United Community Banks Inc (UCBIO) 2011 Q1 法說會逐字稿

Good morning and welcome to United Community Banks First Quarter 2011 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. For each of these non-GAAP financial measures, United has provided a reconciliation 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 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 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 4 of the Company's Form 10-K and other information provided by the Company in its filings with the SEC and included on its website.

Now one final note, while we are located in North Georgia, our call center is in Northern Virginia. That's one of the areas being hit by heavy storms right now, so there is a chance that this call may be interrupted. If so, please bear with us and we will do our best to make sure that we can reconnect and continue the call.

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 first quarter.

As you are already aware, we had a very eventful first quarter with the completion of our capital raise and the announcement of our accelerated problem asset disposition plan, which included the bulk sale of $267 million of performing classified and non-performing loans that closed on April the 18th. Both of these transactions had significant impact on our first quarter performance, and therefore, I would like to take a few minutes to talk about them before we begin the discussion of our first quarter financial results.

For the past two conference calls, we have stated that we had been working diligently on our capital plan. While we have been seeing steady improvement in our credit quality metrics, it had become abundantly clear that improvement was not coming fast enough. Our classified asset ratio, a key metric followed by our regulators that measures classified assets in relation to Tier 1 capital and our allowance for loan losses, was simply not improving quickly enough.

After careful consideration, we concluded that the only way to make any meaningful progress on the classified asset ratio was to raise capital and to de-risk our balance sheet. Our key objectives were to raise additional capital sufficient to meet our defensive and offensive needs, to accomplish a meaningful reduction in classified assets, to strengthen and de-risk the balance sheet, to address concern over any potential write-down of our deferred tax assets, to show a clear and attainable path back to sustainable profitability within a relatively short period of time, and place ourselves in a position to take advantage of opportunities to grow our business.

After reviewing our options, we determined the best way to accomplish our objectives was to sell a significant amount of stock to institutional investors in a private equity transaction. This approach allowed us to recapitalize the Company at a favorable price-to-market and to use the new capital to divest of a substantial amount of problem assets. The combination of the new capital and the de-risked balance sheet allows us to meet these established objectives and to restore compliance with our MOU and resume dividend and interest payments on preferred stock and our trust preferred securities.

On March the 30th, we completed the capital transaction that raised $380 million in new capital at a price of $1.90 per share. On April 18 we completed the bulk sale of performing classified and non-performing loans. The loans sold had been written down in the first quarter to the expected proceeds, and I'm happy to report that the final sales price actually came in a little higher than anticipated, and we expect to book a recovery of approximately $6 million in the second quarter.

Now I would like to briefly cover the financial highlights of the first quarter, and then I'll ask David and Rex to share some comments before I return with some concluding remarks and open the call for your questions.

Our net operating loss was $142 million or $1.57 per share. The net operating loss reflects the loss on loans transferred to the held-for-sale category and the aggressive write-down of OREO to accelerate disposition. Charge-offs for the first quarter were $232 million of which $186 million related to the bulk loan sale.

As a result of the capital raise and the asset disposition plan, our risk profile has dramatically improved. At quarter-end, our non-accrual loans totaled $83.8 million, down from $179 million last quarter. Our foreclosed properties totaled $54.4 million, down from $142 million last quarter. Total NPAs are $138 million or 3.25% of loans and foreclosed properties and 1.73% of total assets.

Also, at March 31, 2011, our foreclosed properties were carried at 30% of their original unpaid principal balance. And our allowance for loan losses was 3.17% at quarter-end. David will provide more information on credit risk profile and loan portfolio a little later in the call.

The net interest margin was 3.3%, down 28 basis points from the fourth quarter and down 19 basis points from the first quarter of 2010. There were a number of factors that temporarily lowered our margin that Rex will discuss in a few minutes.

For the ninth consecutive quarter, we saw solid growth in core customer transaction deposits. In the first quarter they increased $89 million or 13% on an annualized basis. We also added $83.1 million in new loan commitments of which $52.6 million was funded in the first quarter. Now I'm going to ask David to provide more detail on credit, and Rex will follow with details on our financials. David?

