United Community Banks Inc (UCBIO) 2010 Q3 法說會逐字稿

Good morning, and welcome to United Community's Banks' Third 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 core pre-tax, pre-credit earnings, operating earnings and other non-GAAP financial information.

United has provided a reconciliation of these measures to GAAP in the financial highlight section of the news release, and at the end of the investor presentation. Both of these are included on their website at www.ucbi.com. Copies of today's earnings release and investor presentation for the third 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 key events and results for United Community Banks during the third quarter. First, the financial highlights. Our net operating loss from continuing operations was $25.8 million, or $0.30 per diluted share. Now this excludes a non-cash charge of $210.6 million, or $2.22 per diluted share for goodwill impairment. Rex will discuss this charge in detail during the call.

Charge-offs for the third quarter were $50 million. At quarter end, our allowance for loan losses was 3.67% of loans. The net interest margin was 3.57%, down three basis points from the second quarter, but up 18 basis points from the third quarter of 2009.

Our core pre-tax, pre-credit earnings were $27.5 million, and that compares to $31.7 million for the third quarter of 2009 and $29.4 million for last quarter. For the seventh consecutive quarter, we saw encouraging growth in core customer deposits. During the third quarter, they increased $67 million or 11% on an annualized basis, which brings total year-to-date growth to $214 million or 12% annualized.

Residential construction loans totaled $764 million at quarter end, down $56 million during the quarter and down $421 million from a year ago. Residential construction loans now account for 16% of total loans. This compares to 26% at the beginning of 2009.

Our non-performing assets declined from $415 million a year ago to $348 million, a decrease of 16% and the lowest level since the first quarter of 2009. And NPAs were down $500,000 from 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 $50.5 million for loan losses, down from $61.5 million in the second quarter. Net charge-offs were $50 million in the third quarter, compared to $61.3 million last quarter.

Non-performing assets decreased $500,000 from $348.2 million last quarter to $347.7 million this quarter. Non-performing assets included $218 million in non-performing loans, and $130 million in foreclosed properties. The net inflow of new NPLs was $120 million this quarter, down 23% from $155 million last quarter. We had no accruing loans that were 90 days past due.

The ratio of non-performing assets to total assets was 4.96%, compared to 4.55% last quarter, due to a decline in total assets. Our performing classified loans increased $76 million to $550 million on a linked quarter basis. The increases were concentrated in residential construction, commercial real estate and commercial construction, offset by a decrease in residential mortgage. Accruing TDRs totaled $50 million and decreased $17 million from last quarter.

We saw strong improvement in our past dues this quarter. Our 30 to 89-day past due loans were 1.24%, down from 1.69% last quarter. We saw declines in every loan type other than home equity, which increased from 0.72% to 0.93%. The market to sell foreclosed properties to investors and retail buyers remained challenging in the third quarter.

We sold $40.2 million of foreclosed property this quarter versus $35 million in the second quarter, excluding the Fletcher transaction. In addition, we sold non-performing notes, totaling $2.4 million in the third quarter, compared to none last quarter, excluding Fletcher.

Foreclosed property write-downs and losses on sales totaled $14 million, compared to $11 million last quarter. The foreclosed property write-downs were composed of $7 million related to losses on sales, $7 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 66% of their loan balance at the time the loan was placed on non-accrual. Nonperforming loans were written down to 70% of their book balance at the time of non-accrual.

Segmenting the residential construction portion of our NPLs and foreclosed properties, these balances have been written down to 58% and 61%, respectively, of their original loan balance. These aggressive write-downs will help expedite asset sales in the future.

Let me now provide some detail on our portfolio by segment. First, commercial loans, our total commercial loan portfolio of $2.5 billion has remained relatively flat over the past five quarters. Within our total commercial portfolio, we had $79 million of NPLs, down $2 million from last quarter. Total commercial net charge-offs were $17.4 million for the third quarter, compared to $12.1 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 generally been dispersed across our footprint in a mixture of loan and property types. This quarter, our charge-offs were more geographically concentrated in north Georgia and Atlanta. In the third quarter, we completed yet another extensive review of this portfolio, including all watched relationships and all past relationships over $750,000.

We continue to experience some negative migration in this portfolio and CRE charge-offs have increased. However, losses remain well below those experienced in our residential construction portfolio. In summary, with 56% of our CRE portfolio being owner-occupied, a modest average loan size of $451,000 and diversified property types, we remain well-positioned to work through any challenges in this portion of our portfolio.

