United Community Banks Inc (UCBIO) 2011 Q2 法說會逐字稿

Good morning and welcome to United Community Banks Second Quarter Conference Call. Hosting our call today are President and Chief Executive Officer, Jimmy Tallent; Chief Financial Officer, Rex Schuette; and Chief Risk Officer, David Shearrow.

United's presentation today includes references to 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 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 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 four 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. The first thing is I'm sure you notice from our press release is that the second quarter was profitable that has been a long time coming and is the result of a very hard work of everyone at United Community Banks. Another notable event of the second quarter was the completion of a one-for-five reverse stock split. All of the numbers we will be talking about this morning including references to prior periods have been adjusted to reflect the reverse split.

During the second quarter, we received shareholder approval to convert all of the preferred stock we issued in the first quarter into common stock and that conversion was effective on June 20. With the de-risking of our balance sheet, the completion of our capital plan, the reverse stock split and a profitable quarter behind us, we've completed a number of the components that made up our overall goal for 2011. Clearly, we still have work to do.

I'm going to briefly cover the financial highlights of the second quarter and then I will ask David and Rex to share some comments before I return with some concluding remarks and open the call for your questions.

Our net income for the quarter was $7.6 million, or $0.08 per diluted share. Net charge-offs for the second quarter were $16.5 million. At quarter end, non-accruals loans continued their declining trend to $71.1 million, down from $83.8 million at last quarter end. As expected with our accelerated Problem Asset Disposition Plan, foreclosed properties were down and totaled $47.6 million, compared with $54.4 million last quarter.

Total NPAs were $119 million, that represents 2.8% of loans in foreclosed properties and 1.6% of total assets. Also at June 30, our foreclosed properties of $47.6 million [were cared] at 33% of their original unpaid principal balance. Our allowance for loan losses at quarter end was 3.07% of loans. The net interest margin was 3.41%, up 11 basis points from the first quarter and down 19 basis points from the second quarter of 2010. Excess liquidity continues to constrain our margin.

For the tenth consecutive quarter, we saw solid growth in core customer transaction deposits. They increased $69 million from the first quarter, or 10% on a annualized basis. Also in the second quarter, we added $136 million in new loan commitments, $105 million of which were funded at quarter end. All of our capital ratios improved and we expect that trend to continue as we remove excess liquidity from our balance sheet and grow capital with retained earnings.

We reported a tangible common equity to tangible asset ratio of $4.79 for the second quarter, because that ratio is calculated with average equity and average assets, the timing of the conversion of our preferred stock late in the quarter significantly lowered the ratio, using period-end amounts that ratio is 8.92%, which is more indicative of our capital strength.

With excess liquidity and assets continuing to decline, we expect our leverage ratio to be above 9% in the third quarter. Said another way, our excess liquidity could be deployed into future loan growth which would still not impact this ratio.

As you know, we don't normally talk in detail about our loan relationships, but before I turn the call over to David, I want to address our loans to affiliates of Fletcher International in response to questions by several of you about articles published in the Wall Street Journal and elsewhere in regards to Fletcher.

In the second quarter of 2010, we sell non-performing commercial loans, residential mortgage loans, and OREO at our book value to several of Fletcher's affiliates. The original unpaid principal balance was $149 million, that had been written down to our book value of $103 million at the time the assets were sold. In connection with the asset sale, we loaned the purchasers 80% of the purchase price and they paid the remaining 20% in cash or $20.6 million. In addition, the borrowers also posted an additional $18 million which was deposited into United collateral accounts to service the loans over an estimated three-year time period. These loans represent our largest single loan relationship. These borrowers current on paying principal, interest, and related expenses for the underlining collateral including the requirement to maintain adequate carrying cost in our collateral account at United.

In addition, Fletcher has complied with our security purchase agreement related to its potential purchase of $65 million of preferred stock whereby they recently paid the $3.25 million commitment fee for not funding any of the purchase commitment during the first year of their two-year commitment period. As a result of these and other factors, we consider these loans performing and have not made any specific reserve related to them.

