million of OREO has been written down to 66% of its original loan value at year-end, which will help expedite sales with minimal additional losses.

Segmenting our non-performing assets, the largest market concentration at quarter end was the Atlanta MSA at 59%.

The largest loan category concentration was residential construction loans at 77%.

Net charge-offs were $74 million for the quarter compared to $56 million on a linked quarter basis.

Like last quarter, charge-offs continue to be driven by deterioration in the residential construction and housing markets, primarily concentrated in the Atlanta MSA.

Residential construction comprised $58 million or 78% of our total fourth quarter charge-offs.

Of that amount, Atlanta residential construction charge-offs were $43 million.

Now let me provide you some further details about our residential construction portfolio in Atlanta.

Of our total $1.5 billion residential construction portfolio, the Atlanta MSA represents $538 million, which is down $73 million from the third quarter, and down $246 million from a year ago.

We expect this trend to continue.

Of the $538 million in the Atlanta MSA we had $229 million in houses under construction, and $309 million in dirt loans.

The $229 million of houses under construction consisted of $40 million in presold and $189 million in spec.

The $229 million of houses under construction was down $47 million from the third quarter.

The $309 million of dirt loans included $167 million of acquisition and development loans, $86 million in finished lots, and $56 million in land loans.

Total dirt loans were down $26 million from last quarter.

I would like to mention that while residential construction in the Atlanta MSA continues to be the most troubled segment of our loan portfolio, we have seen some migration of credit weakness into other markets and loan categories.

While these problem areas remain much smaller than the residential construction in Atlanta, we're keeping an extremely close watch on them, and on the portfolio as a whole.

In the fourth quarter we saw a rise in our watch and classified loans.

Our past due loans at quarter end were 2.33% of total loans, compared to 1.39% last quarter.

Residential construction loans where 3.78% past due, up from 2.54% last quarter, and accounted for 42% of total past due loans.

While still heavily weighted to residential construction, past dues were up in the commercial and residential mortgage portfolios.

Also this quarter we increased our allowance for loan losses by $11 million to $122 million.

This increased the ratio of allowance to loans from 1.91% last quarter to 2.14%.

Our allowance coverage to non-performing loans was 64%, down from 80% last quarter.

This quarter $84 million of our total $190 million in NPLs had already been charged down, compared to $19 million of $139 million in the third quarter.

Excluding these loans charged down to net realizable value, our allowance coverage to non-performing loans increased 114% from 93% last quarter.

In terms of credit outlook, we expect to see the challenges continue in the quarters ahead, and charge-offs to remain elevated, as we work through our problem credits.

Given the pricing environment, we are also going to follow through on our plan to selectively hold NPAs that we believe are most likely to return to a more normalized value within a reasonable time period.

They will always be up for sale, but these will be assets that we are willing to hold until we feel we can get the right price for them.

Because of this strategy and the market challenges and [legable aid] that come from bankruptcy, we will continue to see upper pressure on the level of our NPAs for much, if not all, of 2009.

Nevertheless, we will continue to recognize our losses and work these problem assets off the books as quickly as possible.

With that, I will turn the call to Rex.

During the fourth quarter we had a net loss of $46.7 million, or $0.99 per share.

Trends in fee revenue and operating expenses were noted in our earnings release, and the changes by category are shown in the attached income statement, including additional detail on foreclosed property costs and FDIC premiums, which were previously in other expenses.

I will comment of several key items, but first I want to begin with our margin.

For the fourth quarter tax equivalent net interest revenue was $52 million, down $7 million from last quarter, and down $18 million from a year ago.

Net interest margin for the fourth quarter was 2.70% compared to 3.17% last quarter and 3.73% a year ago.

Our margin declined 47 basis points this quarter, primarily due to the following.

30 basis points was due to our aggressive actions to build up liquidity.

8 basis points related to higher credit costs impacting our margin.

And 9 basis points related to our asset sensitive balance sheet and the impact of the Fed target rate being lowered by 175 basis points this quarter.

Let me address the circumstances that led to our decisions to build liquidity, which in turn caused a margin compression of 30 basis points for the quarter.

During August and September we were seeing a very fragile banking environment with a significant amount of uncertainty.

The interbank market was in turmoil, with investment banks failing, and banks not wanting to lend to each other.