Moving on to our residential mortgage portfolio, we ended the quarter at $1.3 billion, down $40 million from last quarter and $145 million from a year ago. In this portfolio, we have $58 million of NPLs, up $5 million from last quarter. Net charge-offs were $7.7 million for the third quarter, up from $6.5 million last quarter. Elevated NPLs and charge-offs in the residential mortgage portfolio are due to continued pressure from unemployment in our markets.

It's important to note that, to date, we have not experienced any systematic documentation issues in our residential mortgage portfolio, which might impede the foreclosure process, nor do we expect any issues, since these loans were originated and closed in our local banks.

Home equity is included within our residential mortgage portfolio. This portfolio, which totaled $340 million, declined $20 million from last quarter. Net charge-offs were $2.2 million in the third quarter, up from $1.7 million last quarter. Home equity line usage declined 1% to 62% in the third quarter, compared to last quarter.

Overall, residential mortgage early delinquency was down from last quarter. However, we expect high unemployment to continue to impact this portfolio throughout the remainder of 2010. Nevertheless, given the economic environment, residential mortgages continue to hold up fairly well.

Our total residential construction portfolio of $763 million is down $56 million from the second quarter and down $421 million from a year ago. Looking at credit quality, our residential construction portfolio had $79 million of NPLs and $23.9 million in net charge-offs for the third quarter. NPLs declined $9 million and net charge-offs declined $17.6 million from the second quarter. The 42% drop in residential construction charge-offs this quarter was particularly encouraging, since this portfolio has been our most troubled over the past two years.

The Atlanta MSA represents $159 million of this loan category and breaks down into 53 million in houses under construction and $106 million in dirt loans. The $53 million of houses under construction was down $5 million from the second quarter and consisted of $11 million in pre-sold and $42 million in spec. The $106 million of dirt loans was down $5 million from last quarter and included $34 million in acquisition and development loans, $45 million in finished lots and $27 million in land loans.

North Georgia residential construction remained our most stressed portfolio, with $14.5 million in net charge-offs or 29% of the total in the third quarter. However, north Georgia residential construction charge-offs were down $6.8 million, or 32% compared to the second quarter. North Georgia represents $368 million of this loan category and breaks down into $60 million in houses under construction and $308 million in dirt loans.

The $60 million of houses under construction was down $8 million from the second quarter and consisted of $22 million in pre-sold and $38 million in spec. The $308 million of dirt loans was down $32 million from last quarter, and it includes $98 million in acquisition and development loans, $168 million in finished lots and $42 million in land loans.

At quarter end, our allowance for loan losses was $175 million or 3.67% of loans. Our allowance coverage to non-performing loans was 80%, compared to 78% last quarter. Excluding impaired loans with no allocated reserve, our allowance coverage to non-performing loans was 257% compared with 234% last quarter. And based on recent loss and early delinquency trends, we do not expect any near term reserve building.

Looking ahead, we expect to see continued improvement in our credit metrics. Generally, we expect charge-offs to decline in the coming quarters, although not necessarily on a straight line. We were disappointed by the uptick in classified loans this quarter, however the decline in past dues and new NPL inflow and charge-offs is encouraging. With that, I'll turn the call over to Rex.

Thank you, David. Before I begin, I wanted to briefly comment on the goodwill impairment charge that was reflected in our financial results for the third quarter. With the drop in our stock price during the quarter, we found it necessary to conduct an interim goodwill impairment assessment.

We engaged the same firm that had conducted our previous assessments. They employed the same valuation techniques, with one key assumption change. In the earlier test, they had considered our stock price decline to be temporary and therefore did not include it in their valuation assumptions.

In this test, they believe that the extended period of time over which our stock has been trading below tangible book value made the assumption no longer appropriate. With our stock price trading below 50% of tangible book value, we concluded that the entire remaining balance of goodwill was impaired. And in the third quarter, we wrote off our remaining balance.

Because the non-cash goodwill impairment charge is a special advance, we have excluded it from the presentation of our operating earnings as shown on the summary page of our earnings release and in the related pages of our investor presentation package.

Now, I'll turn to our financial performance for the third quarter and several other schedules that are included in the investor presentation package. Core earnings, on Page 21, for the third quarter of 2010 was $27.5 million down $4.3 million from a year ago and $2 million from the last quarter. Most of the decrease from both prior periods occurred in that interest revenue.