Hopefully this addresses the questions that you may have on this subject. As I'm sure you understand there isn't anything more we can say about these customer relationships. The information provided on this call and in our earnings release and in previous calls and releases (inaudible) provided assuming that our assessment of these loans does not change. Should our assessment of these loan relationships change, we would take appropriate action.

Now I'm going to ask David to provide more detail on credit and then Rex will follow with details on our financials.

Thank you, Jimmy, and good morning. As Jimmy noted, we saw significant improvements in credit this quarter following the de-risking of our balance sheet due to loan sale and OREO write down last quarter and due to continued improvement in our remaining portfolio. This quarter we provided $11 million for loan losses, down from $190 million in the first quarter. Net operating charge-offs were $16.5 million in the second quarter, compared to $231.6 million last quarter. Net charge-offs were positively effected by a $7.3 million recovery from the asset sale in the second quarter.

Non-performing assets decreased $19 million from $138 million last quarter to $119 million this quarter. Non-performing assets included $71 million of non-performing loans and $47.6 million in foreclosed properties. The net inflow of new NPLs was $36 million this quarter, down 34% from $55 million last quarter. We had no accruing loans that were past due in 90 days. The ratio of non-performing assets to total assets was 1.60%, compared to 1.73% last quarter. In addition our performing classified loans decreased $10 million to $313 million on a linked-quarter basis.

Accruing TDRs totaled $41.5 million and decreased $2.5 million from last quarter. We were encouraged by a significant drop in our early delinquency this quarter, which occurred across all loan types. 30 to 89-day past due loans decreased from 1.26% last quarter to 65 basis points this quarter.

The market to sell foreclosed properties remain challenging in the quarter due to a large number of sellers in what remains a very soft market. We sold $28.9 million of foreclosed properties this quarter versus $44.5 million in the first quarter. Foreclosed property expense totaled $1.9 million this quarter, compared to $64.9 million in the first quarter. Included in foreclosed property expense this quarter was $3.2 million in gains on sale and $3.1 million of write downs on remaining foreclosed property inventory.

We continue to aggressively write down our foreclosed properties and NPLs this quarter. At quarter-end foreclosed properties had been written down to 32.6% of their original unpaid principal balance. Non-performing loans were written down to 64.5% of their unpaid principal balance.

Let me now provide some detail on our portfolio by segment. First commercial loans, our total commercial loan portfolio of $2.4 billion slightly increased from $2.3 billion last quarter. Commercial real estate loans were the primary driver of growth in the commercial portfolio this quarter and owner-occupied real estate loans represented 55% of new commercial real estate commitments. Within our total commercial portfolio we had $22.5 million of NPLs, down $4 million from last quarter. Total commercial net charge-offs were $4.7 million for the second quarter, compared to $102 million last quarter. The loss on loans held for sale represented $91 million of the total in the first quarter. Our challenges in the commercial portfolio have generally being dispersed across our footprint in a mixture of loan and property types. This quarter, our charge-offs were more concentrated in commercial real estate.

In the second quarter, we completed yet another extensive review of this portfolio, including all watch relationships and all past relationships over $500,000. While we continued to experience some negative migration in this portfolio the pace continues to slow. We are also seeing improvements in a number of relationships which is leading to some upgrades in the portfolio.

In conclusion, the portfolio de-risking taken in the first quarter had a positive impact on early delinquency and NPL inflow this quarter. Furthermore with 58% of our CRE portfolio being owner occupied, a modest average loan size of $453,000, and diversified property types, we remain well positioned to work through any remaining challenges in this portion of our portfolio.

Moving on to our residential mortgage portfolio, we ended the quarter at $1.17 billion, down $10 million from last quarter and $179 million from a year ago. In this portfolio, we had $25 million of NPLs, up $1 million from last quarter. Net charge-offs were $4.6 million for the second quarter, down from $36 million last quarter. The loss on loans held for sale represented $28.2 million of the total in the first quarter.

