United Community Banks Inc (UCBIO) 2010 Q2 法說會逐字稿

Good morning and welcome to United Community Banks second quarter 2010 conference call. Hosting the call today are President and Chief Executive Officer, Jimmy Tallent, Chief Financial Officer, Rex Schuette, and Chief Risk Officer, David Shearrow. United's presentation today includes references to operating earnings and other non-GAAP financial information. United has provided a reconciliation of these measures to GAAP in the financial highlights section of the news release and at the end of the investor presentation. Both of these are included on the website at UCBI.com. Copies of today's earnings release and investor presentation for the second 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 statement should be considered in light of risks and uncertainties described on page three of the Company's form 10-K and other information provided by the Company in its filings with the SEC and included on its website. At this time we'll begin the conference call with Jimmy Tallent.

Good morning, everyone, and thank you for joining us as we discuss United Community Banks' key events and results for the second quarter of 2010. First, the financial highlight. Our net operating loss was $59.5 million or $0.66 per share, which included a noncash after tax charge of $30 million relating to the sale of the $103 million in nonperforming assets that we sold to Fletcher International. This charge increased our net operating loss for the quarter by $0.32. Rex will discuss the accounting for this transaction and the resulting pre and after tax charge during today's call. Charge-offs for the second quarter were $61.3 million. At quarter end our allowance for loan losses was 3.57% of loans. The net interest margin was 3.6%, up 11 basis points from the first quarter and up 32 basis points from the second quarter of 2009.

Core pretax, precredit earnings were $29.4 million compared to $26.7 million for the second quarter of '09. For the sixth consecutive quarter we saw encouraging growth in core customer deposits. During the second quarter they increased $94 million or 16% on an annualized basis. Residential construction loans totaled $820 million at quarter end after a decrease of $140 million during the quarter. Compared to a year ago, residential construction loans are down by $495 million and account for 17% of our loans. This compares to 26% at the beginning of 2009. Our nonperforming assets declined 17% from $417 million at the end of the first quarter to $348 million at the end of the second quarter. Now I'm going to ask David to provide more detail on our credit and then Rex will follow with details on our financials. David.

Thank you, Jimmy, and good morning. This quarter we provided $61.5 million dollars for loan losses, down from $75 million in the first quarter. Net charge-offs were $61.3 million in the second quarter compared to $56.7 million last quarter. Nonperforming assets decreased 17% or $69 million from $417 million last quarter to $348 million this quarter. Nonperforming assets included $224 million in nonperforming loans and $124 million in foreclosed properties. We had no accruing loans that were 90 days past due. The ratio of nonperforming assets to total assets was 4.55% compared to 5.32% last quarter. Our 30 to 89 day past due loans were 1.69%, down from 2.17% last quarter. We saw dollar declines in every loan type other than commercial construction and consumer. Commercial real estate showed good improvement, dropping to 1.02% from 2.16% last quarter.

Residential mortgage and home equity saw significant declines as well. The market to sell foreclosed properties to investors and retail buyers was below our expectations in the second quarter. However, we completed the Fletcher transaction in the quarter, which positively impacted our results. In the second quarter we sold $68 million of foreclosed property versus $26 million in the first quarter. In addition, we sold nonperforming notes totaling $70 million in the second quarter compared to $8 million last quarter. Excluding the Fletcher transaction, we sold $35 million of MPAs compared to $34 million last quarter, which represents net cash proceeds. Foreclosed property write-downs and losses on sales totaled $11.2 million compared to $8.1 million last quarter. The foreclosed property write-downs were composed of $5.1 million related to losses on sales and $6.1 million of write-downs on remaining foreclosed property inventory.

Overall, we continued the trend of aggressively recognizing losses. At quarter end foreclosed properties had been written down to 72% of their loan balance at the time the loan was placed on nonaccrual. Nonperforming loans were written down to 70% of their book balance at the time of nonaccrual, which will help expedite asset sales in the future. Let me now provide some detail on our portfolio by segment. First, commercial loans. Our commercial loan portfolio of $2.6 billion has remained relatively flat over the past five quarters. Within our total commercial portfolio, we had $81 million of NPLs, up $8 million from last quarter. Total commercial net charge-offs were $12.1 million for the second quarter compared to $8.3 million last quarter. The rise this quarter was primarily due to increased charge-offs related to commercial real estate.