The decrease was primarily due to lower levels of earning assets as loans and security balances declined, more than offsetting the improvement in net interest margin from a year ago. Net interest revenue of $60 million was down $3 million from a year ago, and down $1.6 million from last quarter.

For the third quarter, our margin was 3.57%, down three basis points on a linked quarter and up 18 basis points compared to our margin of 3.39% for the third quarter of 2009. The primary drivers of our margin expansion from a year ago continues to be maintaining our loan pricing while lowering our time deposit pricing. Our margin, however, was again negatively impacted by excess liquidity of $246 million on average during the 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 19 basis points this quarter, compared to 13 basis points last quarter. On Pages 22 and 23, we show our margin trend for the past five quarters and the impact of credit costs that continue to significantly lower our margin, net interest revenue and core earnings.

Another positive factor impacting our margin was core deposit growth as shown on Page 24. Core customer transaction deposits this quarter were up $68 million, or 11% on an annualized basis, which brings year-to-date growth to $214 million or 12% annualized. The lower levels of net interest revenue from last quarter and a year ago were significantly influenced by the reduction in average loan balances of $115 million and $669 million, as compared to the last quarter and third quarter of 2009, respectively.

This run-off of loan balances continues to dampen our margin and puts pressure on net interest revenue. In fact, with loan balances continuing to decline for the remainder of 2010, coupled with very low reinvestment rates for our securities portfolio and our desire to continue to maintain higher levels of liquidity, we expect limited improvement in our margin for the balance of 2010.

Turning to fee revenue and operating expenses. As noted on Page 21, core fee revenue of $12.6 million for the second quarter, was up from both last year and last quarter. Higher mortgage fees and gains from ineffectiveness of cash flow hedges were the primary drivers of the increase for both periods.

Service charge fees were down $490,000 year-over-year, due to lower fees associated with United's courtesy overdraft services, resulting from the recent change to Regulation E, requiring customers to opt-in before using these services. The lower level of overdraft fees was partially offset by higher ATM fees related to the increase in transactions and the number of customers utilizing the product. Our opt-in rates for overdraft services have been very favorable, at 84%, leading us to conclude that the negative impact going forward will be minimal.

Mortgage loan fees of $2.1 million were up $239,000 from last year, due to slightly higher refinancing activities. They were also up $470,000 from last quarter. Other fee revenue of $2.2 million increased $339,000 from a year ago, due to the acceleration of deferred gains of $327,000. The recognition of these gains resulted from the hedge ineffectiveness this quarter for a certain portion of our prime loan portfolio. Looking at core operating expenses on Page 21, they totaled $45.2 million for the third quarter and were up $1.6 million from a year ago and up $1.4 million from the second quarter of 2010.

The primary items that were excluded from core operating expenses were foreclosed property costs, goodwill impairment charges and the $45.3 million charge on the sale of non-performing assets to Fletcher in the second quarter. Page 25 of the investor package reconciles core earnings to our net operating loss from continuing 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. Salaries and employee benefit costs of $24.9 million increased $1 million from the third quarter of 2009, about half of which was due to an increase in the value of our deferred compensation plan liability. The rest of the increase was due to higher mortgage and brokerage commissions caused by an increase in revenue in both those categories. Higher incentives related to our core deposit programs and a reduction in the level of deferred direct loan origination costs.

FDIC assessments of $3.3 million for the third quarter were up $455,000 from last year, due to an increase in our assessment rate from a year ago. Credit-related foreclosed property costs are excluded from our core expenses and were $19.8 million for the third quarter of 2010, compared to $7.9 million for the third quarter of 2009 and $14.5 million for the second quarter of 2010. Foreclosed property costs this quarter included $14.2 million for write-downs of foreclosed properties and $5.6 million for maintenance, property taxes and other related costs, as shown on Page 25 of the investor presentation.

Other operating expenses increased $759,000 from the third quarter of 2009, primarily due to higher collection costs and appraisal fees. Other expense categories were down from a year ago, due to the successful efforts to control discretionary spending.

Turning to capital, as shown on Page 27, our regulatory Tier 1 risk-based capital ratio was 10.4% at the end of the quarter, the leverage ratio was 7.3% and total risk-based ratio was 13.0%. And our tangible common equity to assets was 6.8% and to risk-weighted assets was 9.6%. For the bank, our regulatory ratios were as follows. Tier 1 risk-based capital ratio was 11.4%, leverage ratio was 7.9% and total risk-based ratio was 13.2%. With that, I'll turn the call back over to Jimmy.