Thank you, Jimmy, and good morning. As Jim stated, our financial results were significantly affected by the de-risking of our balance sheet due to bulk loan sale. During the quarter, we moved $267 million of performing and non-performing classified loans to loans held-for-sale which resulted in an additional $186 million of charge-offs. Subsequent to quarter-end, these loans were sold for more than our carry balance, and we expect a recovery in the second quarter.

As I continue my comments, I want to refer you to several additional schedules in our press release this quarter which provide additional detail on our asset disposition plan and the related charge-offs.

This quarter we provided $190 million for loan losses, up from $47.8 million in the fourth quarter. Net operating charge-offs were $231.6 million in the first quarter compared to $47.7 million last quarter. Non-performing assets decreased $183 million from $321 million last quarter to $138 million this quarter. Non-performing assets included $84 million of non-performing loans and $54 million in foreclosed properties.

The net inflow of new NPLs was $54.7 million this quarter, down 32% from $81 million last quarter. And we had no accruing loans that were past due 90 days.

The ratio of non-performing assets to total assets was 1.73% compared to 4.32% last quarter. Our performing classified loans decreased $189 million or 37% to $323 million on a linked quarter basis. The decreases were on all loan categories but concentrated in residential construction, commercial construction and commercial real estate.

The decline in performing classified loans was primarily due to the transfer of $166 million of loans into held-for-sale. In addition, we also had a reduction in new downgrades to classified and an increase in loans being upgraded to pass. Accruing TDRs totaled $43 million and decreased $42 million from last quarter. Most of the reduction in TDRs was due to the transfer into loans held-for-sale. Our 30-to-89-day past-due loans were flat at 1.26% compared to last quarter.

The disposition of non-performing loans and foreclosed properties to investors and retail buyers improved in the first quarter. We sold $56.6 million of foreclosed properties this quarter versus $41.5 million in the fourth quarter. In addition, we sold non-performing notes totaling $20.9 million in the first quarter. Foreclosed property write-downs and losses on sales totaled $60.6 million compared to $16 million last quarter. The foreclosed property write-downs were composed of $12 million related to losses on sales and $48.6 million of write-downs on the remaining foreclosed property inventory.

The increased write-downs this quarter were part of our non-performing asset disposition strategy and our desire to quickly liquidate the remaining balance of our NPAs. At quarter-end foreclosed properties had been written down to 30% of their original unpaid principal balance. Non-performing loans were written down to 57% of their unpaid principal balance. Segmenting the residential construction portions of our non-performing loans and foreclosed properties, these balances have been written down to 42% and 24% respectively of their unpaid principal balance.

Let me now provide some detail on the portfolio by segment. First, commercial loans. Our total commercial portfolio of $2.3 billion declined from $2.5 billion last quarter. Within our total commercial portfolio, we had $26.5 million of NPLs, down $45.4 million from last quarter. Total commercial net charge-offs were $102 million for the first quarter compared to $13.3 million last quarter. The loss on loans held-for-sale represented $91 million of the total this quarter.

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 concentrated in land-related commercial construction and commercial real estate.

In the first quarter we completed yet another extensive review of this portfolio, including all watch relationships and all pass relationships over $500,000. While we continue to experience some negative migration in this portfolio, the pace has slowed. We are also seeing improvements in a number of relationships which are the leading deposit migration in the portfolio.

In conclusion, given the portfolio de-risking and improving credit migration, 60% of our CRE portfolio being owner occupied, a modest average loan size of $442,000 in diversified property types, we remain well-positioned to work through any remaining challenges in this portion of our portfolio.

Moving to our residential mortgage portfolio, we ended the quarter at $1.2 billion, down $92 million from last quarter and $203 million from a year ago. In this portfolio we had $24 million of NPLs, down $27 million from last quarter. Net charge-offs were $36 million for the first quarter, up from $9 million last quarter.

Home equity is included within our residential mortgage portfolio. This portfolio which totaled $315.5 million, declined $19.5 million from last quarter. Home equity line issues remained flat at 62% in the first quarter compared to last quarter.

Overall, residential mortgage early delinquency declined to 1.55% in the first quarter from 2.16% last quarter. While we expect high unemployment to continue to impact this portfolio in 2011, we are encouraged by improving credit trends in the remaining portfolio.

Our total residential construction portfolio of $551 million is down $144 million from the fourth quarter and down $408 million from a year ago. The residential construction portfolio breaks down into $413 million in Dirt loans, $89 million in spec houses and $48 million in pre-sold houses.