By mid-September we saw many of our Fed funds lines reduced or canceled.

Up to that, we normally carried a Fed funds purchase position of $200 million, and that was rapidly dropping to zero.

Due to the uncertainty of these lines we made a decision to completely come out of our Fed funds purchase position and acquire brokered deposits.

At the same time we were seeing customer concerns about FDIC insurance coverage and concerns about bank failures that were now happening in our footprint.

We also saw a core deposit attrition at the end of the third quarter, and decided to add further to our brokered deposits.

And with our projected loss for the third quarter, which would be the first loss in our history, we were concerned about the reaction of our customers in this very fragile environment.

Because of this we made a decision again to augment our liquidity with brokered deposits in late September and early October, in case these concerns persisted into the fourth quarter.

In each of these actions we added brokered deposits, since they did not require collateral, and we could still maintain our excess capacity with the Federal Home Loan Bank and the Fed.

We knew that this would negatively affect our margin, but it significantly improved liquidity position.

In total we added $510 million of brokered deposits from late August to early October to enhance our liquidity.

These deposits have maturities ranging from six months to two years and rates ranging from 315 to 450 basis points.

At the same time we wanted to minimize the impact of these higher cost deposits, so we swapped more than half of them from their fixed-rate to a floating one month LIBOR rate.

However, the interbank markets continued to have liquidity issues and LIBOR rates rose in September and October, so we were paying up to 75 basis points above the brokered deposit rates for a good portion of the fourth quarter, causing further margin compression.

Also, to preserve liquidity and retain our customer money market deposit accounts, on October 1 we increased their rates by 125 basis points to match the competition.

And to hold on to our time deposits, we intentionally did not lower our CD rates in October, even though the Fed lowered rates by 100 basis points.

We knew these actions were going to be expensive in the short term, but we believe that building and preserving liquidity was the right course in light of all the uncertainties, including what, if any, actions the government might take.

In October and November the government made a series of announcements that significantly eased liquidity in the marketplace.

They increased FDIC insurance, added unlimited coverage of DDA and certain NOW accounts, and expanded their debt guarantee program to cover unsecured short and mid-term borrowings.

By late November liquidity in the marketplace became more accessible and the potential threat to our liquidity, and that of banking in general, decreased considerably.

At the time of our earlier decisions we were unsure of the government's actions, so we acted decisively to eliminate what we saw as a significant risk to our Company's stability.

With these pressures receded, we were taking three key actions to improve our spreads and margin.

First, we are implementing better loan pricing.

We have established much higher floors on our prime-based loans.

In fact, for the month of December, our average new and renewed loan pricing was 200 basis points above prime.

Each month we have approximately $250 million in new and renewed loans that reprice, so improved pricing will have a positive effect on our margin as we go into 2009.

Second, we are lowering deposit rates.

The pricing environment is now beginning to change.

Already we lowered rates on our new and renewed CDs three times in the last 75 days, bringing our CD pricing down by more than 100 basis points since October.

We have also lowered rates on our money market deposit accounts, as well as other core interest-bearing accounts.

And we will continue to push rates down while maintaining an appropriate balance between customer retention and margin improvement.

Third, we are letting more expensive funding run off.

Specifically, I would like to make two points about our brokered deposits.

First, we have more than $300 million in excess capacity due to our liquidity build up, so we are intentionally letting some of these high-priced deposits run off.

Second, the $285 million in brokered deposits that we have swapped into one month floating LIBOR was costing us as much as 5% last quarter, and now that has dropped to 1%.

We feel comfortable that we now have ample liquidity to continue lowering our deposit pricing.

All of our actions have had a positive impact on our margin.

If we continue to execute as planned, and if liquidity and credit costs remain stable, we expect to see our margin return to the 3% range by the end of the first quarter.

Looking once again at our fee revenue and operating expenses for the quarter, fee revenue of $10.7 million was down $2.4 million from last quarter, and down $5.4 million from last year.

The $2.4 million decrease in fee revenue from the third quarter was primarily due to prepayment charges incurred in the fourth quarter relating to the early termination of borrowings, net of security gains, and lower earnings on deferred compensation assets.

Combining these items accounted for $2.6 million of the decline from last quarter.

These items also accounted for $2.7 million of the $5.4 million decrease in fee revenue from last year.

