United Community Banks Inc (UCBIO) 2010 Q1 法說會逐字稿

Good morning, and welcome to United Community Banks first quarter 2010 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 at the end of the investor presentation, and both of these are included on their website at www.UCBI.com.

Copies of today's earnings release and investor presentation for the first quarter were 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 by United Community Banks. Any forward-looking statements should be considered in light of risks and uncertainties described on page 3 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 thanks for joining us as we discuss United Community Banks key events and results for the first quarter of 2010. First, our financial highlights.

The net operating loss for the quarter was $34.5 million or $0.39 per share. Our charge-offs were $56.7 million and at quarter end, our allowance for loan losses was 3.48% of loans.

The interest margin for the quarter was 3.49%, up 9 basis points from the fourth quarter and up 41 basis points from the first quarter of 2009. Our core earnings were down $1.1 million compared to the previous quarter, but were up $7.4 million for the first quarter of 2009.

On March 31, we sold our consulting services business, Brintech, which has been part of the United family for more than 10 years. Consulting is a business that requires scale in order to grow.

Our focus is on returning to profitability in our core lines of business. We found an acquirer that is a good match for Brintech and that will allow the vast majority of its employees to continue in their roles. As Rex will explain later, this transaction has been reflected in our income statement as a discontinued operation. We have restated our financials for all periods.

For the fifth consecutive quarter, we have seen encouraging growth in core customer deposits with an increase of $53 million or 9% annualized in the first quarter of 2010. Residential construction loans totaled $960 million at the end of the first quarter, down $90 million from the prior quarter and down $470 million from a year ago. Residential construction now accounts for 19% of total loans. That compares to 26% at the beginning of 2009.

The inflow of non-performing assets decreased 20% during the quarter. However, NPAs still increased to $417 million, which we had anticipated. The sales were hampered by two things. First, by a lack of investors outside of the Atlanta market; and second, one of the most severe winter seasons that I can remember here in North Georgia.

To help offset some of these issues, we entered into a key transaction with a private equity firm, Fletcher Asset Management. By the end of April, we will sell to Fletcher $100 million of our more illiquid non-performing assets, primarily outside of the Atlanta market, while avoiding any additional charge-offs and credit costs. This is particularly attractive due to the lack of investors in these markets and the difficulty that we have experienced in successfully selling certain larger tracts of land.

This transaction reduces our non-performing assets by a very significant 25% and is consistent with our goal of reducing non-performing assets at the highest economic value to our shareholders, while preserving our capital position. Now I am going to ask David to provide more detail on credit and then Rex will follow with details on our financials.

Thank you, Jimmy, and good morning. This quarter we provided $75 million for loan losses and charged off $56.7 million in loans. Non-performing assets increased $32 million to $417 million compared to $385 million last quarter. Non-performing assets included $281 million in non-performing loans and $136 million in foreclosed properties. We had no accruing loans that were past due 90 days.

The ratio of non-performing assets to total assets was 5.32% compared to 4.81% last quarter. Our 30 to 89 day pasty due loans were 2.17%, up from 1.44% last quarter. The dollar increase in past dues was concentrated in commercial real estate and residential mortgage.

The rise in commercial real estate was primarily due to two large credits, which increased the past-due percentage by 40 basis points. On the other hand, home-equity and consumer saw declines in past dues.

The market to sell foreclosed properties to investors and retail buyers slowed considerably in the first quarter. In the first quarter, we sold $26 million of foreclosed property versus $61 million in the fourth quarter. In addition, we sold non-performing notes totaling $8 million in the first quarter compared to $20 million last quarter.

The combination of very poor weather and limited investor interest in North Georgia land affected our sales efforts. Overall, the loss content on foreclosed property sales was improved compared to last quarter.

Net charge-offs were $56.7 million for the quarter compared to $84.6 million on a linked quarter basis. Foreclosed property write-downs and losses on sales totaled $8.1 million compared to $9.6 million last quarter.

The foreclosed property write-downs were composed of $3.5 million related to losses on sales and $4.6 million of write-downs on remaining foreclosed property inventory. Overall we continued the trend of aggressively recognizing losses.