Our challenges in the commercial portfolio have been disbursed across our footprint in a mixture of loan and property types. There were no significant geographic concentrations this quarter. In the second quarter we completed yet another extensive review of this portfolio including all watch relationships and all past relationships over $750,000. While we continued to experience some negative migration, actual losses have been manageable. Also while CRE losses increased this quarter, we saw declines in both C&I and commercial construction. That said, with 54% of our CRE portfolio being owner occupied, a modest average loan size of $450,000, average loan-to-value of 61% and diversified property type, 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, down $34 million from last quarter and $114 million from a year ago. In this portfolio, we had $53 million of NPLs, down $5 million from last quarter.

Net charge-offs were $6.5 million for the second quarter, up from $4.6 million last quarter. Elevated NPLs and charge-offs in the residential mortgage portfolio are due to continued pressure from unemployment and the markets. Home equity is included within our residential mortgage portfolio. This portfolio, which totaled $360 million, realized a decline in early delinquency this quarter. Net charge-offs were $1.7 million in the second quarter, up from $1.1 million last quarter. Home equity line usage was flat at 63% in the second quarter compared to last quarter. Overall, residential mortgage, early delinquency 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 mortgage has continued to hold up fairly well. Our total residential construction portfolio of $820 million is down $140 million from the first quarter and down $495 million from a year ago.

Looking at credit quality, our residential construction portfolio had $88 million of NPLs and $41.5 million in net charge-offs for the second quarter. NPLs declined $59 million and were positively affected by $43 million of sales to Fletcher. Net charge-offs declined $1.6 million 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 $13.2 million or 21% of the total. The Atlanta MSA represents $183 million of this loan category and breaks down into $60 million in houses under construction and $123 million in dirt loans. The $60 million of houses under construction was down $12 million from the first quarter and consisted of $10 million in pre-sold and $50 million in spec. The $123 million of dirt loans was down $33 million from last quarter and included $52 million in acquisition and development loans, $39 million in finished lots and $32 million in land loans.

It's important to note that approximately $33 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 remains our most stressed portfolio, with $21.3 million in net charge-offs or 35% of the total in the second quarter. However, charge-offs related to this residential construction were down $3 million or 12% compared to the first quarter. North Georgia represents $407 million of this loan category and breaks down into $68 million in houses under construction and $339 million in dirt loans. The $68 million of houses under construction was down $12 million from the first quarter and consisted of $24 million in pre-sold and $44 million in spec. The $339 million of dirt loans was down $41 million from last quarter and included $113 million in acquisition and development loans, $181 million in finished lots and $45 million in land loans.

Looking at our total loan portfolio, we saw an $82 million decrease in our classified loans to $699 million for the second quarter. Residential construction represented 34% and commercial real estate represented 28% of classified loans in the second quarter. Our performing classified loans declined $26 million to $474 million on a linked quarter basis. The improvement was in C&I, commercial real estate and residential construction offset by a slight increase in commercial construction. Accruing TDRs totaled $67 million and increased $2 million from last quarter. At quarter end our allowance for loan losses was $174 million or 3.57% of loans. Our allowance coverage to nonperforming loans was 78% compared to 62% last quarter. Excluding impaired loans with no allocated reserve, our allowance coverage to nonperforming loans was 234% compared with 142% last quarter. Based on recent loss and early delinquency trend and our declining level of classified loans, we do not expect any near-term reserve building.

Looking ahead, we expect to see continued improvement in our credit metrics. Generally, we expect credit losses to decline in the coming quarters, although not necessarily on a straight line. We were disappointed by the uptick in new NPL inflow this past quarter, however, the decline in past dues and classified loans is encouraging. In terms of NPAs, we were pleased with the steep decline this quarter. The decline was primarily driven by the completion of the Fletcher transaction, which allowed us to move off $103 million of our most illiquid NPAs. Going forward, we remain concerned about the difficulty of selling some of the more illiquid land tracts in our non-Atlanta markets, which puts upward pressure on our overall level of NPAs. Fortunately, the Fletcher transaction allowed us to move a significant portion of those NPAs without depleting capital. With that, I'll turn the call over to Rex.