Home equity is included within our residential mortgage portfolio. This portfolio, which totaled $308 million, declined $8 million from last quarter. Home equity line usage declined slightly to 61% in the second quarter, compared to 62% last quarter. Overall, residential mortgage early delinquency declined to 1.28% in the second quarter from 1.55% 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 $502 million is down $48 million from the first quarter, and down $318 million from a year ago. The residential construction portfolio breaks down into $385 million in dirt loans, $74 million in spec houses and $43 million in pre-sold houses. Looking at credit quality, our residential construction portfolio had $23 million of NPLs and $6.6 million in net charge-offs for the second quarter. NPLs declined $9 million from the first quarter.

At quarter end our allowance for loan losses was $128 million, or 3% of loans. Our allowance covers to non-performing loans was 180%, compared to 159% last quarter. Excluding the impaired loans with no allocated reserve, our allowance coverage to non-performing loans was 333%, compared with 379% last quarter.

Given the significant de-risking of our loan portfolio and improved credit metrics, we believe our reserve is strong and we do not expect any near-term reserve building. In fact should improving credit trends continue, further reductions in our reserve are likely.

In summary, while we still have some credit challenges ahead, we've made significant progress to the de-risking of the loan portfolio last quarter and generally improving trends in the remaining loan portfolio. We are encouraged by the decline in classified loans, new NPL inflow and past dues this quarter. Furthermore, our NPAs have been written down the levels which should allow for continued liquidation without significant losses.

Looking ahead, we expect to see continued improvement in our credit metrics although not necessarily on a straight line. Total NPAs will continue to be impacted by our ability to liquidate foreclosed properties in this very challenging market and Net charge-off could have some lumpiness.

With that I'll turn the call over to Rex.

Thank you, David, and good morning. Most of my comments today will refer to pages within our investor presentation and tables included in our earnings release. We revised the table this quarter within the credit quality section of the earnings release. That table breaks down the total net charge-offs for the first and second quarters between the asset disposition plan and other net charge-offs. Additionally, we have moved a table we included in the first quarter earnings release to the investor presentation exhibit section. This table provides detail on the bulk loan sale, both by loan categories and regions as well as charge-offs.

Now highlights for the second quarter. Core pre-tax, pre-credit earnings for the second quarter of 2011, as shown on page 22, were $26 million, up $2.6 million from last quarter and down $3.4 million from a year ago, primarily related to the mix of items in fee revenue, lower net interest revenue, and higher operating expenses.

I would comment on each area later, but first is net interest revenue. Net interest revenue was up $540,000 from last quarter due to the second quarter having one additional accrual day. As we noted last quarter, we added back to net interest revenue, the $2 million of interest reversals related to performing loans included in the bulk loan sale. That reversal charge was included in the bulk loan sale charges as shown on page 30. Also loan balances declined only $31 million from last quarter end, the lowest decline between linked quarters for the past three years.

The $2.7 million decrease in net interest revenue from a year ago was primarily due to a $745 million decline in average loan balances along with carrying abnormally high levels of excess liquidity, which was offset partially by lower funding costs. Excess liquidity balances averaged $1.1 billion in the second quarter, compared with $751 million in the first quarter of 2011, which was primarily due to the closing of the $380 million capital transaction at the end of the first quarter. At the end of the second quarter, our excess liquidity declined to $942 million due to calls and maturities of broker deposits that totaled $383 million in the second quarter.

We have continued to conservatively invest this excess liquidity in commercial paper, floating rate agency CMOs, and other short-term funds at a negative spread. The impact of carrying this excess liquidity reduced our margin by 76 basis points in the second quarter, 49 basis points last quarter, and 45 basis points for the fourth quarter of 2010. Keep in mind, that excess liquidity primarily impacts certain margin trends and not necessarily net interest revenue. We have basically added $1 billion to our denominator that is average earning assets with the same revenue.

On pages 23 and 24, we show our margin trends for the past five quarters with the impact of credit cost and excess liquidity.

Net interest margin for the second quarter was 3.41%, which is equal to the 3.41% core margin we reported last quarter when we added back the $2 million of interest reversals for the bulk loan sale and was down 19 basis points from a year ago. The 30 basis point impact of credit cost this quarter continued to lower our margin, net interest revenue, and core earnings, but at a declining level for the past five quarters. The decline is primarily due to the improvement in credit quality, as noted earlier by David.