Looking at credit quality, our residential construction portfolio had $32 million of NPLs and $92 million in net charge-offs for the first quarter. NPLs declined $22 million from the fourth quarter.

At quarter-end our allowance for loan losses was $133 million or 3.17% of loans. Our allowance coverage to non-performing loans was 159% compared to 98% last quarter. Excluding impaired loans with no allocated reserve, our allowance coverage to non-performing loans was 379% compared with 274% last quarter. Given the significant de-risking of our loan portfolio, we believe our reserve is strong and we do not expect any near-term reserve building.

In summary, while we still have some credit challenges ahead, we've made some significant progress this quarter through the de-risking of the loan portfolio. We were encouraged by the significant decline in classified loans, new NPL inflow and our past-dues have held steady. Our NPAs have been written down to levels which should allow for rapid liquidation without further losses. Looking ahead, we expect to see a significant reduction in credit costs and further reductions in our level of problem assets. And with that, I'll turn the call over to Rex.

Thank you, David, and good morning, everyone. My comments today will refer to pages in our Investor presentation package and tables included in our earnings release.

We added two tables this quarter within the Credit Quality section of the earnings release. The first table breaks down the total net charge-offs for the first quarter between the asset disposition plan and other net charge-offs. The second table provides more detail on the bulk loan sale, both by loan category and region as well as charge-offs. Additionally, we expanded the earnings release discussions on net charge-offs and foreclosed properties associated with the accelerated asset disposition plan.

Now highlights for the first quarter. Core pre-tax, pre-credit earnings for the first quarter of 2011, as shown in Page 22 of the Investor package, were $23.4 million, down $5.5 million from a year ago and down $4.2 million from last quarter. About half of the decline from both periods was due to lower net interest revenue with the balance due to higher operating expenses. The decline in interest revenue was due primarily to lower average loan balances while the increase in core expenses for both periods was primarily due to higher FDIC assessments related to an increase in our assessment rate and higher levels of insured deposits.

Our core net interest margin for the first quarter was 3.41% which was 11 basis points higher than the reported margin of 3.30%. Our reported net interest margin and net interest revenue included a $2 million charge for interest reversals that were taken on performing classified loans that were included in the bulk sale transaction. Those one-time interest reversals were excluded from our core margin and earnings.

For run-rate purposes, our core net interest margin was down 8 basis points from a year ago and down 17 basis points from last quarter due to carrying abnormally high levels of excess liquidity. This excess liquidity averaged $635 million in the first quarter of 2011 compared with $429 million during the fourth quarter of 2010. We continue to invest this excess liquidity in commercial paper and other short-term funds at a slightly negative spread. The impact of increasing earning assets for this excess liquidity at a slight negative spread reduced our margin by 49 basis points in the first quarter, 30 basis points last quarter and 18 basis points a year ago.

On Pages 23 and 24, we show our margin trends for the past five quarters and the impact of credit cost. The 46 basis point impact of credit cost continues to significantly lower our margin, net interest revenue and core earnings but at a declining level for the past four quarters. This decline is primarily due to the improvement in credit quality as noted by David earlier.

For the balance of 2011, we expect to see a rise in net interest margin from our core level of 3.41% in Q1 to the 3.8% range for the fourth quarter. The rise in margin relates to the expected reduction in credit costs that will drive lower interest reversals and carrying cost. The other factor positively impacting margin will be the reduction in excess liquidity balances through a decline in brokered and time deposits.

Another positive factor impacting our margin continues to be core deposit growth as shown on Page 25. Core customer transaction deposits this quarter were up $89 million which is in addition to the growth of $550 million over the past two years. The true benefit of these higher core deposits will not be fully realized until short-term rates begin to rise.

Turning to fee revenue and operating expenses, as noted on Page 26, core fee revenue of $11.8 million for the first quarter was about level with last quarter and a year ago. Excluded from core fee revenue are security gains of $55,000 and $61,000 in the first quarters of 2011 and 2010 respectively, and gains from the sale of low income housing tax credits of $682,000 in the fourth quarter of 2010.