The balance of decrease from last year was in consulting fees and other fee revenue.

Consulting fees were down $1.3 million from last year, due to Brintech's focus on assisting us with our Companywide performance improvement process, and also due to weakness in the financial services industry that affected sales efforts and delayed consulting contracts.

Brintech's intercompany consulting services that are provided to United are eliminated in our consolidated fee revenue.

Other fee revenue of $1.4 million was down $684,000 from last year due to lower earnings on bank-owned license life insurance assets this quarter.

Looking at operating expenses, they totaled $52.4 million for the quarter.

This was an increase of $3.1 million from a year ago, but a decrease of $4.5 million from last quarter.

First I will comment on the variances from last year.

The $3.1 million increase from a year ago was primarily due to higher costs for foreclosed property of $1.4 million, an increase in professional fees of $504,000 related to legal costs on foreclosed properties, and an increase in FDIC insurance premiums of $879,000.

Additionally, salary costs were down a $2.7 million from a year ago, primarily due to eliminating bonuses, which was offset by a $2.4 million adjustment for contested BOLI costs accrued this quarter in other operating expenses.

These two items also impacted the variances to the third quarter, reflecting lower salary expense, offset by higher costs in the other expense category.

The largest item impacting the $4.5 million decline in total operating expenses compared to the third quarter was that our foreclosed property costs of $5.2 million this quarter was a decrease of $4.9 million compared to our third quarter cost of $10.1 million.

Our staff levels at year-end totaled 1,994.

We're down more than 30 people from last quarter and a year ago due to a hold on filling positions, both new and replacement.

Excluding the special items I noted for the quarter, we are continuing to control our core operating expenses across all areas.

Jimmy will provide an update on We are United, which is our revenue enhancement and cost reduction initiative, in a few minutes.

Now to discuss capital.

All of our regulatory capital ratios continue to be strong.

At December 31 our Tier 1 capital ratio was 11.2%, leverage was 8.3%, and total risk-based was 13.9%.

Our average tangible equity to asset ratio was 6.6%.

And the average tangible common equity to asset ratio was 6.2%.

Also, at year end these ratios were 8.2% and 6.1%, respectively.

With that, I will turn the call back over to Jimmy.

Before I provide a look forward to 2009, I want to revisit a statement we made in October about our expected levels of charge-offs for the fourth quarter.

The statement was that we didn't expect fourth quarter charge-offs to be at the third quarter levels.

We were wrong.

However, the world changed in the fourth quarter.

Unemployment, market conditions, sales volume and price valuations deteriorated even faster than we expected.

Now let's look ahead to 2009.

We have three key areas in which we will be intensely focused throughout the upcoming year, credit, margin and expenses.

In regards to credit, at this point we have what we have in our loan portfolio.

The environment is not getting any better; we know that.

Despite this, our strategy will be the same, recognizing and moving troubled assets through our process as quickly as possible.

But at all times we will make the best economic decisions for our Company.

We have a very experienced team that can quickly and wisely determine how best to handle all of our credit, ensuring that they go through the right processes and attain the best possible outcome.

In some cases that may mean select properties are held for a longer period of time while we wait for more appropriate price points.

Certainly these properties are always for sale, but for now the gap between ask and bid is too great.

So while carrying costs are low, we will be patient and look for better pricing on these select properties.

Underlying this strategy we will preserve our capital strength, as it is the fuel that drives our aggressive credit disposition efforts.

Now living to margin.

As we move forward, our pre-tax, pre-provision income must improve in 2009.

And we are already seeing evidence that we're making very good progress.

We have improved our loan pricing.

In fact, it is some of the best pricing for credit spreads on new and renewed loans I have seen in years.

We have been able to lower our deposit rates, while retaining customers, a balance we will monitor very closely.

And our funding cost is now declining.

We are seeing an immediate impact on our margin.

In regards to our ongoing core deposit gathering strategies, bringing in new deposits is the heartbeat of this Company.

Several new programs have been launched for 2009.

Last year our net new accounts increased, but the average balance per account decreased.

We believe this is due to the prevailing economic conditions.

However, the bank mergers that we saw last year are bringing name and customer perception changes to our markets that have created many opportunities for us.

We are determined to get our share.

In regards to expenses.

We have spent a significant amount of time looking at our expenses through our formalized cost-cutting effort that we call, We are United.