Foreclosed properties had been written down to 63% of book balance at the time of non-accrual at quarter end, while non-performing loans were written down to 72% of the book balance at time of non-accrual. This will help expedite asset sales in the future.

Let me now provide some detail on our portfolio by segment. Let me start with commercial loans. Our commercial loan portfolio of $2.5 billion has remained relatively flat over the past five quarters.

Within our total commercial portfolio, we had $73 million out of NPLs, up $12 million from last quarter. Total commercial net charge-offs were $8.3 million for the first quarter compared to $8.8 million last quarter, continuing a declining trend.

Our challenges in the commercial portfolio have been dispersed across our footprint in a mixture of property types. The highest geographic concentrations have been in North Georgia and coastal markets.

In the first quarter, we completed yet another extensive review of this portfolio, including all relationships over $500,000. While we continue to experience some negative migration, actual losses have been manageable and have declined over the past two quarters.

That said, with 54% of our CRE portfolio being owner occupied, a modest average loan size of $444,000, average loan to value of 60%, and diversified property types, we are well-positioned to work through any challenges in this portion of our portfolio.

Moving onto our residential mortgage portfolio. We ended the quarter at $1.4 billion, a decrease of $37 million from last quarter and $114 million from a year ago. In this portfolio, we had $58 million of NPLs and $4.6 million in net charge-offs for the first quarter. Elevated NPLs and charge-offs in the residential mortgage portfolio are due to continued pressure from unemployment in our markets.

Home equity is included within our residential mortgage portfolio. This portfolio, which totaled $369 million, realized a decline in early delinquency this quarter and continued to perform well with $1.1 million of net charge-offs for the first quarter. Home equity line usage was flat at 63% in the first quarter compared to last quarter.

Overall residential mortgage, charge-offs and NPLs were down from last quarter. However, we expect high unemployment to continue to impact this portfolio throughout 2010. Nevertheless, given the economic environment, residential mortgages continue to hold up fairly well.

Our total residential construction portfolio of $960 million is down $90 million from the fourth quarter and down $470 million from a year ago. Looking at credit quality, our residential construction portfolio had $147 million of NPLs and $43 million in net charge-offs for the first quarter. While NPLs rose $5 million, net charge-offs declined $24 million or 36% compared to last quarter.

Similar to the last several quarters, the Atlanta residential construction market represented a large portion of our net charge-offs totaling $13.5 million or 24% of the total. However, Atlanta-based residential construction net charge-offs were down $26.3 million or 66% from last quarter. The Atlanta MSA represents $228 million of his category and breaks down into $72 million in houses under construction, and $156 million in [dirt] loans.

The $72 million of houses under construction was down $12 million from the fourth quarter and consisted of $14 million in pre-sold and $58 million in spec. The $156 million of [dirt] loans was down $15 million from last quarter and included $66 million in acquisition and development loans, $47 million in finished lots and $43 million in land loans.

It is important to note that approximately $30 million of the Atlanta residential construction portfolio reflects ORE financing deals done at current market values with strong equity and we believe little risk of default or loss. North Georgia residential construction has become our most stressed portfolio, with $24.3 million in net charge-offs or 43% of the total in the first quarter.

North Georgia represents $460 million of this loan category and breaks down into $80 million in houses under construction, and $380 million in [dirt] loans. The $80 million of houses under construction was down $8 million from the fourth quarter and consisted of $26 million in pre-sold and $54 million in spec.

$380 million of [dirt] loans was down $35 million from last quarter and included $148 million in acquisition and development loans, $189 million in finished lots, and $43 million in land loans. Looking at our total loan portfolio, we saw a $16 million increase in our classified loans to $781 million for the first quarter.

Accruing TDRs totaled $65 million and increased $12 million from last quarter. Residential construction, although declining from last quarter, continues to be our most challenged portfolio, representing 39% of total classified loans.

Despite some deterioration that we are actively monitoring in the commercial and residential mortgage portfolios, we do not believe that they will be nearly as hard hit as residential construction, where the losses have been much higher. At quarter end, our allowance for loan losses was $174 million or 3.48%, up $18.3 million from last quarter.

The reserve buildup this quarter was due to our allowance methodology that heavily weights the most recent quarterly loss rates. We saw a rise in our quarterly loss rate in the third and fourth quarter in 2009 that were driven up by two primary factors.