Thank you, David. Before I begin, I want to review the accounting for the NPA sale transaction that was reflected in our financial results for the second quarter and summarized on pages 21 and 22 of the investor presentation package. As we previously disclosed, we sold $103 million of nonperforming assets at our recorded book value on April 30th. As part of the asset sale, we provided Fletcher with a warrant to purchase common stock and an option to purchase $65 million of preferred stock. The assets sold were already recorded at fair value and we had to record the fair value of the equity instruments provided as part of this transaction. The $30 million warrant at $4.25 was valued using the traditional Black Shoals model. However, the option to purchase the preferred stock was more complex and required a Monte Carlo simulation valuation model. There were several parameters around the structure of this transaction.

First the timing of the two-year option to purchase the warrant, the conversion price of $5.25, the exercise of the warrant at $6.02 per share and the duration and volatility of these components. Also liquidity of our stock within certain time periods within Fletcher's limitation on ownership. A very complex transaction to fair value. So we used an independent valuation firm to provide the April 30th fair values of the option to purchase the preferred stock and to assist us with a Black Shoals assumption for valuing the warrant. The fair value of the equity components totaled $39.8 million, which resulted in a noncash credit to capital surplus with a corresponding noncash charge to expense. Also we recorded a $4.5 million noncash charge to expense to adjust the loan interest rate to a market rate of 5.5% and recorded $1 million of closing costs bringing the total pretax expense charge to $45.3 million or $30 million on an after-tax basis and equal to $0.32 per share.

Looking forward, we will have some dilution when equity is issued and the warrants become in the money. Bottom-line, we sold $103 million of our more illiquid, nonperforming assets and recorded a $9.8 million net increase in capital to reflect the fair value of the equity components of this transaction. This was a very complex and unique transaction requiring many assumptions to arrive at the fair value of the equity granted, which resulted in noncash charges and credits that were for the most part offsetting the capital. One could argue that the expense recognized is nonrecurring and should be excluded from our operating loss. However, for conservative purposes we have included the expense in our operating loss, but we have provided separate disclosures to assist you in analyzing the comparative trends and run rates. Now I will turn to our financial performance for the second quarter and several of the schedules that are included in the investor presentation package.

Core earnings on page 23 for the second quarter of 2010 were $29.4 million, up $2.7 million from a year ago and $561,000 from last quarter. The primary drivers of our core earnings growth have been margin expansion and expense controls, including the 10% workforce reduction initiated early last year. Net interest revenue of $61.6 million was up $745,000 from a year ago and up $348,000 from last quarter. For the second quarter our margin was 3.6%, up 11 basis points on a link quarter and up 32 basis points compared to our margin of 3.28% for the second quarter of 2009. The primary drivers of our margin expansion continues to be maintaining our loan pricing while lowering our time deposit pricing. Our margin, however, was again negatively impacted by excess liquidity balances of $214 million on average during the quarter.

We continued to invest this excess liquidity in commercial paper and other short-term funds at a slight negative spread, which reduced our margin by 13 basis points this quarter compared to 18 basis points last quarter. Most of the excess liquidity will run off over the next two quarters as broker deposits mature. On pages 24 and 34, we show our margin trend for the past six quarters and the impact of credit costs that continue to significantly lower our margin, interest revenue and core earnings. Another positive factor impacting our margin was core deposit growth as shown on page 25. Core customer transaction deposits this quarter were up $94 million or 16% on an annualized basis, almost doubling last quarter's growth. The margin improvements in growth and net interest revenue from last quarter and a year ago were significantly offset by the reduction in average loan balances of $162 million and $586 million, as compared to last quarter and the second quarter of 2009 respectively.

This runoff of loan balances continues to dampen our margin and puts pressure on net interest revenue. In fact, if we continue to have the same pace of declining loan balances for the second half of 2010, coupled with the very low reinvestment rates for our securities portfolio, we expect limited improvement at our margin for the balance of 2010. Turning to fee revenue and operating expenses. As noted on page 23, core fee revenue of $11.6 million for the second quarter was basically flat as compared to last quarter and last year. There were a couple of offsetting items noted on the income statement and earnings release. Service charge fees increased $436,000 year-over-year, driven by higher AMT fees related to the increase in transactions and number of customers utilizing the product. Mortgage loan fees of $1.6 million were down $1.2 million from last year due to lower refinancing activities and were up slightly from last quarter.