For the balance of 2011, we expect to see a rise in our net interest margin from 3.41% in the second quarter to the 3.7% range for the fourth quarter. This outlook is down slightly from last quarter due to retaining additional excess liquidity throughout the remainder of 2011. The expected rise in the margin relates to lower credit costs for interest reversals and carry cost.

Another positive factor impacting our margin continues to be core deposit growth as shown on page 25. Core customer transaction deposits were up $69 million from the first quarter continuing our steady growth trend. The second quarter increase represents an annualized growth rate of 10% and we have added over $700 million in core transaction deposits over the past 10 quarters. The true benefit of the higher level of 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 28, core fee revenue of $13.9 million for the second quarter was up $2.1 million from last quarter and up $2.3 million from a year ago. Excluded from core fee revenue are securities gains of $783,000 and $791,000 of repayment charges from the repayment of the $14 million of Federal Home Loan Bank advances in the second quarter of 2011. These transactions were offsetting and were part of our balance sheet management activities.

Service charge fees of $7.6 million for the second quarter were up $888,000 from last quarter and down $385,000 year-over-year. The decrease from a year ago was due to $1 million of lower fees associated with our courtesy overdraft services, resulting from changes to Regulation E, requiring customers last year to opt in before using these services. This was offset partially by higher ATM and debit card usage fees that were $684,000 higher than last year as well as $749,000 higher than last quarter.

We have some additional risk related to our courtesy overdraft product related to recent changes in the order of processing ACH and check payments. It is too early to see the impact, but these changes could further reduce our overdraft fee revenue by 10% to 20%.

An additional risk in fee revenue relates to interchange fees on our debit card. Regulators have now deferred implementation into October 1. As proposed interchange fees would be reduced from $0.44 to $0.24 per average transaction. However, we are exempt under the regulations with assets under $10 billion. It is still unclear how this will impact us and we continue to evaluate our options.

Due to these changes on pending rules, we are evaluating all elements of fee revenue including revising fees and structures relating to our transaction accounts. These proposals could replace a significant portion of the loss fee revenue. We cannot discuss these proposals in detail, simply have competitive issues with banks in our markets.

Mortgage loan fees of $952,000 were down $649,000 from a year ago and down $542,000 from last quarter. Refinancing activities fell sharply in the second quarter resulting in lower mortgage fees. Other fee revenue of $4.7 million for the second quarter was up $1.8 million from last quarter and up $3.3 million from a year ago. The increase in both periods was almost entirely due to the accelerated recognition of deferred gains from terminated cash flow hedges that became ineffective. I have added this item on page 28, which shows the recognition of $2.8 million in gains this quarter, compared to $1.3 million in the first quarter of 2011 and $239,000 a year ago.

Looking at core operating expenses on page 29, a total of $46.8 million for the second quarter, about flat with last quarter, but up $3.1 million from a year ago. The primary item excluded from core operating expenses was foreclosed property cost of $1.9 million in the second quarter, $64.9 million in the first quarter, and $14.5 million a year ago.

Core operating expenses for the first quarter also excluded $2.6 million of property taxes paid on loans that were included in the bulk loan sale and $1 million of professional fees related to the loan sale and capital transactions, which are all included in the bulk loan sale charges on page 30 of the investor package.

Second quarter 2010 core operating expenses also excluded the $45.3 million loss on the sale of NPAs to Fletcher. Page 30 reconciles core earnings to our net income and net loss for each period. The details of operating expenses are noted on page 29 as well as on the income statement and commented on in our earnings release. Here are some of the other key items. Salaries and employee benefit cost of $25.3 million, increased $1.7 million from the second quarter of 2010 and $362,000 from last quarter. The increase from a year ago was due to higher incentive costs and adjustments to the value of our deferred compensation plan liabilities.

We have also shown separately on page 29, the $1.2 million severance cost recognized in the second quarter that relates to elimination of 44 staff positions. About half of the positions were terminated at quarter end and the balance will leave by the end of the third quarter. FDIC assessments of $3.6 million for the second quarter were about the same as a year ago and down $1.8 million from last quarter, primarily due to the new asset base formula. Going forward, we expect the assessment each quarter to be about $2.6 million.