First, in the third quarter of last year, loss rates were driven up by the clearing of specific reserves as directed by the FDIC. Second, in the fourth quarter of 2009, loss rates increased due to the sale of $80 million of NPAs.

With our $28 million decline in charge-offs this quarter and as charge-offs decline going forward, our provision for loan losses will be favorably impacted in future quarters. Our allowance coverage to non-performing loans with 62% and 83% on a pro forma basis if you net the loans being sold to Fletcher. Excluding impaired loans with no allocated reserve, and assets to be sold to Fletcher, our allowance coverage to non-performing loans was 233% compared with 190% last quarter.

Looking ahead, we expect to see steady improvement in our credit metrics. We are encouraged by the decline in new NPL inflow over the past two quarters. In addition, the majority of our credit challenges over the past two years, both charge-offs and NPAs, have been centered in the Atlanta residential construction portfolio. Default rates and loss content had been much higher in this portfolio than our other portfolios.

As expected, with the rapid decline in the Atlanta residential construction book and the related problems largely behind us, our charge-offs have declined and should decline in 2010. In terms of NPAs, we are disappointed with the rise in NPAs this quarter, but not surprised.

We were uncertainty about the difficulty selling some of the more illiquid land tracts and in our non-Atlanta markets, which put upward pressure on the overall level of NPAs. Fortunately, the Fletcher transaction will allow us to move a significant portion of these NPAs with no additional loss.

Let me finish with just a few summary comments on the Fletcher transaction. First of all, the loan structure on the transaction is conservative with $20 million cash down, plus a three-year interest and expense carry account totaling $17.5 million pledged to the loan. Second, the assets purchased are heavily concentrated in non-Atlanta markets and residential construction credits. These credits represent some of our largest and most difficult to sell in a short timeframe. Moreover, assets being sold include seven of our largest NPLs this quarter.

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

Thank you, David. Before I begin, I want to highlight two reporting issues that were reflected in our earnings release this morning.

As both Jimmy and David have commented, the sale of $100 million of our non-performing assets is significant. It will reduce our NPAs by about 25% and as David noted, have several positive implications to our credit quality. We have highlighted the pro forma impact in our earnings release and investor presentation schedules.

The second item that impacted our reporting was the sale of our consulting services business, Brintech, on March 31, 2010. The results of operations for all periods presented in the release this morning have been restated to show earnings from continuing operations, which excludes Brintech's consulting services fee revenue and the related operating expenses.

We have included a revised five quarter income statement that has been restated to exclude discontinued operations of Brintech and the earnings release schedules and at the end of the investor package. This income statement should assist you to revise your models for comparability of both quarterly and year-to-date performance for 2009.

Now I will turn to our financial performance for the first quarter. As Jimmy stated earlier, we continue to focus on areas to improve core earnings.

Core earnings, or our pretax, pre-credit earnings; excludes special items and nonrecurring items that assist us in analyzing our core run rate. Foreclosed property costs, securities gains and losses and other one-time revenue expenses are examples of items that we exclude from our core earnings run rate.

However, these items are included in our net operating loss that totaled $34.5 million for the first quarter. We have provided summaries of core earnings on page 22 and net operating losses from continuing operations on page 27 of our investor presentation package that was filed on Form 8-K and is available on our website. We believe these summaries provide a better view of our overall performance trends and quarterly run rates.

I will comment on the drivers of core earnings from these pages as well as other areas of the investor presentation package. We have also provided a schedule in the earnings release and at the end of the investor presentation package that reconciles core earnings and other key ratios to our net operating loss and to the reported GAAP net loss.

Core earnings for the first quarter of 2010 were $28.9 million, up $7.4 million from a year ago, but down $1.1 million from last quarter. The primary drivers of our core earnings growth rate has been margin expansion and expense controls, including the 10% workforce reduction initiated a year ago.

Net interest revenue of $61.3 million was up $3.9 million from a year ago and down $2.7 million from last quarter. The improvement from a year ago was driven by the 41 basis point margin expansion which was partially offset by $502 million of reductions in average loan balances from the first quarter of 2009.

The $2.7 million reduction in net interest revenue from the prior quarter was primarily due to two less days in the first quarter and a decline in the average loan balances of $184 million. This reduction was offset partially by a margin expansion this quarter.