With approximately one-third of the process complete, I'm pleased with our results thus far.

We have already implemented changes that will realize $1.6 million in annualized savings, and identified $2 million more of revenue enhancements and cost savings that will be implemented this quarter.

We are just beginning to see the results, and I'm confident that we will continue to realize more savings as we complete the project.

Now let me be clear, we are very aware of our challenges in 2009.

We expect it to be another tough year for our Company, as well as our industry.

But I know United will be a survivor.

We have the strategies, we have the capital, and we have the people to keep us on solid financial ground and see us through these difficult times.

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

(Operator Instructions).

Kevin Fitzsimmons, Sandler O'Neill.

Just a couple of questions for [some] on credit.

Can you give us a little color on the type of properties, specifically type of NPAs, that you are -- it seems like you are more intent on holding now?

And either by market or by loan segment, what types are those, and what kind of marks you have taken on those already, if there's a way to generalize that?

And then secondly, I am surprised to see what -- you guys have made good progress in taking resi construction down over the last several quarters.

I was surprised to see that land loans directionally actually went up this quarter.

And I was curious why that happened, and if there's any reason there.

Thanks.

David, you want to answer that?

Yes.

Let me answer that.

First of all, on the question, what types of products would we -- OREO would be the holding.

We have been going through an ongoing process of evaluating credits that may be going non-performing and then on into non-performing status, and effectively kind of grading those assets' underlying collateral.

And for the most part, where the most emphasis has been has been really on the A&D side, because we are continuing to sell houses at a fairly good pace.

So in terms of what we might hold, and I think right now if I pulled the schedule today, probably we've got about $42 million that is kind of earmarked as what we would call potential hold properties.

These would be typically close in counties around the Atlanta area.

If you think about Atlanta, it is probably going to be something in Cobb or maybe Gwinnett County close in that we think has -- there's activity nearby, or it would be attractive to a buyer.

Price points are right.

So we would hold that.

And then as far as write-down, we would get a current appraisal, and then we would markdown based on that current appraisal.

Typically at about 85% of the appraised value.

The second question you asked was about the increase in construction land loans.

That change -- we did not make any land loans.

That was a recoding issue.

As we have continued to work through this, we had some excess land on a couple of A&D loans that really would more appropriately be coded as raw land at this point in time and we just reclassified those.

But it was not that we made any new land loans.

One follow-up.

If you are doing appraisals on the things in OREO, but basically letting these sit there until the prices get better, is anything going to trigger -- because I would think the prices are still going down -- is anything going to trigger you guys to get another appraisal and to write them down further, if they are really sitting in there for a while?

I guess I'm trying to get a feel for if there's some kind of time limit for this plan, this game plan, to hold them hoping for a better price point?

Certainly we would continue to look at those.

There are some regulatory guidelines about how often you have to revisit that.

Off the top of my head I can remember the frequency of it.

It is certainly in excess of a year, I know that.

If we thought there was significant decline in value on one of these in the meantime, we might get an updated appraisal and write it down further.

Of course, we are hedging it, by typically writing them down below appraisal anyway at 85%.

So I think -- and keep in mind, this is a little different than what we have done.

We have been very aggressive at moving these things off the books.

It is just that the bids have gotten so low, we think maybe a little bit of a pause here and being a little bit more patient is going to work in our favor, which is driving our strategy.

Every one of these properties is still for sale.

If we can get our price, we're going to move it off the book.

This is Jenny.

We want to make sure that we communicate that these are what we would truly determined as Class A properties.

That is so much driven by the location and what we think is the marketability.

Certainly the time of the year that we are in probably -- certainly properties can continue to come down in value, but with our conservative marks on these, we just don't think that we absolutely have to take a rock bottom price at this point.

You're not going to see a tremendous build in this category, but we're still going to do what we feel is economically best for the Company.

And these are still going to remain in OREO, right?

They're not going to be pushed over to a held for sale category or --?

That's correct.

When I use that $42 million number, that includes some that are still -- were in non-performing at year end that may have been going into foreclosure.

But, yes, these properties will be held in OREO and will be mark-to-market based on the appraisal process I discussed.

Christopher Marinac, FIG Partners.

David, you had mentioned about the residential construction loans going from $784 million down to $538 million in the last year.

How much of that has been sales; how much of that has been charge-offs?

Can you just give us a little color on how that has migrated downward?

I'm going to have to look at that that.

Go ahead, Rex --

I don't think we have the number right handy, but again if you look at our charge-offs for the year, it was about $150 million in charge-offs that would come out of -- a good portion of that would have come out of that category.

Then the balance of it would be primarily paydowns coming out as it moves out of that category.

So the sales you have done would not necessarily be of those loans per se?

That you would have -- the lot loans would have been more of the sales that were this quarter or last quarter?

Yes.

We had some last quarter that actually we sold loans last quarter, but for the most part it has been OREO that we have been selling -- in the OREO category.

So it has already come through the paydown or paydown process or moved to foreclosure.

Rex, I know that the disclosures have all -- this year you had given us Atlanta specific and Gainesville separate, but you look at Atlanta specifically, were there any major charge-offs during the course of 2007?

This $100 million this year, or $113 million, really is the number you have written off so far?

I'm not sure.

Is the question again, what are the major charge-offs this year that we took?

Actually it was going back to last year, but --

Last year, '07?

Yes, was there any major charge-offs to speak of that you're trying to do a cumulative loss view of just Atlanta?

'07, that they were actually liquidated in '08, is that --?

Correct.

No, I don't think so.

Most of what we had charged-off in '07 would have been liquidated then.

And for the most part our approach had been really up to -- even through the first half of '08 is pretty much we took charge-offs when we went to foreclosure, and then went into liquidation.

Really until this past quarter -- well, I would say the last two quarters -- most of what we took in to OREO, we were able to get rolled out within 90 days or just over 90 days.

So it was a very quick realization of actual losses.

Until we have seen this build up in the last couple of quarters.

I think I mentioned in my earlier comments that, particularly in the fourth quarter, of our $190 million of non-performing loans, $83 million of those loans in the fourth quarter received some level of charge down, and typically to net realizable value.

And that compares to -- really going back in the first half of year, really there probably would have been virtually been no loans charged down.

And then the third quarter -- I misplaced the number here -- but I think it was $19 million on $139 million.

So you can see that we have taken a much harder hit on the nonperforming loan piece here at the end of year than we had previously.

So if you went back -- again, getting back to your original question -- at the end of '07, most of what we would have charged-off would have related to OREO, which would have been liquidated within that quarter.

It just seems to me that you have written off about 5% of the peak, if you look Atlanta specifically, trying to again factor out Gainesville separately out of that.

So I'm just curious how that number builds up as this year goes on, if the pace of losses continues at the same number?

So I don't necessarily expect you to comment on that, but just sort of what I'm getting at.

So that's great.

Thank you very much.

Jennifer Demba, SunTrust Robinson Humphrey.

David, what causes you guys to think differently about your problem loan disposition strategy?

And you said the difference between the bid and ask is just too wide right now.

What causes you to change your tact and perhaps take a little bit lower price?

It is a couple of things.

Ultimately we're trying to maximize the economic return to the Company.

While we want to get through this as quickly as possible, some of that -- the seasonality of the winter, the fact that many investors have pulled back -- pulled back particularly we saw in the fourth quarter with all the turmoil going on the market.

We just think that -- and obviously each day it goes by we're a little closer to an eventual turnaround.

I think that a little more patience right now probably makes sense, in that we think we are at a low point, and that we will begin to see some upward improvement in pricing, hopefully in the near term.

Again, what we're talking about is only those properties that we think are going to be the first to recover when the market turns.

In general, our strategy has not changed.

We have just specifically identified those close-in projects in the metro Atlanta area really at this point.

It may be other market as well that we think have a closer turnaround time attached to them.

Second question is on FDIC premiums.

How much will those rise for you guys in 2009?

Right now, unless they change the funding of it, it is going to double for most banks, going from the 7 basis points up to 14 basis points.

So our costs in '09 are about $5 million.

It is going to go up to about a $10 million runrate starting out in January.

That is pretty much the same for most of the commercial banks.

Jeff Davis, Howe Barnes.

Jimmy and Rex, I joined the call, or got back on, I think quite as you were wrapping up Chris' question, and I may be asking essentially what he was asking.

So just cut me off if you have already covered it.

You have had heavy losses the last two quarters as you think about your capital position, and I'm talking about common capital, not common equity -- not TARP and trust preferred is, as we look into '09, maybe not thinking about the earnings per se, but is there not going to be a point maybe where the provisioning -- and maybe not so much on the loss recognition side -- but the provisioning is going to back off some, so that the losses for the Company taper off some, if you all are truly in front of this?

We certainly hope so, and that is our plan.

Our game plan, our strategy has been to be as aggressive -- and I know that word is certainly overused -- in recognition and disposition of the asset.

And certainly we keep a very, very close eye on our capital.

That is one of the reasons I had mentioned earlier in my prepared remarks on the pre-tax pre-provision in improving that throughout '09.

But if you just do a burn down, and these are just examples.

$200 million in '09, for example, that would -- a Tier 1 would still be 10.5% total, well above 13%.

And our common would be about 5.5%.

If you add another $100 million, let's say $300 million, Tier 1, 9.5%, total still well above 12%.

And then the common would certainly be under 5%.

And we are just continuing to watch that very, very carefully.

If we can get some relief with stability within the real estate, and certainly the housing piece, because that has today the least amount of loss to us, whereby the loss becomes marketable again at a reasonable price, certainly that would help to lessen any potential and continued pressure on our margin -- on our capital.

Maybe if I say it a little bit different.

Is the delta between pre-tax, pre-provision and your provisioning level, does that tighten up, if not maybe for the full year, the second half of the year?

We think so.

From what we see today, that is our hope.

[Michael Sharma], Raymond James.

Could you talk a little bit about the lot inventory and housing inventory numbers in Atlanta?

Sure.

This is David.

The latest numbers that we saw that came out here at the end of year showed the total number of lots on the ground at 150,000 lots.

That is up a little bit from 148,000 last quarter and 147,000 prior year.

Most of that increase really I think is just kind of completion of what was already started, because there really hasn't been any significant new projects started in quite some time now in Atlanta.

So the lot inventory, I would say it is fairly stable.

But with starts being as anemic as they are at this point in time, the month supply is very excessive.

If you look at just closings and starts on housing year-over-year, in the fourth quarter on an annualized basis you had 21,600 closings runrate, and starts 11,900 in the fourth quarter of '08.

That compares to 37,800 in '07 in closings and 31,800 in starts.

What has happened now for going on nearly two years, frankly, is closings have exceeded starts on the housing piece, but the pace of closings has continued to deteriorate and decline over that time period.

So closings -- just give you prospective -- closings just on an annualized pace of under 22,000 units in Atlanta is extremely low relative to historical average in the range of about 40,000, and a peak in the market of about 60,000.

Separately, I was wondering if you could, Rex, talk a little bit about the decline in employee expense in the fourth quarter?

Was that due mainly to headcount reduction or is there something else happening there?

No, as I indicated earlier, it is primarily due to the reduction of incentive compensation, primarily related to bonuses.

So that was reduced in the fourth quarter.

That is the biggest variance in the fourth quarter compared to third.

Could you see that number then creeping back up in the first quarter?

Uncertain.

It has got to have some to it, but again incentives were down because volumes were down in the other businesses too -- the mortgage business and refinance, we had some declines across the board.

Is it question about dollars or --?

Yes, is (inaudible) dollars.

(multiple speakers).

Yes, it was about dollars.

Yes, about dollars.

All right.

Thank you.

Jefferson Harralson, KBW.

I was just going to ask you about some of the nonconstruction categories and the losses there.

I was going to ask you first about residential mortgages, it is a pretty decent jump at the high rate versus anything we have seen historically for the industry -- but everybody has seen a big jump.

Can you talk about what is driving that jump?

And is there anything specific in this quarter that you are seeing that is new?

I think what is really happening is pretty much what others are experiencing as well.

This climb in unemployment is having an effect on the consumer out there.

We have been seeing our past dues kick up here over the last couple quarters.

And we're trying to work with folks, but some folks are just stretched, and they have not been able to work through their challenges.

So that is really driving it.

Then of course, coupled with that, in terms of the actual loss, the markets have softened out there.

Even though we maybe have gone in at a the time in a LTV, the deterioration out there in pricing has had an impact on the overall loss experience there as well.

I think our numbers fare pretty -- on the residential mortgage continue to fare pretty well relative to some of the industry numbers I have seen.

But obviously they are climbing, and I would expect them to continue to climb in '09.

I will ask you about one more category there, the P&I you had a $3.4 million in that charge-off.

Can you just talk about the composition of that $3.4 million, and what you are seeing and expecting there?

We had one sort of outlier in that group that really could almost be called residential construction, although it truly is P&I.

We had a relationship -- about a little over $2 million of that number was an Atlanta-based relationship.

It is very closely tied to residential construction in Atlanta.

And effectively they got in trouble -- and we charged that one off.

That was a total loss.

That was an unusual relationship that was largely driven by guarantor support, which we have been having some challenges with on that credit.

But outside of that, it was really kind of a mixed bag of reasons and types of credit.

And of course that -- over 60% of the charge-off was really related to that one account.

[Louis Feldman], Wells Capital Management.

A quick question.

David, did I hear you correctly that you said in terms of four of your larger relationships that were not performing, the builders, they were continuing to build and sell houses, is that correct?

The comment was -- we mentioned the fourth largest non-performing loans.

And the point that I was making was that the two largest of those are both still builders that are in business.

They are building homes.

They're delivering product.

They're keeping liens off of their product and maintaining the product and selling them and reducing our loan balances.

The issue -- the reason they are on non-performing is because in some cases they're having to take short sales on some of these houses to move them out.

Or, in one case, they have run longer than they should on past due and we have gone ahead and put them on nonaccrual.

But in both cases these two individuals are doing all they can to keep them alive.

I just wanted to make the point that these aren't dead, they are still working diligently to reduce our debt, and we have gotten good reductions.

They still have a pulse?

Oh, yes.

The basis for that was I was just wondering what the average time on market for houses around Atlanta has been recently.

I don't have a really good number to point to on that, because that is going to be driven by the pricing that the seller is willing to take.

I just don't have a good answer on that.

I'm sure it is fairly long.

Typically if you look at the resale, on a new product, there's builders out there that are probably sitting on two-year-old inventory.

And there's others that have cut their prices and are moving product.

I think it is a little bit across the board, depending on the pricing.

And I assume also location.

Well, sure.

Barry Cohen, Knott Partners.

I have a couple of questions, if I could.

One is did you give a range -- I may have missed it either on earlier call or this call.

Did you give a range for your outlook for '09 for provision and loss rates, as well as net interest margin?

We didn't give a range, no.

We did comment in regards to our improvement in margin based on the actions on our loan pricing, and also our deposit costs coming down with the actions that Rex went through piece by piece.

We do feel that we will see margin expansion based on where we are today, where the world is, and what we see.

We haven't given ranges on provisioning.

Do you anticipate maybe doing so?

Well, we are every single day looking at what is happening.

We are on top of it.

If that became necessary, certainly we would.

But it is just so hard to give clarity, and certainly we don't want to give direction and be wrong.

Just a couple of more quick questions, if I could.

Could you maybe like go through what your assumption is for your paydown rates in the major loan categories that you put on your P&L?

On the paydowns rates, if you're asking are we are expecting some compression of our loan portfolio or decrease this year, is that what you're asking?

No, no.

I was just kind of wanted to understand what the assumption of paydown rate was.

On residential construction what we are anticipating is probably somewhere in the $300 million range this year, and hopefully it would be more.

And then I was going through your equity account, and it just caught my eye, it looked like your AOCI account sequentially went up a fair amount.

Could you maybe help me understand why?

It is primarily related to both our securities portfolio and our derivative portfolio.

At the end of the third quarter again with the rates, and again the velocity of them moving, our securities portfolio was basically flat on a mark-to-market basis.

And with the drop in rates of 175 basis points in the fourth quarter, that significantly impacted our derivative portfolio to move that up.

As well as the long rates came back down again, adjusted and moved up again on mark-to-market on the securities portfolio.

But it is those two items that are driving it.

That is what I figured, but I just wanted to make sure.

Thank you very much.

[Casey Ambrich], Millennium.

A couple of questions for you, Jimmy.

The problem loans, do you guys have a number what you think total problem loans would be?

The NPAs right now are $250 million, do you have a number on the 90 day and the 30 day -- the [90] day buckets?

(multiple speakers) Bottom assets.

We don't have any accruing loans over 90 days.