Credit related foreclosed property costs are excluded from our core expenses. And as I noted, a summary is presented on page 30. Foreclosed property costs this quarter included $3.1 million for write downs, which were more than offset by $3.2 million of net gains on sales and $2 million for maintenance, property taxes, and other related costs, which have decreased due to the reduction in the level of foreclosed properties.

Last quarter, as part of the asset disposition plan, we wrote down and incurred net losses on the accelerated sales of foreclosed properties totaling $60.5 million. As a result of executing that plan, our net write downs in losses for the quarter decreased substantially and in fact were net gain of about $100,000. With foreclosed properties written down at [$0.33 in a $1] we expect these credit cost to remain at lower levels in the near future. Other core operating expenses of $4.8 million were about flat with prior periods.

Turning to capital, as shown on page 32, our holding company regulatory capital ratios were as follows. Tier 1 risk based capital was 13.9%, total risk based capital ratio was 16.4%, and our leverage ratio, at quarter end was 8.7%. Using period-end assets which better reflects our shrinking balance sheet, our quarter-end leverage ratio was 8.9%. Also our tangible common equity to assets ratio was 8.9% at quarter end. As part of our capital transaction, we held $70 million of the proceeds at our holding company, which is well in excess of our cash flow needs for the next three years.

With that I'll turn the call back over to Jimmy.

Thank you, Rex. We had previously laid out our strategy for returning United to financial strength and growth and now are about the business of implementation. We have completed the capital raise, de-risked our balance sheet through the bulk loan sale, written down the OREO, executed the one-for-five reverse stock split, and achieved profitability.

Our strategy now is to build on this progress and continue our long-term plan of growing the business and creating shareholder value. To that end, let me outline some of the actions that we are taking.

First, adding to our commercial banking presence is a key step to long-term success. As we previously stated, dollars we save from positions eliminated in the second quarter are being reinvested in revenue generating commercial relationship managers. Several of these either are or soon will be in the Atlanta market with others in our (inaudible) Asheville and Coastal markets.

So far, five of these commercial relationship lenders are on board and eight others have verbally committed to joining us within a few weeks. They generally have been working with large regional banks and in most cases were already known to us and respected by us. They have many years of extensive experience in their markets and significant portfolios. A large portion of which we expect to migrate to our Company over time. We are in fact seeing this already. These increased resources will provide further traction for growing high-quality commercial loans. Our focus is on businesses secured by owner occupied properties with full deposit relationships. We are seeing the benefits of this approach in our top line.

Second, we will continue to grow core customer transaction deposits. These efforts have been very solid over the past two years, as I have mentioned, and are continuing. So, far in 2011, we generated $158 million. Our expectation is for more of this same, further changing the mix of funds and lowering their overall cost.

No discussion of our progress would be complete without mentioning our cornerstone of customer service. Over the past two years our customer satisfaction rate has been consistently above 90%, in fact through June of this year it is at an all-time high of 95%. United employees not only embrace our sales culture they embody it. Quarter after quarter they bring in impressive new business all the while earning national recognition for outstanding service, regardless of the distractions of the economic environment. They are truly remarkable and a distinct competitive advantage for this organization. And this is more than a feel good story. It results in quantifiable, significant bottom line growth.

We sold over 161,000 new services to our customers over the past 2.5 years during some of the most volatile economic times we've seen in this country. We've done this by satisfying the financial and service needs of customers and by continuing to earn their confidence. United with all the challenges through this period has maintained its reputation as a strong bank for mere service provider and dependable service in communities throughout our footprint.

To wrap up, you might characterize United Community Banks as a work in progress, significant progress. Due to much planning and work by talented and dedicated team we'd make substantial strides and have returned to profitability. We are proud, but by no means satisfied. There is more work to do. With a focus on credit, commercial growth, organic growth, co-deposits and customer service. We are busy about this work moving forward with confidence, determination, and optimism.

With that, I'll ask the operator to open the call to any questions.

Thank you. (Operator Instructions). Our first question is from Jennifer Demba with SunTrust. Your questions please.