For the first quarter, our margin was 349, up 9 basis points on a linked quarter and up 41 basis points compared to our margin of 308 for the first quarter of 2009. On pages 23 and 24 of the investor package, we show our margin trend for the past six quarter ands the impact of credit costs.

Historically, credit costs have lowered our margin by 8 to 12 basis points, so the 66 basis points of credit cost this quarter or drag continues to significantly lower our margin, net interest revenue and core earnings. Even with this margin drag, we expanded our margin by 9 basis point this quarter, driven by further lowering our time deposit pricing while maintaining the level of strong credit spreads in our loan pricing.

Our margin continued to be negatively impacted by the $260 million on average of excess liquidity this quarter. We continue to invest this excess liquidity in commercial paper and other short-term funds at a slight negative spread, which reduced our margin by 18 basis points this quarter compared to 20 basis point last quarter.

We believe that it is prudent not to leverage these funds into investment securities that would have extension risks later in 2010 if rates move up. Most of the excess liquidity will run off over the next two quarters as we further lower our CD pricing and as broker deposits mature.

As we continue to lower deposit pricing and reduce excess liquidity and credit costs, we expect further margin improvement throughout 2010, ending the year in the 370 to 380 range. Another positive factor of our margin expansion was core deposit growth as shown on page 25.

Core customer transaction deposits this quarter were up $53 million or 9% on an annualized basis. This is consistent with our $194 million or 9% growth from a year ago. The year-over-year growth excludes the $53 million of core transaction deposits acquired from Southern Community Bank.

Turning to fee revenue and operating expenses, as noted on page 22 of the investor presentation package, core fee revenue of $11.6 million for the first quarter was basically flat as compared to last year and last quarter. The $413,000 year-over-year increase in service charge fees as noted in the income statement was driven by higher ATM and debit card fees related to the increase in transactions and number of customers utilizing these products.

The $810,000 decline from the last quarter was primarily seasonal and due to lower fees and activities related to our customer overdraft products. Mortgage loan fees of $1.5 million were down due to lower refinancing activity as compared to last year and the prior quarter. We closed 412 loans in the first quarter of 2010, which is down from 996 loans in the first quarter of 2009 and 552 loans last quarter.

Other fee revenue of $2 million increased $1 million from a year ago due to an acceleration of deferred gains of $520,000 resulting from the ineffectiveness of cash flow hedges for a certain portion of our prime loan portfolio. Also, we had $320,000 of higher earnings on bank loan life assets that were reinstated a year ago.

Page 27 of the investor package reconciles core earnings to our net operating loss from continuing operations. The key reconciling items include the provision for loan losses and credit related foreclosure costs that David has already discussed.

Looking at core operating expenses on page 22 of the investor package, they totaled $44 million for the first quarter and were down $3.5 million from a year ago and down $1.7 million from the fourth quarter. The primary item that was excluded from core operating expenses was foreclosed property costs. The details of operating expenses are included in the income statement and commented on in our earnings release. Here are some of the key items.

Salary and employee benefit costs of $24.4 million declined $3 million from the first quarter of 2009 due primarily to the 10% reduction in workforce implemented at the end of the first quarter of 2009. Also, for the first quarter of 2010, professional fees of $1.9 million were down $1.3 million from a year ago. The decline was primarily due to higher consulting fees paid in the first quarter of 2009 to Brintech for the completion of our special project, We Are United.

This project was focused on reductions to our operating expenses and workforce. These intercompany fees were previously eliminated in the consolidation of our consulting services subsidiary, but now that expense is included in professional fees.

Offsetting these cost savings compared to the prior year were higher FDIC insurance premiums of $944,000 due to rate increases. Foreclosed property costs are excluded from core expenses and were $10.8 million for the first quarter of 2010 compared to $4.3 million last year and $14.4 million for the fourth quarter of 2009.

Foreclosed property costs this quarter include $8.1 million for write-downs of foreclosed properties and $2.7 million for maintenance, property taxes and other related costs as shown on page 27 of the investor presentation package.