Thanks, Rex. I want to close with some perspective on where we are at the end of the third quarter of 2010. I'll start with the credit quality first. Although non-performing assets and net charge-offs are too high, they are at their lowest level since the first quarter of 2009.

The provision for loan loss is at the lowest it has been since the second quarter of 2008. Our allowance-to-loans ratio is the highest it has been. Residential construction loans now total $764 million or 16% of total loans, compared to nearly $2 billion or 35% at their peak. Residential construction net charge-offs dropped 42% in the third quarter. In summary, although we are still disappointed in our credit and have a lot of work to do, we believe our credit metrics have improved and expect them to continue to improve going forward.

In terms of our core business, over the past seven quarters, core customer deposits have increased by $472 million. That is the strongest growth in our company's history. Our loan pricing has stabilized, deposit costs have decreased and our net interest margin is 18 basis points above where it was a year ago.

New lending during the third quarter totaled $85 million, primarily commercial and small business loans in the metropolitan Atlanta and north Georgia markets. Though new loan growth is tepid, at best, and with the intent to dramatically reduce our residential A&D portfolio, our total loans are down $391 million year-to-date, though it's worth noting that new loans closed during the past three quarters totaled $242 million.

Despite significant attrition in the loan portfolio, net interest revenue has surpassed $60 million over each of the past six quarters. We are, however, seeing pressure on net interest revenue due to the lowered investment rates and level of earning assets. Most of our controllable expenses are either flat or down compared to a year ago. However, foreclosure and other real estate related costs will continue to be high for a couple of quarters.

Our net operating loss in the third quarter was the lowest it has been since the second quarter of 2009. Obviously, the numbers are not where we want them to be, but they are moving in the right direction.

In terms of capital, all of our regulatory capital ratios remain significantly above the well capitalized ratios, but the 7.94% leverage ratio at the bank level is slightly below the regulators' higher target of 8%. We continue to assess our capital plans and have many alternatives available to strengthen our capital position.

I cannot conclude without recognizing all of our bankers. They continue to produce customer satisfaction scores that lead this industry. They are truly remarkable. With that, I'll ask the operator to open the call to your questions.

Thank you. (Operator Instructions). And our first question comes from Kevin Fitzsimmons with Sandler O'Neill.

Good morning, everyone.

Good morning, Kevin.

Good morning.

Just a couple questions -- first if David, you were talking too fast for me to keep up with you, if you could give the accruing TDRs, what they were this quarter and versus last quarter. I think you did give that. I just didn't get to copy it. And then secondly, Jimmy, could you just expand a little bit on what range of alternatives might -- that you think are available to you in terms of boosting that capital position?

And then what kind of timeframe you think you're working on and then if you can just give us an update on where the Fletcher transaction stands in terms of is that just where the stock price is? Is that something that is just not to count on for a while or where do you guys consider that? Thanks.

Kevin, on the TDR question, this is David, we ended the quarter with accruing TDRs of $50 million and that's down $17 million on a linked quarter basis.

Great. Thanks.

Kevin, in regards to the capital, as we have noted a number of times, our commitment to maintain strong levels of capital, particularly during the periods of time that we're not making money. We feel we've got a number of options available to us that we continuously explore. In looking at the overall capital, I think we have to look at a mixture of a number of things as we are formulating this.

Certainly the core earnings, the amount of credit losses, particularly through 2011, and that is one of the themes that I think is important that we're dissecting the NPAs, particularly when you look at the residential construction and how we have been able to reduce that significantly. For example, a year ago, over 2/3 of that NPA bucket was residential construction issues.

Today, it's less than a third, as well as just the mix of classified assets have changed certainly from the residential piece that's been the most toxic down to more of a commercial, which saying all that, we believe does not have the loss content that we've experienced in the prior year.

Other components of that is the timing of credit losses and the disposal of our NPAs. Certainly we will want to be in dialogue with our regulators as we have continuously done for years, but capital alternatives such as a common, a preferred or asset sales with capital and as well as looking at incremental capital as we work through the credit cycle.

The bottom line is maintaining strong capital is very important to us, to the regulators, to our shareholders. Our goal has not changed. We will continue to accelerate our credit issues to get back to breakeven profitability sooner than later. And really all the decisions that we're making and will make is based on restoring the shareholder value short and long term.

In regards to the Fletcher, at this point, I don't have an absolute answer to that. Certainly with where their strike price is versus where the share price is today is a distinct difference. But they're -- certainly that is an option, but I'm not positive today as to their action or what their action would be. As far as the overall capital plan, all of that will be formalized by the end of this quarter or certainly during the fourth quarter.

Okay. Thank you.

Our next question comes from the line of Brett Scheiner with FBR Capital Market.

Hey, guys.

Morning, Brett.

Morning.

Can you describe the company's policy around the age of appraisals of NPLs and watch list your special mention loans?

If you're referring to valuation, we get updated appraisals on any -- once a credit becomes classified, we would get an updated appraisal. Of course, we get updated appraisals when we renew loans. In terms of our ORE, we re-appraise our ORE at a minimum of once a year.

In fact, that's why, for example, in the current quarter where we had ORE write-downs of $14 million, $7 million of that related to losses on sales, $7 million was really write-down on foreclosed properties still in inventory. And that really is a function of just the re-appraisal process. Hopefully that answers your question.

Yes. That's very helpful. And one other question just to clarify, you had $17 million of TDRs coming off in the quarter. Can you describe how that occurs, what that looked like?

The vast majority of that would be a function of them either going non-accrual and/or foreclosed. We didn't have a lot in the way of just payoffs, for example, and really had none that were upgraded out of TDR status to pass.

And the TDR process in general you're going I/O or is there principal forgiveness? How are you handling that?

It could be a variety of functions. It could have a reduced interest rate. If it's a -- say it's a commercial retail center that's lost some tenants and they ask for a principal abatement for six months or something, we might do that and allow them to go interest-only for a period. So it really would be a mix of either of those.

Okay, great. Thanks very much.

You're welcome.

Our next question comes from the line of Jennifer Demba from SunTrust.

Thanks. Good morning. David, you said that it was more challenging this quarter to dispose of problem assets. Can you kind of give us some more color around there? And are you seeing increasing severities?

I mean maybe -- I think what I intended to communicate was it remained challenging rather than it was more challenging. I don't know that it's any more important than the last.

Okay.

But it has been -- it's a very challenging market out there, particularly as we continue to liquidate out properties that are in non-metro areas. It's just it's a little bit more tricky, particularly on the land side. The loss severities this quarter were a bit worse than last quarter. I think last quarter our realization on assets was right at about 57% on the dollar and I think this quarter we're right about $0.52 on the dollar.

On the other hand, Jennifer, I would tell you that while it was a very challenging quarter, we're early -- and we're early in this quarter, obviously -- there are some -- we have a fair amount of activity early and here in the fourth quarter that's been encouraging. And I'll just give you one example of that is this past weekend, we had a development that we sold through an event sale, an auction-type sale. We sold out all 55 lots we were marketing over the weekend and got 12 backup contracts. The lots were sold at what we felt were very handsome retail prices. And in fact, the retail sale out exceeded our loan balance.

This was real encouraging because these north Georgia properties just been more difficult and we've been selling them one by one. So we felt good about the method that we used and the success of this particular one. And by the way, this development was in Blairsville, so you get a picture of where it was at.

We also have a lot of interest continuing this quarter in the commercial side, which is encouraging. And we've got here, early in the quarter, quite a bit of commercial product already either under contract or at the LOI stage. So my sense is that we're going to see better numbers on the sales front this quarter, but ultimately closings are closings, and so we'll have to work through the quarter.

Okay. Thanks a lot.

Welcome.

Our next question comes from the line of Christopher Marinac from FIG Partners.

Thanks, David. I was going to ask you about the OREO experience. But I guess just to delve into that further, given the OREO losses and write-downs kind of combined, that $14.2 million number, if you have a better experience percentage-wise, would that portend into that direct figure coming down relatively, not necessarily absolute dollars, but just on a relative from what you're moving?

I'm not positive I understand the question, Chris, and whether I can answer. Can you repeat it, real quickly?

Okay. If we look at the cost that you're incurring on OREO sales --

Yes.

-- as well as OREO write-downs and combine their $14 million and change this quarter --

Yes.

-- if you're suggesting that the 52% might be a little bit better, if that portent -- if that is true, would we see a different number in that, those OREO write-downs going in, so therefore would that be a number that would fluctuate, based on that percentage?

I'll try and answer that best way I understand what you're asking. But the way I'm understanding your question is a little bit of a outlook on the ORE expense line. Is that it?

Correct.

Okay. What I would tell you is because I think the appraisals track, they follow, they lag what's going on in market activity, we're continuing to see appraised values coming in lower than what they were a year ago. So to the degree we're having to re-appraise inventory, we're going to continue to see some level of write down I think over the next couple quarters.

My expectation, Chris, is that the ORE expense write-down and loss on sales here over the next couple quarters is going to remain elevated. And I think to think of it in terms of what we just experienced this quarter and possibly even a little bit higher, depending on the volume that we move in the next quarter.

Okay.

Is that -- hopefully, that's helpful.

Okay. No, that's great. And then, Rex, I had a question just to update us on the DTA and part of my question was since it's already backed out for regulatory capital purposes, is that influencing, at all, the valuation decision on any allowance?

Probably the second part. I don't think it's impacting anything on the valuation with respect to our provision or allowance. It's about probably of a total -- we have $147 million DTA at quarter end. $110 million of that, Chris, is related to NOL carry-forwards. And again, the $147 million compared to $127 million last quarter.

In the context of the DTA, obviously we look at that and our auditors look at it every quarter we performed. And there is a very small valuation allowance of that, about $5 million related to short-term tax credits that we believe cannot be utilized in the next two or three years. We performed very thorough tests, again, as we do each quarter, but I think that's elevating as we go through this process to assure ourselves that as we look at both the forward earnings using a stress model and using very conservative assumptions that we're able to utilize this tax benefit.

Even though we have 20 years out there for utilization, we don't expect or would want to have a policy that we would look at it going out to that length of time. And again, in fact, as we look at it, very conservative assumptions in our testing of the NOL and the DTA that we'd be able to utilize it well into the first half of that period.

And again, we look at that further with respect to in looking at it under a GAAP basis, look at further with respect to the attributes, both positive and negative, around the position of the DTA. And again, we feel, again, with both the utilization of the DTA as well as the other positive factors that are underneath that with respect to core earnings both trend short and long term, our core deposit franchise, our growth in core deposits. There are a lot of positive attributes that outweigh the negative attributes as we assess this and go through completion on it.

We review this with our auditors each quarter. They, again, looked at the tests and our documentation and concluded with our same position that we feel very comfortable that we can more likely than not utilize the tax benefit well within the time period and is supported from an SEC standpoint. We feel that, again, unless there's any significant assumptions as we look forward in our stress model and looking out beyond that, that could have an impact on it. But from what we see, again, and we take a stress model into consideration as we look at the valuation.

So we feel very comfortable with the position at quarter end. Again, it's sensitive, obviously, but we feel comfortable that we have supported it from a GAAP standpoint and our auditors have concluded the same.

And again, for regulatory capital purposes, the entire thing is removed?

Yes. For regulatory, the DTA is excluded completely from our Tier 1 capital ratio, so from safety and soundness as they look at it, it's a non-issue. But it is excluded from all the capital ratios, the regulatory capital ratios.

Great, Rex. Thank you for the color there. Appreciate it.

You're welcome.

Our next question comes from Jeff Davis with Guggenheim Partners.

Good morning.

Morning, Jeff.

Morning, Jeff.

The pre-tax pre-provision, excluding the other real estate expense has been fairly constant the last four or five quarters, around $30 million, plus or minus. With charge-offs down to $50 million this quarter, is it reasonable to assume that PPO, the charge-offs might fall below that adjusted PPO line, maybe in the second half of 2011?

David, do you want to comment on that, or I think --

I think, Jeff, as we look at forward into 2011, and David commented, I think, on this earlier, that we do expect a downward trend with seeing the positive credit trends in this quarter as well as measured from the prior quarter also. So I think we do see that number dropping down and our outlook would indicate that in the second half we still look at profitability in '11, whether in the third or fourth quarter, but late in '11 based upon our current scenarios.

Okay. Okay. All right. And then secondly, if you said it, I missed it. Did the parent company in terms of the 797 leverage ratio at the bank level, did the parent contribute any cash or assets to the bank this quarter?

No. There was none contributed this quarter.

Thank you very much.

I'm showing no further questions in the queue.

Well, let me say first, thank you for being on the call this morning, and we appreciate your continued interest. We look forward to talking with you at the end of the fourth quarter and hope everyone has a great day.

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