Thank you. Good morning. Congratulations on your return to profitability. Question on the types of loan -- you kind of gave us some color on the types of commercial loans you're going after right now. Just wondering kind of what size credits you feel like needed to be the bread and butter here and how much competition you're encountering on these credits and from larger or smaller institutions?

David, do you want to take this?

Sure. Yes, hi Jennifer, it's David. As far as what we're targeting Jennifer, we're really putting all of our -- not all, the majority of our focus on business lending looking at commercial customers, looking at owner occupied, real estate, and C&I type opportunities being our number one target. And in fact, the lenders we've been adding, as Jimmy mentioned in his comments, that's what we're hiring, as people that are involved in that market.

We are having some opportunities on the investor CRE side as well. But -- and we had probably little more this quarter than first because we had unusually -- a couple of unusual (inaudible) particularly strong that we put on the books. But our focus is really on a core business operating type company.

To your question on competition, it's a very competitive market, particularly in the larger metro areas. We're seeing a lot of competition around primarily on the pricing side, but to a degree on tenure of maturities as well as on some structural issues as well. So it's a pretty competitive market there. Outside the metro areas, probably a little bit less competition. And we're taking good advantage of opportunities where we see failed banks and consolidation occurring.

What's the size (inaudible)?

I'm sorry. Yes, on the size question. I'd say probably our target kind of the bread and butter is that, I'd say, $2 million to $5 million range on total exposure for credit. We've had -- we've seen some opportunities between the $5 million and $10 million range. But we really can't focus you more on the smaller middle market type credit.

Okay. And question, if you covered this, I'm sorry, if I missed it. But what are kind of some of the offsets you're seeing to -- is it you haven't given really any guidance on how the check sequencing changes are going to impact you. But what do you see in terms of offsets there?

Yes, Rex.

Yes, Jennifer, Rex here. I think, we've looked at several things going from revising our fee structure, Jennifer, we did that about a couple of years ago and looking at fees across all of our products. The obvious one out there, and we're looking at this as our interest free checking our accounts and again we're looking at that category at the same time, but really it's across the board. We're looking at all avenues of fee revenue whether related to core transaction or other fees at the same time.

Jennifer, our goal is to replace as much of the loss revenue here as possible, but yet still we're in a competitive business and managing through that, and I'm sure over the next few weeks, few months we will certainly have more clarity with it.

Thank You.

Thank you. Our next question is from Kevin Fitzsimmons of Sandler O'Neill. Your question please.

Good morning, everyone.

Hi, Kevin.

Good morning, Kevin.

David, you might have went over this in your comments, but just want to get a sense, I know you said net charge-offs may be lumpy quarter-to-quarter and it seems like you guys have done the big steps in terms of disposition, but I'm just trying to look forward here the -- because we've had such a dramatic change from what we've had in prior quarters. How should we think about the pace of OREO expenses of net charge-offs of provisioning going up the next two or three quarters? Is it more kind of probably steady from these levels or do you expect them to continue to decline? Thanks.

Sure, yes. Generally, directionally I'm expecting a decline. And my comment around lumpiness really is -- as we've gotten down to these lower levels, one challenged credit that pops in to get [$5 million] credit has more of an impact at these levels than it did when we had much higher levels of charge-offs and NPAs. But I kind of think in terms of this past quarter, of course we had the benefit of the recovery from the loan sales, about $7 million, which helped get our net charge-offs down to $16.5 million.

If I'm thinking of that base line of $23 million -- I'm directionally down, looking at is that coming down this quarter. And I think the provisioning level, the release you saw on the provision, I think somewhere in that same kind of range is likely over the next couple quarters, a little higher, a little bit less depending on the metrics, but as I described in the call, we're really seeing not only the benefit of the de-risking we did, but improvement just in our -- the remaining core portfolio, which is going to help to alleviate some of that provisioning going forward and allow little bit more release.

On the ORE front, I think in terms of -- if you think -- you can go back to what we were experiencing before in more recent quarters, we were running somewhere in the 5% to 10% of our carry balance of our ORE expense. That's probably not an unreasonable proxy going forward for the next few quarters, because we're still going to have to carry -- have some foreclosure costs, some maintenance costs on what we're still carrying on the books.

In terms of gains our loss on sales within the ORE book, I think were written down very well at 32.6% on the dollar. However, we're still in a very challenged market out there, so I guess I don't anticipate any significant loss and maybe no loss, but I think until we see an absolute bottoming out in the market I'm little bit hesitant to, kind of, forecast that. So probably a 5% to 10% range is a reasonable proxy.

Okay, that's helpful. Just one quick follow-up, Jimmy, we've had pretty dramatic change over the last few quarters and I know you can't get too specific on this, but can you just give us a flavor for how -- have the regulators been in recently, have they looked at a post common ways and post asset disposition, United Community and from that do you get any sense on when you all might be eligible to participate in deals and get on the offensive on that front? Thanks.

Kevin, we had, I think, told the market that we were expecting a mini exam in April, might be as early May and that did occur. It was concluded and we were very pleased with the outcome. We do have a full, which is our annual exam schedule begins September 6, which would include FDIC state and the fed. Clearly, fast forwarding our health and the passion and the manner in which we did, a part of that was certainty to put ourselves in a position to be involved in the consolidation of our industry within our footprint. And certainly that still -- it's very much within our goals.

But let me be very clear, our current focus is on organic growth of which we are beginning to really see some pretty, what we believe, pretty impressive traction, hiring experienced bankers with the loan taps that we want to expand, we're beginning to see the benefits of that. We're getting a lot of calls every day from other bankers, certainly in the metro markets is where that focus is, but also let me say that in our markets, in the markets, particularly north Georgia where we've had failed banks, our growth opportunities have been very, very strong and I think when you look to the material, I think, take north Georgia for example, in core deposit growth which really is new customer acquisition, you'll see a significant pick up, Q2 over Q1 and Q1 over Q4 of last year. So (inaudible) say this, yes that is something that we are very, very interested in doing. We're fast forwarding our health as quickly and as efficiently as possible, but in the meantime we're are taking our eye off the ball with the opportunity that currently exist.

Okay. Thank you.

Thank you. (Operator Instruction). Our next question is from Christopher Marinac of FIG partners. Your question please.

Thanks. Jimmy or David, I was curious if you could talk about any migration away from (inaudible) classified back to pass, are you seeing some signs of that or do you think you may see some of those as the year and couple -- next quarters unfold?

Yes. As far as the upgrade question, we have seen some upgrades come out of our [eight's backup to sevens or pass]. I would call it still fairly minor at this point. I think our total upgrades this past quarter about $18 million out of eight category. A lot of that's driven by when you receive the financial statements, but also when you look at the type of loans you got that are classified and also I guess our hesitance to upgrade aggressively.

I do think we'll continue to see that number increase particularly on the more commercial, the CRE and the C&I side to the degree we have classifieds there, we're seeing better numbers generally from a lot of these customers, the real estate side can be I think quite bit slower to see, a lot of upgrade coming out of that portion of the portfolio.

Okay, great. And then I guess, separate from the credit side, Jimmy, are there opportunities for you to do some cost renovation on just the overall operating side or would you rather tackle that after seeing how, what things shape up on external without external transactions?

Yes, Chris. We continually look at our operating costs and I think this past quarter was once again indicative of a reduction of the workforce by 45 people or so and on top of a 10% that we did couple years ago. Clearly, in this business going forward, we're glad to be able to [be mold] with less cost and we are very much aware of that and quite candidly believe that's going to be an ongoing process for us and all banks for certain the foreseeable future.

Okay. Thanks, very much.

Thank you. I'm showing no further questions in queue at this time, I would now like to turn the conference back over to Mr. Tallent for any remarks.

Thank you, operator and thanks to everyone for being on the call this morning, we appreciate your interest. David, Rex and myself of course will be here all day, if you have other questions don't hesitate to call. Otherwise we look forward to chatting with you in another quarter. Hope you have a great day.

Ladies and gentlemen, thank you for your participation. That concludes the conference, you may disconnect and have a wonderful day.