Service charge fees of $6.7 million for the first quarter were down $728,000 year-over-year and down $319,000 from last quarter due to lower fees associated with our 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 number of customers utilizing the product. Our opt-in rates for overdraft services have been very favorable at 84% leading us to conclude that, excluding any future legislation, the negative impact going forward will be minimal.

Mortgage loan fees of $1.5 million were about equal to a year ago but down $374,000 from last quarter. Refinancing activities in the first quarter fell below the fourth quarter level resulting in a decrease in mortgage fees.

Other fee revenue of $2.9 million for the first quarter was up $780,000 from a year ago and $817,000 from last quarter. The positive variances were mostly due to the ineffectiveness of terminated cash flow hedges that resulted in accelerated recognition of deferred gains in all three quarters. In the first quarter of 2011, hedging effectiveness resulted in the acceleration of $1.3 million in deferred gains from terminated positions compared with $400,000 and $610,000 for the fourth and first quarters of 2010 respectively.

Looking at core operating expenses on Page 27, they totaled $46.8 million for the first quarter and were up $2.5 million from last quarter and $2.8 million from a year ago. The primary items excluded from the first quarter's core operating expenses were $64.9 million of foreclosed property costs. $2.6 million of property taxes paid on the loans that were included in the bulk loan sale and $1 million of professional fees incurred related to the loan sale and capital transactions.

Page 28 of the Investor package reconciles core earnings to our net operating losses from continuing operations for each period. The details of operating expenses are noted on the income statement and commented on in our earnings release.

Here are some of the other key items. Salaries and employee benefit costs of $24.9 million increased $564,00 from the first quarter of 2010 and $1.1 million from the fourth quarter of 2010. Most of the increase from a year ago was due to higher group medical insurance costs while the increase from the fourth quarter was primarily due to higher payroll taxes and other benefit costs which are disproportionately higher in the first quarter of the year.

FDIC assessments of $5.4 million for the first quarter were up $1.8 million from a year ago and $2.1 million from last quarter, both variances due to an increase in our assessment rate and higher average balances for insured deposits. With the change in the second quarter to a new FDIC assessment formula based on assets, we expect our assessments to decline by over $1 million beginning in Q2. This should decline further with any improvements to our assessment rate.

Credit-related foreclosed property costs are excluded from our core expenses. They totaled $64.9 million for the first quarter of 2011 compared to $10.8 million for the first quarter of 2010 and $20.6 million for the fourth quarter of 2010. Foreclosed property costs this quarter included $48.6 million for write-downs, $12 million for net losses on sales and $4.3 million for maintenance, property taxes and other related costs as shown on Page 28 of the Investor package.

Other core expenses of $4.6 million were about equal to a year ago and last quarter. Again, other core expenses exclude the $2.6 million of property taxes paid on loans included in the bulk sale. With the exception of occupancy expense and professional fees, all other expense categories were flat or down from a year ago due to the ongoing efforts to control discretionary spending.

Turning to capital as shown on page 30, our regulatory bank capital ratios were as follows. Tier 1 risk based capital was 12.95%, leverage ratio was 8.34%, and total risk based capital was 14.73%. For the holding company our regulatory capital ratios were as follows. Tier 1 risk based capital was 7.81%, leverage ratio was 5.05% and total risk based capital was 15.63%. Also, our tangible common equity to assets ratio was 5.51%.

The holding company's regulatory capital ratios have limitations that exclude $257 million of our recently issued cumulative preferred stock from an inclusion in our Tier 1 capital at quarter-end. This preferred stock is mandatorily convertible to common stock upon approval by the shareholders in June. Assuming conversion of this cumulative preferred stock to common at quarter-end, the holding company's pro forma Tier 1 risk based capital ratio and leverage ratio would have been 13.23% and 8.54% respectively.

Also, our average tangible common equity to asset ratio would have been 6.3%. If you use period-end numbers, since the stock is issued on March 30th, the ratio would have been 8.2%.

As part of the capital raise transaction, we held $70 million of proceeds at our holding company which is well in excess of our cash flow needs for the next three years. On April 14 we received approval from the Federal Reserve Bank to pay all of the April 2011 interest and dividend payments, including prior deferred loans, for the trust preferred securities and our TARP preferred stock. We have formally requested approval from our regulators to resume the remainder of the second quarter's interest and dividend payments for the trust preferred securities and the dividends on our TARP preferred stock. With that, I'll turn the call back to Jimmy.