This quarter we had $3.5 million of write-downs related to sales, which compared to $7.4 million last quarter due to the higher volume of properties sold in the fourth quarter of 2009. This quarter we also took $4.6 million of additional write-downs on existing foreclosed properties as David noted earlier to help expedite sales.

Maintenance, property taxes and other related costs for managing foreclosed properties have risen over the past few quarters to the $2 million to $3 million range due to the increase in the number of foreclosed properties being handled by our workout groups. Last quarter was higher due to the timing of property taxes paid at the end of the year.

Turning to capital, as shown on page 29, Tier 1 ratio was 11.7% at the end of the quarter and the leverage ratio was 8.1% and total risk-based ratio was 14.4%. And our tangible common equity to assets was 7.1%. With that, I will turn the call back to Jimmy.

Thanks, Rex. Now I would like to reflect on certain key points from the first quarter and then look toward the future.

Charge-offs during the quarter were down almost $30 million on a linked quarter. The most toxic sector, as you know, continues to be the residential construction, particularly large tracts of land and multiple lot projects. The construction component, however, is doing well as we are selling houses at a fast pace consistent with prior quarters.

As we shared in our last quarterly call, our concern has been the slow pace of liquidating certain large tracts outside of Atlanta. The good news here is that the Fletcher transaction will greatly help to reduce the volume of these tracts. While our non-performing assets are still too high, this transaction removes a large block and allows us to redirect the time and attention to other NPAs.

Let me provide some perspective on the Fletcher transaction. It includes $72 million of our larger non-performing loans, including seven of our 10 largest. I am pleased to report that since quarter end an additional $25 million of NPAs went under contract, including another of those 10 largest NPLs.

As you can see, we are addressing problem credits aggressively and efficiently. While the inflow of non-performing loans is still high, it has declined for two consecutive quarters and we believe it will continue to decline in this quarter.

We have just completed another thorough review of all of our existing credit and are $2.5 billion commercial loan portfolio. This review has been conducted quarterly since 2008 and generally we continue to feel good about this portfolio.

With respect to loan growth, we added $57 million in net new loans for the first quarter, consistent with our loan growth for 2009. The margin improved quarter over quarter by 9 basis points. Even though we are able to lower our deposit costs, particularly our time deposits, the challenge will be maintaining our loan yield. We continue to believe we can accomplish these goals and expect to see margin improvement throughout 2010.

During the quarter, we were successful in our cross-selling and our core deposit initiatives that began in early 2009. Our bankers generated over 17,500 cross sells, the most of any quarter in our history. We grew core deposits by $53 million, which is an annual rate of 9%. Additionally, we added 3600 net new core accounts of which 25% were business accounts.

Many of those deposits came from North Georgia, which grew at a strong 16% pace, where we already held a number one market share and have held for many years. To some degree the growth was due to the disruption of banks being closed in this market.

But customers had other choices, and we believe with good reason that they came to United because of our reputation as a strong bank with strong service. That theme, strong bank and strong service, is our dominant marketing message and we believe it is resonating among people who are looking for stability and a community bank environment.

The first quarter of 2010 has been eventful and productive, in particular, our transaction to move $100 million in non-performing assets out of the bank is a significant milestone. It significantly reduces non-performing assets and underlines our determination to find new and innovative ways to restore profitability.

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

(Operator Instructions) Michael Rose, Raymond James.

Based on all your guidance, is it conceivable that your provision on a quarterly basis will continue to decline from here and that NPAs have likely peaked, particularly in light of the asset sale?

This is David. I think, yes, that is a likely scenario. Given the sale of Fletcher, obviously that gives us huge traction in moving those NPAs out and we do believe the inflow is declining.

So I think that is true on that side. Then with regard to the provisioning, which is heavily driven by historical losses, we had the peak last year in loss rate. It declined this quarter.

I don't know how much it will decline. The (inaudible) charge-offs losses would decline in the second quarter. That's -- depend largely on how much we are able to sell, but I think that is a reasonable assumption that you would see provision continuing to decline quarter by quarter.

Have sales picked up subsequent to quarter end, and maybe any color by market there?

Yes, sales have picked up. We are getting a lot of traction already, as I think Jimmy mentioned. We've got $25 million under contract already this quarter, including one of our large ones that we had been working on. And spring just typically is a better quarter. I'm fairly optimistic our numbers on sales will be much better this quarter than last.