Other fee revenue of $1.4 million increased $262,000 from a year ago due to the acceleration of deferred gains of $123,000 resulting from the hedge ineffectiveness this quarter for a certain portion of our prime loan portfolio. Looking at core operating expenses on page 23, they totaled $43.8 million for the second quarter and were down $2.4 million from a year ago and flat with the first quarter of 2010. The primary items that were excluded from core operating expenses were foreclosed property costs and the $45.3 million expense charge on the sale of nonperforming assets that I commented on earlier. Page 26 of the investor package reconciles core earnings to our net operating loss from continued operations. The details of operating expenses are noted on the income statement and commented on in our earnings release.

Here are some of the key items. Salary and employee benefit costs of $23.6 million declined $2.7 million from the second quarter of 2009 due in part to the 10% reduction in workforce implemented at the end of the first quarter of 2009. Professional fees of $2.2 million for the second quarter were down $1 million from a year ago. The decline was primarily due to last year's higher legal costs for credit and workout issues, as well as higher fees paid to Brintech Consulting last year relating to the completion of our expense savings project "We are United". FDIC assessments of $3.6 million for the second quarter are down $3.2 million from last year, primarily due to the special industrywide FDIC assessment that we paid in the second quarter of 2009.

Credit-related foreclosed property costs are excluded from our core operating expenses and were $14.5 million for the second quarter 2010 compared to $5.7 million last year and $10.8 million for the second quarter of 2009. Foreclosed property costs this quarter included $11.2 million for write-downs on foreclosed properties and $3.3 million for maintenance, property taxes and other related costs as shown on page 26 of the investor presentation. Turning to capital, as shown on page 28, our regulatory tier one ratio was 11.1% at the end of the quarter, the leverage ratio was 7.7% and total risk based ratio was 13.8%. And our tangible common equity to assets was 6.9%. With that I'll turn the call back over to Jimmy.

Thanks, Rex. I want to close today with a few additional comments on our credit quality capital and our franchise. First, credit. We made reasonably good progress this quarter on credit quality and we believe our visibility continues to improve in that area. We reduced nonperforming assets as well as our past used and performing classified loans. Our most difficult segment continues to be residential construction. We have, however, made good strides in reducing exposure and potential future losses. In fact, our residential construction portfolio has decreased from its peak of $2 billion to $820 million this quarter. The commercial and residential mortgage portfolio has experienced some stress, as you would expect. However, the losses have been much lower in comparison to residential construction and recent delinquency trends are encouraging.

Again, after our most recent in-depth review of all of our past and watch loans, I continue to remain optimistic about the future performance of our commercial portfolio. As I have said earlier this year, our goal is to get through the credit issues in 2010 and be profitable in early 2011. The Fletcher transaction helps fast forward us to that goal by taking the $103 million of our more illiquid assets off the books. Second would be capital. At quarter end all of our capital ratios remained solid and as part of the Fletcher transaction, we have committed to issue up to $65 million in preferred stock, which will further strengthen our capital ratios when that occurs. However, that issuance will also fully utilize the remaining capacity under our existing shelf registration. We do not believe that it's prudent to operate without an active shelf.

So in response we plan to file a shelf registration statement with the SEC later this quarter. That shelf should be identical to what we had in place previously. Finally, our business franchise is solid. Core transaction deposits increased nearly $100 million for the second quarter. They have increased by $350 million since early 2009, when our highly successful United Express Incentive Program began. This growth and better loan and deposit pricing helped increase our net interest margin by 11 basis points this quarter and we've held net interest revenue above $60 million over the past six quarters despite the attrition in the loan portfolio. Our net new loan growth for the quarter was a little over $100 million. The growth was evenly split between Atlanta and the north Georgia markets and over half of it was in commercial and small business.

We continue to attribute the core business growth to confidence in the United franchise. We have had our share of challenges, but the marketplace disruption brings opportunities to a strong bank with strong service, as we are and as we emphasize in our marketing. The message is being heard and acted on with a growing core deposit business that I have described. The result is that our core pretax, precredit earnings increased 10% this quarter compared to the second quarter of '09 to $29.4 million. That is pleasing given the environment of the past year and especially considering that average loans declined by $586 million when compared to a year ago. However, I will add going forward further reductions in the loan portfolio will begin to put more pressure on our margin and net interest revenue.