Thanks, Rex. We made great progress in the first quarter in reducing our credit risk and placing United securely on the path to profitability. With the completion of the capital raise and the bulk loan sale, our strategic position has greatly improved. Our remaining non-performing loans and OREO are conservatively valued.

With high unemployment and real estate prices just beginning to stabilize, we know that challenges remain. But we are in a very strong position to deal with them. Looking forward, our primary focus will be on restoring value to our shareholders. With our outstanding customer satisfaction scores and positive momentum in growing core transaction deposits, we have a very solid foundation to build on.

I will discuss both of these in a moment, but first, I want to comment on another action we are proposing to our shareholders. Upon shareholder approval of the conversion of our newly issued mandatory convertible preferred stock, our common shares outstanding will approach 290 million shares. We believe that is simply too many shares for a company our size, and we also believe that it will keep our share price in a range below the minimum threshold required by many investors.

We therefore are asking our shareholders to approve a one-for-five reverse stock split at the shareholders meeting in June. We believe the split will return our stock price to a more desirable trading range, acceptable to a wide variety of investors which will improve liquidity and the potential value of our shareholders' investments.

When I think of challenges we have faced over the past three years, it would have been easy for our people to have taken their eyes off the ball. But the opposite has happened. We have more customers today than we did three years ago. And our core deposit growth is more than $600 million. Our customer satisfaction was clearly validated by J.D. Power which named United Community Bank a 2010 customer service champion, one of 40 companies across all industries so honored in the US. And we are the only bank on the list.

In the midst of the worst economy in memory, our bankers did an outstanding job of increasing customers and core deposits adding 8,100 new core deposit accounts and 17,600 new services during the first quarter. The increase in new accounts were reflected in the balances which increased by $88.9 million or 13% annualized over the fourth quarter of 2010.

While the challenging economy has made good lending opportunities difficult to find, our lenders are working hard to let our existing as well as potential customers know that we want their business. And we're seeing positive momentum develop in our pipeline and closings as a result.

One last thing I want to mention is a recent appointment of Peter Raskind, former CEO of National City Bank to our Board of Directors. Peter brings a wealth of experience to our board, and I'm very excited to have him on our team.

In closing, with the first quarter's actions you may be wondering, now what? We have several initiatives planned but these are immediate. First, finish the job of credit; second is to continue to grow our retail and business core deposit base; third, add experienced bankers with portfolios within our Metro markets. This provides solid opportunities for our organic growth.

We're also revisiting our expense base. We are implementing margin improvement initiatives. We are exploring revenue enhancement opportunities. And we want to place ourselves in a position to participate in the consolidation. With that, I'll ask the operator to open the call to your questions.

(Operator Instructions)

Our first question comes from Kevin Fitzsimmons at Sandler O'Neill.

Good morning, guys.

Good morning, Kevin.

I just - Rex, maybe just to start with the margin outlook, I just want to make sure I understand it right. The 11 basis points difference, the 3.30% versus the 3.41%, that's this reversal related to the bulk sale. So really, we should start with the 3.41 and you're saying that should go up toward the 3.80% by the end of the year, or does that just mean the core margin is getting up there? In other words, you're still going to have cost of carry-on on some non-performers.

Kevin, as I commented on earlier, we expect the margin to move from the 3.41%, which again was 11 basis points reversal being one-time, up to the 3.80%, primarily in three areas. One, as I mentioned, the credit cost of 46 basis points, we do expect that to come down and that will affect us even starting in Q2 with less interest reversals and less carry.

The liquidity, which again was 49 basis points, will start to come down in Q2. We have a little over $200 million of brokered deposits, plus another $100 million, in addition $100 million of CDs that we expect to roll off in Q2. That will help to pull down the liquidity impact on the margin.

The other impact that's going to impact about equally is the reduction of our interest cost. Late in first quarter, again, with the capital raise nearing completion, we put in place reductions in both our core deposit pricing, lowering it anywhere from 15 to 30 basis points. That has an immediate impact; some of that impact actually in Q1, the balance of it in Q2.

And additionally, we lowered our CD pricing by about 40 basis points from 1.15, coming in at about 75 basis points. That has a positive impact as, again, CDs reprice. So we expect it to move somewhat up steadily over the next three quarters to that range, Kevin.