Can you discuss your potential appetite for FDIC-assisted deals or maybe even traditional transactions as we get later into the year and maybe into 2011?

This is Jimmy. Certainly one of our key goals is to participate in the failed bank activity that most likely will be occurring later in '10 and '11. Certainly that is one of our principal goals. We believe the removal of this $100 million of NPAs will certainly get us closer to the goal.

But I also would want to again remind our listeners that the success of our very strong calling program that we have had in place for a long time is continuing to win new customers over. I think it is quite significant when you look at just the North Georgia region, core deposit balances in that region is a little over $650 million, a market that we have held the number one deposit market share for many, many, many years.

Last quarter because of the dislocation, because of the failed banks, we were able to actually increase that core deposit share on an annualized basis of 16%. So the point is, yes, we are absolutely -- want to continue to view that as the opportunity with the failed banks, but we also are taking advantage of the closed banks within our market.

Kevin Fitzsimmons, Sandler O'Neill.

Just wanted to look at a couple other angles of the Fletcher transaction, if we could. If you could just give us an update on the timing of when you think that will close and how we should look at the likely impact to the share count.

I know there's the convertible preferred, then there is also the warrants. And if you can just help us out, how we should view the final fully converted share count. And then secondly, I would just be curious how -- in terms of Fletcher financing, or you guys financing Fletcher to some extent, was that something that needed review with the regulators and were they comfortable with that? Thanks.

This is Rex. I will take the first couple parts, and let David talk about the regulators. The sale of the assets is scheduled to close by the end of the month. So we should complete that by April 30, is the plan right now. That will affect, obviously, our second quarter NPAs. And again, we have talked in some of the pro forma numbers David has already.

The other part of it on the equity, obviously it's a complex transaction, but the first piece of it is the asset sale of which they will [tick] up a little over 7 million shares or warrants, which again will come into our diluted EPS calculation gradually as share price increases on a treasury basis. So it won't have an immediate impact in Q2. It will have some impact, but not a significant impact, we don't think, in Q2, but it really depends on the stock price appreciating as that comes back into EPS dilution.

The other side of it is the contingent capital portion of the preferred stock. Again, it is contingent capital. They have two years to purchase the preferred stock and again, if there is a need for capital, we would look to them to pull in contingent capital at such time.

Currently that would not be in the numbers or in our numbers right now until the (inaudible) comes in. So we are not equating any of that into our capital projections at this time. And additionally when the preferred stock is issued, there is -- it is convertible at 5.25, so there is another 12.7 million shares potentially at that time that will come into the calculation on a dilution basis.

But at the current time, until the capital is issued, no different than doing another contingent capital offering, it wouldn't impact the capital or the dilution ratios at this time. David, I will let you talk on the regulatory.

On the loan structure piece of it, we did meet quite a bit with the FDIC as we were putting this together and talking about the loan structure because our concern was not only the true sale accounting, but really part of our objective was to try and get our classified loans down. And really the structure that we ended up on we believe is very -- the FDIC feels very comfortable with. 20% cash down and then another $17.5 million of carried, which basically equates to a three-year carry on these assets even if you sell nothing out of the pool. So I think the FDIC is very comfortable with what we've structured and I think it is going to achieve our objectives.

Steve Covington, Stieven Capital Advisors.

Just a quick question on the net interest margin. Rex, does your expectation for the end of year margin in that 370 to 380 range, how much of that comes from a decline in non-performing assets versus just repricing of the deposit base? Or maybe even more specifically, do you have any type of schedule available as far as repricing opportunities?

The repricing primarily comes from two areas. There is a certain part of that that is impacted by credit quality late in the year with NPAs coming down. That is a positive impact. The Fletcher sale will have a positive impact on the margin by moving out $100 million of NPAs that basically is in our drag or credit cost we talked about -- I talked about earlier.

But the two primary items are the CDs, the time deposit repricing we have, about $202 million monthly that reprices on average about 2.05%. That basically is being repriced at the 100 to 110 basis points, so there is a significant pickup from that each month. That gets layered in as each month precedes in 2010.