In closing, I want to thank our bankers for their unwavering focus on customer service. Just to emphasize the point, our customer satisfaction scores continue to be at record levels. In April J.D. Power and Associates ranked us number one in the southeast for customer satisfaction and third highest in the entire country. This recognition is very humbling to our team and reminds us we are in the people business,a powerful reminder of the intangibles that distinguish our Company. With that I'd like to ask our operator to open the call to your questions.

(Operator instructions). Our first question comes from Adam Barkstrom from Sterne Agee. Your question, please.

Hey, guys, good morning.

Good morning, Adam.

Hi, Rex, wondering if you could comment, I know you've commented on this in -- or I'm sorry, Jimmy, you've commented on this in the past, but I'm just curious, I mean, certainly the Fletcher transaction, big step for you guys, you guys continue to be very aggressive on cleaning up the problem asset portfolio. Just curious how that perhaps has either changed or has it changed maybe your attitude going forward looking at potential FDIC deals, if you could comment on that.

Sure, Adam. To begin with, we do have an interest, a strong interest in the FDIC transactions, but I would, again, have to say we've got a stronger interest in what we are doing today. We did make a good, solid step with the Fletcher transaction in removing those NPAs. We would still like to see some credit improvement and certainly getting back to breakeven and profitability is very important. I do believe the transactions of failed banks will be occurring for some time. I think throughout 2011 is just my personal view, but I would also say this too, Adam, that we are finding really what I believe is the best opportunities that I can remember within the markets where we are seeing failed banks today.

Our core deposit, just new customer acquisitions, is probably as strong as it's ever been and these are customers that have banked at a particular bank for decades, the bank is closed, a lot of the folks they have known go away and it's just been the inflection point to move those folks over or at least look for other options. The other piece of that too is on the loan side. Of course we have done the failed bank transactions and have a little bit of understanding of how that works, but a bank acquiring a failed bank sometimes has a tendency to look at all loan customers as being in the same category in order to protect the guarantee. That's not always the case. There's a lot of good borrowers still in those banks. We are seeing lots of those opportunities. So that may be a little more than you wanted, but that's kind of our overall global view.

Jimmy, maybe add to that, I mean, what do you mean a bank looking at a failed bank considers all the customers? I mean, how would the customer -- I guess how would the customer know that and then how does that provide an opportunity for you?

Well, many times it's -- when you get the transaction and in order to protect the guarantee, brings about the lack of flexibility. It becomes a very regimented process that's very foreign to good customers and then they start wondering, well, maybe I need to look at another bank and as a result of that, just creates an opportunity.

That makes sense. One follow-up and I'll hop off. BB&T highlighted on their call that in this quarter in particular they saw or they, yes, they saw a significant increase in the number of potential bidders enter the market, a firming up of the market. I'm talking about for problem asset disposition. Did you guys kind of witness that same trend a little bit this quarter or can you speak to that?

I'd like to get the name of those bidders.

I guess apparently not, huh?

I would say this. Adam, we have been what we feel is very realistic, very aggressive in the Atlanta market. I'm very proud of where we are at. I'm very sad about the equity and destruction for our shareholders, but coming down from a $1 billion to, in our legacy portfolio, $150 million, half of that is in our criticized assets, we're pretty much through with Atlanta. We still have some losses. What is still interesting to me is the number of large foreclosures that I see going on today whereby we have resolved that credit over a year ago, but that's just what I view. We are challenged when we get out of the non-Atlanta markets in finding the investor poo. It's much more difficult. The foreclosures in non-Atlanta are generally much smaller, more granular, so you have more pieces to deal with. Unfortunately we don't have the larger credits as we did in Atlanta, but as far as the buyers in non-Atlanta to me they are still very challenged.

Great, thank you.

Thank you. Our next question comes from the line of Christopher Marinac from FIG Partners. Your question please.

Thanks. Jimmy, just, I guess, to continue on that thought. So would that portend that the level of inflows in the next couple quarters doesn't necessarily look a whole lot different than this last quarter?

I'm sorry, Chris. Would you please repeat that.

If you look at the level of inflows for the second quarter, given what you were just saying about -- from Adams' question, would that mean that there isn't necessarily any change meaningfully in the pace of inflows, lower?

No and I want David to address that, Chris, but I personally believe we will see inflows decline reasonably sharply in Q3, but -- .

Yes, Chris, let me address that. We -- on the inflow question, we did see a little bit of an uptick this quarter. We had declines prior to that in the prior two quarters. What I see right now looking out in front of us based on what's happened in delinquency, based on our performing classified loan decline, I'm anticipating that inflow in the third quarter will certainly be below second quarter and I'm expecting likely it will be below first quarter levels. And then looking out beyond that, I think that will continue. I think the other thing that's really important is that the content of the inflow and there's a shift that has occurred. Of course the bad news is there's -- we see more commercial challenges than we did a year ago, but the good news part of that equation is that the loss content on this commercial, the commercial NPLs is a fraction of what we experienced in residential construction and all of that is going to lead ultimately to lower credit costs, we believe, going forward.

Okay. And then, Jimmy, I guess, just as a separate question, I mean, given the Fletcher transaction now being behind you, what's the likelihood of doing something similar to that in the future? Is that still a possibility?

Chris, we have got basically an open view on anything that we can do to help this Company get back to profitability sooner rather than later and within that we wanted to be in the most or in the least dilutive fashion for our shareholders. So we will continue to look at different avenues, whether we would do another Fletcher transaction, again, we just have a very open view, because I think in these difficult times and challenging times, I think one has to look outside the box.

Great. Thanks for the color, guys.

Thank you. Our next question comes from the line of Jennifer Demba from SunTrust. Your question please.

Thank you. Jimmy, your loan portfolio and a lot of other banks' loan portfolios have declined a lot in the last four to eight quarters. Does this make you rethink your expense base given it looks like loan demand may be weak for a while for the industry?

Yes, Jennifer, it makes us really revisit every component and certainly given our composition today, even though that has dropped significantly on the real estate, the residential construction, we are continuously looking at that. In our work force reduction a year and a half ago certainly included a number of lenders that were specialized in that area. I do believe the significant decline in our book will, I think, that pace will start slowing and here I'm hopeful by the end of two more quarters and the end of this year we should be getting at a pace that would be level. I will say this. We -- in the redesign of our Atlanta markets and the line of business and the traction that I believe we continue to make there, just any uptick in the economy will pay tremendous benefits. I was looking last night, our commercial officers last month made 2100 calls and that's about what they did in Q1. So, we are out with the shoe leather on the pavement, we're knocking on doors, looking for opportunities and I think at the end of the day that will resolve itself as we move through 2010 and probably a little more clarity about the expense base.

Okay, thank you.

Thank you. (Operator Instructions) Our next question comes from the line of Jefferson Harralson from KBW. Your question, please.

Hi, thanks. The -- I want to ask you guys about the $65 million in preferred. Can you just talk about the circumstances under which it can be -- in which Fletcher draws it down or not, I seem to remember there's a timeframe and there's, I think, there's like a payment, they have to make a payment if they don't buy it by a certain, take it down by a certain time. Is this $65 million a certainty and what's the, I don't know, the framework under which it comes in and the timing?

Yes, Jefferson, Rex here. The $65 million has a couple of components to it. One, as you mentioned, there is a time period and a commitment after one year, there would be a 5% penalty for the un-drawdown amount that they have not taken at that time and again at the end of the second year the same, an additional 5%. In our discussions with Fletcher, I think their intent would be not to incur that penalty. They do not want to expend over $3 million to leave that option open for another year probably, but I think in general terms the preferred stock has the rate at LIBOR plus 4%, which is probably a little below market but again still attractive in this market when you look at rates or thinking of that being a one or two year or three year hold before they convert down the road. So I think their intent I think would be to look at pulling that down, Jefferson, before the first year is what I would expect. And we are in discussions with them from time to time keeping in touch on that or when their likelihood would be to pull a portion of it or some of it down.

It sounds like maybe since it's bull market maybe they just wait almost a full year and then drawdown right before the interest payment, the penalty, but it sounds like you may, you think they may come a little sooner.

I think they look at it as a shareholder, also, Jefferson. So I think they would look at it what's in the best interest for us besides in their best interest from a timing standpoint. So, depending on capital needs or whatever, I think they look at it from that standpoint also.

All right, thanks and I hope I didn't miss it, but did you guys talk about Reg O at all and what kind of implications it might have for the second half of the year in 2011.

Jefferson, I'll let Rex give you the numbers on that. Obviously everyone is very focused. We've had a number of initiatives in getting folks to opt in from mailings. I think we have had three mailings for the entire customer base. Currently we have narrowed that base down to anyone that has had an NFF charge within the last 18 months and that's had other mailings. Now we are doing -- every bank is calling their customer and we are making really good progress and having a high percentage of opt-in. So we have what I believe is a very solid effort. Rex, would you like to share the numbers?

Yes, with respect to the product itself, Jefferson, there's two products, one is just NSF, which isn't impacted by that, just straight forward NSF return fees. The other is providing a credit facility, which we call "Bounce Safe", our product, and it's about $2.5 million a quarter. We do see potential for some runoff of that number. Again, if you look at it from last year, it totaled about $10 million, a little over $10 million, it's on the same pace, up about the same pace as last year as well as the preceding three quarters also. So we think there could be some runoff of that number. August 15th is the timetable officially of opting in. There's some portion of that, probably in the $1 million to $2 million range, that we could lose on an annual basis where we can't charge non-customers where they use the service indirectly. So we do predict some of that coming down, but again as Jimmy indicated, we are getting probably, I think, over about an 86% positive response when we go to the customer of having them sign in. So we are having very good success and continuing on the calling efforts.

All right. And lastly can I just ask you about how or what the process is for a DTA review at year-end or for 2011 or just kind of what the process is. You used to look at the DTA and when's the next kind of look at it.

Sure. We look at that each quarter and again in anticipation if we see a net loss for the quarter, we are talking with our auditors as well as our tax consultants and have done that for this quarter also. Our DTA for the quarter is $127 million. That again is fully reserved again, so we are offset in our regulatory capital ratios, but we do not have any valuation allowance and again in our discussions recently both our tax preparers as well as with our auditors, they are all in agreement that a valuation allowance isn't needed. And again at this time we don't foresee it. I think we have positive factors that far outweigh the negative factors that are out there of moving through the credit cycle, again, having strong core earnings in growth in core earnings, our customer base is expanding, so I think we feel very comfortable that more likely than not that we are going to utilize this DTA.

Right. Thanks for the comments.

Thank you. Our next question comes from the line of Al Savastano from Macquarie. Your question, please.

Good morning guys. How are you? Good morning.

Good morning.

I just wanted to check with you in terms of the foreclosure cost in a loan loss provision. Do you think they will remain kind of elevated for the next couple of quarters and then pull off materially and I'm basing that based on your comments how you're say you want to be profitable in early 2011.

Yes, Al, this is David. I think we at this point as far as, I guess, the first kind of overriding issue is in terms of like would you, would we pull down the reserve, so to speak, I really don't see that occurring this year, only in that we are fairly cautious. We have obviously been through a very difficult time. We have done a lot to build our reserves and so I just don't see that occurring this year.

On the other hand, if you look at what's happening on the mix of our NPLs and where the future losses will come from, the shift I mentioned earlier on an earlier question where we are more commercial content, the losses there are much lower and at some point in time that is going to drive some kind of a release of reserve, but I would expect that to happen, if it happens it will happen in 2011 and then as far as just the general reserve levels looking out the rest of this year, I think what we have communicated is that generally we think our -- the reserving and our charge-offs are going to remain elevated. General direction, I think, is probably going to be down, although there could be some lumpiness in there depending on what could come in on a given quarter. But looking out say over the next four quarters the general direction is clearly down. Hope that's enough color to help you.

Okay. Thank you.

Thank you. I'm not showing any further questions at this time. I would like to turn the program back to management for any further remarks.

Thank you operator. We just, once again, like to say thank you for your interest in United. Thank you for being on the call this morning and we look forward to talking with you at the end of Q3. If you have any additional questions, any follow-up, please don't hesitate to call David, Rex or myself. Thanks and have a great day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.