Okay. Thank you. Just a quick follow-up, Jimmy, you mentioned desire over time to return to the consolidation phase that's going on in the industry. It obviously seems like a positive development that the Fed has already given you guys approval to start repaying TARP dividends and TARP payments.

Assuming you return to profitability as you guys have said you expect next quarter, and - what other kind of timeline or milestones do you think lie ahead before getting to that point of being eligible and getting to participate in that? Thanks.

Kevin, really what our focus is right now is to get back to profitability. We feel confident of where the - migration should be, in regards to the loan portfolio, it would be our hope and desire that sometime in the near future that we would be allowed to participate. I don't have a timeline nor have we been given one.

Okay. Great. Thanks, guys.

Our next question comes from Jennifer Demba with Suntrust Robinson.

Thank you. Good morning. I was wondering how the tornadoes this week impacted your markets, first of all.

Jennifer, yesterday and last night of course over in the Floyd County in the Rome market, we did have some damage there on a couple of locations, nothing that I would consider major. Cave Spring actually had one earlier in the day yesterday. A little bit of damage there in Cleveland, Tennessee, but fortunately, no one, none of the family members of United Community Bank had any injuries. But other than that, we did miss the major part of the damage though there are areas that are just devastated within the markets.

Okay. Kevin actually hit on a question I was going to ask about a timeline for when you thought you might be able to participate in the consolidation. But you also hit on a couple of areas, hiring, revisiting the expense base and looking at margin expansion opportunities. Can you give us a little more detail there, if you can?

Sure. We have said for some time, Jennifer, that we want to continue to build a stronger commercial team. And when I say stronger, I'm talking about enlarging it, particularly in the Metro markets - Atlanta, Savannah, Knoxville, Ashville because certainly, the lending opportunities in some of the more rural traditional markets will be certainly less than we have seen for, in my opinion, for some time.

We have been fortunate over the years to attract a lot of very good bankers. We are in that process now; in fact, we're bringing one on tomorrow. There are some bankers that have been in the business a long time, has worked with some of the larger banks that likes our business model whereby they can give very good individual service to the customer, but yet the scalability of product lines, those kind of things of a much larger base.

So that's really attractive. We want to capitalize on that. Again, we're talking to a number of people, and we plan on expanding that over the next few quarters.

In regards to the expense base, margin and so forth, we are talking with all of our bank presidents, have been over the last week and a half and that's ongoing whereby we're in essence just reestablishing 2011 budgets and getting a real good view of 2012. We're basically trying to assign what we believe would be a profitability number that each one needs to achieve individually versus where they are. They may achieve this through expense base reductions, margin improvements, fee income; so there's a multitude of things that they can do within each bank. That project will be finalized here in the next two weeks and ongoing.

So that's just a little bit of flavor of what we're doing.

Okay. And my final question is for David. I missed this I know when you were talking, but can you repeat the classified, total classified assets number now? How much of that is performing?

Yes. The performing classified is $323 million, and you can see that in our Investor package; and then, $84 million is the non-performing loan.

Okay. Thank you.

Welcome.

Our next question comes from Christopher Marinac with FIG Partners.

Hey, guys.

Good morning, Chris.

Just want to drill down on Jenny's question on expenses for a second. So the press release mentioned $51 million as kind of a number here, but that still includes some professional expenses, FDIC fees; that may change. And so, is there a better number that we should be thinking about just for now, and then, obviously, that will evolve over time relative to the revenue stream?

Chris, that would be part of it. Our current run-rate is probably about $21 million in FDIC expenses. And again, we expect that to drop down to an annual run-rate of $15 million or so beginning in Q2. And again, we think that will come down further as we go through our reviews with the regulators.

Okay. And then, would professional fees also be changing?

Professional fees, we expect that will come down later this year. Again, I think focused on less credit-related activities since we sold off a significant portion of these performing (inaudible) possibly could roll into non-performing and require more work. So we do see that coming down in both Q2 and Q3 going forward. Again, there were some one-time fees in that line I mentioned earlier, but additionally, some additional costs in that line that will not be on a run-rate basis.