Additionally, we have brokered deposits that mature. There is about $90 million, just under $100 million that mature this quarter, $260 million in Q3 and about just under $200 million in Q4. Those all have average rates in the 4% range. So that is going to have again another positive impact on margin, heavily related in the second half of the year helping margin.

Your expectation is the brokered CDs roll off? Will those just basically roll off?

Again, as I had mentioned just briefly before, the excess liquidity, we have about $260 million of excess liquidity on average for the quarter. It was a little over $300 million at quarter end. That's basically invested in commercial paper and excess reserves at the Fed, earning about 25 and the commercial paper's probably about 70 basis points.

That will come off first as the combination of the CDs that come in, that we are expecting some CD rolloff of probably $40 million to $50 million a month ideally, but we haven't had that happen so far. And then the brokered deposits will come off. That would again reduce the excess liquidity or it would roll back into deposit, core deposits, because we are expecting probably about a 10% growth in core deposits this year.

I guess just quickly again on the Fletcher transaction, I apologize if I missed this. I know you did give some pro formas. But can I then assume that the vast majority of the NPLs that Fletcher took were North Georgia residential construction? Is that what you're saying or is that not done yet?

That is correct. The bulk of the assets being selected are (inaudible) 70% are residential construction and most of those are going to be North Georgia or non-Atlanta markets. Better way to phrase it, because some it is Western North Carolina, a little bit is on the coast.

The little bit that is tied to -- the minor amount that is tied to Atlanta is really kind of outskirt properties that I would characterize as more like North Georgia. But it's heavily weighted towards just pure North Georgia residential construction.

Christopher Marinac, FIG Partners.

Just wanted to clarify, David, the OREO cost that you have in the quarter, how much of those are bona fide write-downs versus other related expenses?

The total actual write-downs were $8.1 million and about $4.6 million of that was write-down on ORE -- we still had on our books at quarter end. And $3.5 million of the write-down was actual tied to sales that we did in the quarter. So $8.1 million was related to ORE write-downs in total. Does that make sense?

It does. Is there a way to sort of I guess think about the marks that you are taking in OREO, if those are higher or different than you originally had thought or is some of this just sort of timing in terms of when they flow into the P&L?

Some of the write-downs on existing OREO that we had, the $4.6 million I just mentioned, relates more to kind of reappraisal activity as much of anything. If we have something on the books over a year, we get it reappraised and adjust.

But all in all -- so the $3.5 million which was related to sales activity is down from last quarter. I feel pretty good about our marks. Obviously, we had to true it up a little bit. So we weren't exactly on it, but I feel like we are fairly close.

Then just one other question just about deposit growth in general. Is there any part of the footprint that is stronger or weaker than others?

Really it is across-the-board. We've got a very active [tall] program, referral program, incentive programs that include everyone in the Company. The first quarter, the largest sector that contributed to the $53 million was this North Georgia.

We believe it is because opportunities of customers that we've sought for some time and the disruption within those markets was the event that allowed them to come on over and move their business to us. But we are seeing solid core deposit growth across the entire footprint.

Very good. Thanks, guys. I appreciate it.

Christian Koch, Koch Asset Management.

Can you just walk us through your potential path back to profitability, and what has to come together besides your run rate on non-performing loans?

I guess maybe just let me [prune] a good portion of that entire scenario. If we take Q1 and we lost $0.39 a share, if we look at our provision expense, that was $0.48; if we look at our OREO expense, that was $0.06; if we look at the drag on the NPAs, that was another $0.07. We also bake into that our loan balances really have declined $500 million year over year. Certainly this is going to level off at some point, because that is basically in the residential construction, and once it reaches that level amount, the other types of loans we believe will then at that point start growing will create obviously other interest revenue.

Our quality of the funding base and the quality of that continues to improve with our continued success in growing these core deposits, giving us a better margin. But at the end of the day when you boil it all together, it is all about credit. And what we've got to do is to get these losses behind us as quickly as possible, which is what we do every single day, and the moment that occurs, I think the underlying earnings power is going to be quite significant.

Good, thank you.

Adam Barkstrom, Sterne Agee.

Rex, I wonder if you could -- I know we talked about this before and maybe in light of the Fletcher transaction as well, but give us an update on the deferred tax asset issue.

Sure. Deferred tax assets at quarter end is $92 million. It is up about $22 million from last quarter. That is really driven almost entirely by the deferred tax, by the tax on our loss position.

So it has increased which is what we expected. And again, we still feel very comfortable with our position of not needing a valuation allowance, as Jimmy indicated.

We do look to see profitability down the road. And again, I think that is a strong attribute that we see as well as our core earnings underneath it continue to be strong. So we are very comfortable of not needing any valuation allowance.

Okay, if I could ask one follow-up either for David or for Jimmy, you had mentioned TDRs were up $12 million this quarter, $65 million total. Just wondered if you could give us some color as to how you use that category, what -- how things are restructured and what is the composition of the total TDR bucket. Is it mainly commercial; is it more residential?

Right. This is David. Yes, it is more heavily weighted towards commercial loans. There are a few residential construction loans in there, but not a lot.

The bulk of it, the vast majority is commercial and where you have some real cash flow coming off. Typically the situation is it's a commercial project of sorts that maybe the lease didn't come off it. It was underwritten at 150 debt service coverage and now it is with principal amortization, you're at 9.9. You're not covering it.

In those situations, we might do a couple of things. We may give some principal abatement for a period of time, meaning we would reduce the principal amortization or eliminate the principal amortization for a short period of time. Typically we do these things on a year or less type of activity and often as short as six months.

That may involve the reduction in the interest rate as well. In fact, that would be a typical thing. We have been putting floors in all of our loans, but if we get in a situation and the only alternative is maybe a short-term interest-rate reduction, we have negotiated the write-down as well on occasion.

What drives it -- to define it as a TDR is, is that transaction a market deal or not? We just make that evaluation. The combination of interest reduction and/or principal abatement means it is non-market, we throw it into the TDR bucket. So does that help?

That's great. Thank you.

Jefferson Harralson, KBW.

I was going to ask you about -- it seems like in part at least the Fletcher transaction is designed to have the balance sheet ready to be a successful FDIC bidder by lowering problem assets. Is that true?

And along those lines, where you stand on the desire and ability to do deals? If you want to do deals, how does this quarter's increase in NPAs -- was that contemplated when you were doing your math around the Fletcher deal? It's all one big bundled question, that might --?

Let me try to unbundle it. Certainly the Fletcher deal, by removing the $100 million, gets us closer to our goal. We want to continue, as I have said many times, we are absolutely interested in the FDIC transactions within our footprint that has real customers and real franchises that would add to our franchise.

But the number one priority is what we have already. Because our franchise, we believe, is the -- is one of the most premier and nothing that we can do that would create more shareholder value is to get through this recession, get our loan losses behind us, go back to doing what we have done so many times. And that is where, I believe, the real growth in shareholder value will come.

In addition to the fact, if there is an opportunity to layer on good transactions, we certainly are open to that. Now I have unbundled part of those. There was another part to that question I may have missed.

I think you really caught it all. I guess I was going with the -- if the Fletcher deal got you to where you had a balance sheet where you thought you were ready to do the deal, and this quarter was a half step backwards with NPAs increasing, does it make you a little further away from doing deals than you thought you were after seeing the NPAs grow this quarter by 8%, or really there is no change to the whole desire and ability to do deals?

I don't think the desire has changed at all. We had said a quarter ago our biggest concern was the unknown or the uncertainty going into the winter season and the ability to sell OREO and NPLs with a similar velocity that we did last year. That has proven that certainly that market was way off and I think compounded by just the weather, because so many people travel within these markets on the weekends to purchase those.

So the increase -- as David had said, is not -- did not come as a surprise. But by taking the $100 million of Fletcher, taking the $25 million that we have under contract and what we see today as far as the appetite of purchasing OREO, I think we will be pleased with that number by the end of the quarter.

So I say all that to say this. No, it hasn't changed our view of participation. But we want to make sure that the principal company is on the absolute mend and the earnings are not far off.

Great. Thanks, that's very helpful.

I am not showing any further questions. Would you like to continue with any further remarks?

Operator, we will go ahead and conclude the call. We want to thank everyone for being on the call and participating. Thank you for your interest in United Community Bank.

Also, would make you aware of the fact, please call Rex, David or myself if you have further questions. We will be happy to address those. Thanks again, and we hope you have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.