We are at 233 basis points on 30 to 90 at the end of the year.

233 basis points on 30 to 90?

Right.

Okay.

I will just calculate that.

Okay.

Then the NPA disposition, you're talking about how you're stepping back from -- the buyers are stepping away from the banks trying to sell assets.

It is my understanding that there's a bunch of -- apparently there's like a whole regulatory squad going down to Atlanta.

And if there were to be some sort of big action over one weekend where they shut down a bunch of banks, and the FDIC liquidates 50, 60 banks, one, are you hearing that and, two, what do you think that would do towards asset values if f the FDIC is a seller of assets?

I have not heard that at all.

Certainly the more inventory that comes on, it brings about more challenges.

If we go back to third quarter, and our actions during that period, we had opportunities to move some loans, as well as some inventory, on prices that we in our own mind were questioning, given the seasonality, given where we were possibly in the cycle, and we were able to go ahead and move those.

Certainly with Wachovia now becoming Wells, I think certainly we will probably see more liquidation.

The other thing too, I'm only aware of maybe one, possibly two, true sales through the FDIC on these closed banks thus far.

I'm not --.

It is my understanding though they hired DebtX recently.

And so I just wonder if they're going to take down a bunch of supply, and they're going to use organizations like that to really distribute these loans.

It is my understanding that is who they hired.

I know they were in charge of the disposition of the first sale, and there may have been a second sale.

That is all I have heard about to date.

Do you know how that loan pricing came in to where that bank held their loans?

I have heard the $0.40 number.

I heard from folks that actually made bids that weren't even in the ballpark.

I think you've got obviously a lot of bottom fishers.

Most likely these properties may not be what, again, we call Class A.

I don't know what the real definition there may be, but --.

But the stuff was clearing at $0.40?

Yes, but I think that is across the board.

You can take small pods of lots.

I think it is -- from what I have been told, they are not selling one category.

They are bundling up commercial, residential, A&D and you bid on that whole package.

Do you guys have a sense how big the buying pool is for assets in the greater metro Atlanta area?

I do not.

Just to sum that conversation up then, so are you worried that if they take over a bunch of banks, and consolidate all these NPAs, and start kicking them out at distressed sales, it is that a good thing or bad thing for the other banks not taken over?

Well, I worry about everything.

Certainly the more inventory that comes on the market in a short window will have some impact on pricing.

Just one last question, and maybe you can just figure out how you want to answer this.

Do you think there's any chance for consolidation in the market?

You guys have an enviable franchise, and I was just wondering if you can -- there could be some -- a larger partner maybe you can link up with.

Where we are today, and where our heads are, we're truly focused on our business -- working through this.

When you step back and look twelve to eighteen months beyond, I can't help but get excited about the opportunities for this Company.

Today, going out and acquiring a bank, I don't see how any of that math works.

I don't see how you value an asset.

Even the closed banks, whereby you are buying a deposit base, I have yet to see a quality deposit base.

Certainly we would look at that, if it was truly a core bank that could deepen our footprint where we already are, not getting outside of this footprint, I think we certainly would want to continue to look and listen.

What about going the other way?

What about you linking up with a larger bank?

Well, you know, we're always mindful of our responsibilities to the shareholder, and we will always do what is best for them.

I don't -- today when you look at the world of banking, I think most everybody has got their own internal challenges.

Then last question.

Do you have an idea where you think tangible book could settle in by the end of '09?

That is going to be a function of the credit throughout this year.

Again, as we continue to work through this cycle as we said earlier, we will do what is the most economically advantageous for the Company.

We've got our eye on these -- our common equity, and we will just make the right business decision.

I don't have a number, no.

Thanks very much.

Good luck.

With that, we will conclude the question answer session.

Mr.

Tallent, I will turn the conference back to you.

Let me just first say a huge thank you to our team of United bankers, and how they continue to demonstrate every single day of doing all the right things, following our golden rule of this Company, reaching out.

And really as we continue to work through this cycle, I could be not be more proud of the people that make up this wonderful Company.

To those of you (technical difficulty) the line, I want to thank you for your interest in this Company.

Thank you for your questions.

Certainly, David, Rex and myself are available if you have other questions.

We look forward to talking with you in April, and hope you have a great day.

With that, we will conclude today's conference.

Thank you everyone for your participation.