Okay. Great. Can you clarify, Rex, I guess what happens with the DTA for regulatory capital purposes? I mean, you know, there's been this gap between the TCE and the Tier 1 common. Is that going to change over time or that actually will start to change in the second quarter?

That will start to change fairly quickly. Again, our DTA which we have now in the balance sheet, we broke that out separately for you, $266 million, up about $99 million from last quarter. But we feel even probably in a better position, looking at it right now, again, with the capital raise and de-risking the balance sheet, and again, returning to profitability beginning in Q2, that I think we're in a much stronger position to validate the reasonableness of our DTA and no allowance needed.

And with that, as far as the regulators, we're allowed to look forward four quarters with respect to our forecast and reduce the DTA on a current basis looking forward now that we look to be profitable. So we are reducing our DTA adjustment with respect to the regulatory capital starting in Q1 [even], down slightly.

Okay. Great. And then just one last one I guess for David, which would just be what is the balance of loans you want to sell this quarter, second quarter? I want to separate that from your ongoing sales efforts that I'm sure will be incurring in addition to what you've already pledged to sell with the capital raise.

Well, clearly, we want to remove the remaining balance of the OREO as best we can. We believe we have got $0.30 on the unpaid principal balance. We're in a good position to accelerate to the balance of that; that's $54 million on that.

On the loan side of the non-performers, about 25% of those are still performing. So I don't think you'd see us move on those. And we're not - we don't envision doing any kind of bulk transaction this quarter on the balance of the call it $60 million of non-performers that aren't performing. We will continue to work through this; some of that will go through foreclosure activity. We may cut some deals on a one-off basis, but I couldn't give you a macro number on the NPL piece.

Okay. Great. Thanks for the call, guys. I appreciate it.

Our next question comes from Jeff Davis with Guggenheim Partners.

Thank you. My question was covered.

And our next question comes from Jefferson Harralson with KBW.

Hey, thanks, guys.

Hey, Jefferson.

David, I want to ask you a question on the performing loan sale. It seems like you have a pretty high net charge-off rate, higher than the NPLs or the OREOs. Is this simply because they haven't been written down yet? By my estimation it was $119 million of net charge-offs on $166 million of sales.

Yes. Yes, that's right. The NPL piece, those are loans that already received charge-off in the prior quarter. As it relates to the loan package itself, it was in the bulk sale itself. It was all loans, and the way the pricing mechanism worked, it was a bid against unpaid principal balance. And so, obviously, the non-performers that received pretty good charge-offs would appear to have lower charge-off rates this quarter. But all in all, it was the same across the board on all those loans.

All right. And do you guys still have a held-for-sale, loan in the held-for-sale bucket? I don't see it here.

No. Well, it was at quarter-end, but it's now closed post-quarter-end. And so, next quarter you'll see it cleared out. We closed on the 18th.

Okay. Can you just talk about the flows into and out of potential problem loans? It looks like that you had a good experience there if you started with $512 million, ended with $323 million and sold $156 million. It looks like net of the sale it improved by $23 million. Is there anything else that - am I thinking about that right, or is there anything that --?

Well, we're seeing, you know, there's still some in-migration, new in-migrations into the performing classified status, but we're seeing that in migration decline quarter by quarter. If you look, just for example, what was downgraded from pass into classified status, we had a little less than $54 million this past quarter. That compares to $74 million in the fourth quarter and a $157 million in the third quarter of '10.

So it is ratcheting down. At the same time, we're continuing to see more upgrade out of classified status back up into our watch or pass category. So it's both of those things are helping us. There's still an inflow in terms of - to performing classified but declining.

Okay. And should I think about that the same way as the overall inflow? The $54 million is still a decently high number, but should that come down [certainly] next quarter or decently next quarter? How would you describe the improvement we should see next quarter?

Yes. Well, what I would tell you is, clearly, we expect the continued decline on the NPL inflow. It will definitely be less than what we experienced. I think - I'm not ready to give an absolute number on that, but I do believe it will be down and should be down fairly well from this past quarter.

Okay. Thanks a lot, guys.

And I'm not showing any further questions at this time.

Well, thank you for being on the call today. And thank you for your interest in United Community Banks. We look forward to talking with you next quarter. Again, anyone that needs questions answered by Rex, David and I, please feel free to call today.

Thanks, again, and hope you have a great day.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect.