United Community Banks Inc (UCBIO) 2011 Q3 法說會逐字稿

Good morning. And welcome to United Community Banks' third 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 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 ucbi.com.

Please be aware that during this call, forward-looking statements may be made by United Community Banks. Any forward-looking statements should be considered in light of risks and uncertainties described on Page 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.

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 third quarter.

Our core business continues to perform very well. We are growing low-cost deposits and expanding customer relationships. This past year, we have grown market share in more than half of our markets according to the FDIC numbers. The new lenders that we've attracted are bringing in quality loans. And our customer service, according to hard data from third-party sources, is nothing less than the best in the business.

As we preannounced in our press release, we classified our largest lending relationship of $76.6 million this quarter and added a provision of $25 million for our estimated exposure. Consequently, we had a net loss of $6.2 million this quarter or $0.16 per share. The additional provision reduced earnings per share by $0.26; otherwise, we would have had a profit of $0.10 per share or $8.8 million.

The loan in question continued to perform according to the agreed terms. And the borrower is in full compliance with collateral and liquidity requirements. The loans are secured by a combination of real estate loans and foreclosed properties and were expected to be repaid from the sale of this collateral during the five-year term. By this point, we had expected to begin to see measurable reduction of the loan balances through sales of the underlying assets. Because those sales have not occurred as anticipated and because the real estate market has continued to deteriorate, we believe full repayment has become unlikely.

When you look at a relationship, loan grading is always a judgment. In this case, we have a nonrecourse borrowing structure, underlying asset values that have continued to decline and a borrower that has not completed any meaningful asset sales. Given these facts, we believe it is appropriate to classify these loans. At the end of the quarter, we downgraded the loans to substandard, placed them on nonaccrual status and recorded a specific reserve for our estimated exposure. We are obtaining updated appraisals and will charge the loan down to net realizable value once those appraisals are received. We do not expect the losses to exceed the specific reserves we have established. Excluding this downgrade, which pushed our net results to a loss, third quarter results were in line with our expectations.

Net charge-offs were $17.5 million. While this was up $1.1 million from the second quarter, remember that the second quarter included a $7.3 million recovery from the bulk loan sale. So the trend continues to move in the right direction.

At quarter end, non-accrual loans were $144 million, up $73.4 million from the second quarter. That increase resulted from placing our largest loan relationship of $76.6 million on nonaccrual at quarter end.

Foreclosed properties continue to trend down to $44.3 million from $47.6 million last quarter and were written down to 33% of their original unpaid principal balance.

Nonperforming assets totaled $189 million on September the 30th. That represents 4.5% of loans and foreclosed properties and 2.6% of total assets.

Our allowance for loan losses was 3.55% of loans, up from 3.07% last quarter due to the specific reserve discussed earlier.

Our net interest margin was 3.55%, up 14 basis points from the second quarter.

For the 11th consecutive quarter, we saw solid growth in core customer transaction deposits. They increased $112 million from the second quarter or 16% on an annualized basis.

Also, in the third quarter, we added $141 million in new loan commitments, $88 million of which were funded by quarter end.

We reported a tangible common equity to tangible asset ratio of 9.1% for the third quarter.

And, finally, all of our regulatory capital ratios improved. And we expect that trend to continue as we remove excess liquidity from the balance sheet and grow capital with retained earnings. With excess liquidity in assets continuing to decline, we expect our leverage ratio to be above 9% going forward.

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

Thank you, Jimmy. And good morning.

As Jimmy noted, our credit metrics this quarter were significantly impacted by the classification of our largest loan relationship as non-performing and the establishment of a $25 million specific reserve against the relationship. Excluding this event, we saw continued improvement or stabilization in most credit metrics following the de-risking of our balance sheet through the loan sale and OREO write down in the first quarter.

This quarter, we provided $36 million for loan losses, up from $11 million in the second quarter. Net operating charge-offs were $17.5 million in the third quarter, up $1 million from last quarter. Net charge-offs were positively affected by a $7.3 million recovery from the asset sale in the second quarter. Excluding the $7.3 million recovery last quarter, net charge-offs would've declined $6.3 million in the third quarter.

Nonperforming assets increased $70 million from a $119 million last quarter to $189 million this quarter. The increase in the quarter was due to the addition of $76.6 million in loans to our largest relationship. Nonperforming assets included $144.5 million of nonperforming loans and $44.3 million in foreclosed properties. The net inflow of new NPLs was $103 million this quarter compared to $36 million last quarter. Excluding the $76.6 million relationship moved to nonperforming this quarter, the net inflow would've declined 25% to $26.8 million from last quarter. We had no accruing loans that were past due 90 days. The ratio of nonperforming assets to total assets was 2.64% compared to 1.60% last quarter. In addition, our performing classified loans increased $28 million to $341 million on a linked-quarter basis.

Accruing TDRs totaled $69.8 million and increased $28.3 million from last quarter. Most of the increase in TDRs occurred in CRE, commercial and residential construction categories. We were encouraged by our early delinquency again this quarter, 30 to 89 days past due loans were 70 basis points compared to 65 basis points last quarter. These results are significantly below the delinquency reported prior to the first quarter de-risking of the balance sheet.

The market to sell foreclosed properties remained challenging in the quarter due to the large number of sellers in what remained a very soft market. We sold $13.8 million of foreclosed properties this quarter versus $28.9 million in the second quarter. Foreclosed property expense totaled $2.8 million this quarter compared to $1.9 million in the second quarter. The third quarter included $1.8 million for maintenance cost and $1 million in net losses and write downs on properties.

We continued to aggressively write down our foreclosed properties and NPLs this quarter. At quarter end, foreclosed properties had been written down to 33.4% of their original unpaid principal balance.

Nonperforming loans, excluding the $76.6 million relationship added this quarter, were written down to 62.2% of their unpaid principal balance. A $25 million specific reserve was taken on the $76.6 million relationship.

Now let me provide some detail on our portfolio by segment. First, commercial loans. Our total commercial loan portfolio of $2.4 billion was flat compared to last quarter. Commercial real estate loans were a driver of growth in the commercial portfolio this quarter, but were offset by declines in commercial construction. New loan commitments totaled $141 million this quarter and $95 million of the total were in commercial categories. Owner-occupied real estate loans represented 82% of new commercial real estate commitments this quarter as we continue to focus on small business in our markets.

Within our total commercial portfolio, we had $86.4 million of NPLs, up $63.9 million from last quarter. The increase was primarily due to the addition of the large relationship discussed previously, since $63.7 million of the $76.6 million was classified commercial. In fact, $52.2 million was classified as C&I, because this portion of the relationship involved the financing of promissory notes. Total commercial net charge-offs were $4.2 million for the third quarter compared to $4.7 million last quarter.

In conclusion, the portfolio de-risking taken in the first quarter continued to have a positive impact on commercial early delinquency and NPL inflow this quarter. Furthermore, 59% of our CRE portfolio is owner-occupied with modest to average loan sizes and diversified property types.

Moving on to our residential mortgage portfolio, we ended the quarter at $1.1 billion, down $27 million from last quarter and $166 million from a year ago. In this portfolio, we had $22.7 million of NPLs, down $2.1 million from last quarter. Net charge-offs were $6.2 million for the third quarter, up from $4.6 million last quarter. Home equity is included within our residential mortgage portfolio. This portfolio, which totaled $301 million, declined $8 million from last quarter. Home equity line usage was flat at 61% in the third quarter compared to last quarter.

Overall, residential mortgage early delinquency increased to 1.36% in the third quarter from 1.15% last quarter. However, residential mortgage inflow continued the declining trend to $6.9 million this quarter compared to $10.8 million last quarter. We expect high unemployment and property devaluation to continue to impact this portfolio into 2012. Nevertheless, overall credit metrics continue to stabilize in the residential mortgage portfolio.

Our total residential construction portfolio of $474 million is down $28 million from the second quarter and down $290 million from a year ago. The residential construction portfolio breaks down into $373 million in dirt loans, $64 million in spec houses and $37 million in presold houses. Looking at credit quality, our residential construction portfolio had $34.5 million of NPLs compared to $22.6 million last quarter. The $11.9 million increase this quarter was due to the addition of $12.8 million related to the $76.6 million relationship discussed previously. Net charge-offs declined to $6.4 million this quarter from $6.6 million last quarter.

At quarter end, our allowance for loan losses was $146 million or 3.55% of loans. Our allowance coverage to non-performing loans was 101% compared to 180% last quarter. The decline in NPL coverage was due to the classification of the $76.6 million relationship to nonperforming, although a $25 million specific reserve was established.

In summary, while we still have some credit challenges, the de-risking of the loan portfolio in the first quarter continues to positively impact our credit metrics. New NPL inflow, excluding the largest relationship, continued to decline. And past dues held steady this quarter. In addition, our NPAs have been written down to levels which should allow for continued liquidation without significant losses.

Looking ahead, we expect our credit metrics to improve over the next several quarters, although not necessarily on a straight line. Net charge-offs will rise in the fourth quarter due to an anticipated charge down of the $76.6 million relationship to net realizable value. The specific reserve established this quarter is expected to cover the charge-off. Total NPAs will continue to be impacted by our ability to liquidate foreclosed properties in this very challenging market. And new NPL inflow and net charge-offs could have some lumpiness.

There's a great deal of uncertainty in a domestic and global economy, which makes it difficult to forecast economic conditions in 2012. Nevertheless, based on our visibility today, overall credit trends are expected to continue to improve.

And with that, I'll turn the call over to Rex.

Thank you, David. And good morning.

My comments today will refer to pages within our investor presentation and tables included in our earnings release.

Now, highlights for the third quarter. Core pre-tax, pre-credit earnings for the third quarter of 2011, as shown on Page 20 of the investor presentation, were $26.5 million, up $2.1 million from last quarter and down $630,000 from a year ago. The increase from last quarter is primarily due to lower operating expenses.

I will comment on each area later, but first is net interest revenue. Net interest revenue of $59.3 million was up $335,000 from last quarter due to the lower average cost of deposits. We lowered our interest rates on deposits and CDs three times over the past two quarters, which contributed to the 13-basis point decline in our average interest bearing deposit rate. That rate was 86 basis points this quarter compared to 99 basis points in the second quarter.

The nonaccrual classification of our largest lending relationship that Jimmy mentioned earlier resulted in an interest revenue reversal of $480,000. Also, loan balances declined $53 million from last quarter end. With the exception of a $31 million decline in the second quarter of 2011, this was the second lowest decline between linked quarters for the past three years. The $733,000 decrease in net interest revenue from a year ago was primarily due to a $702 million decline in average loan balances, which was substantially offset by lower deposit costs.

As shown on Page 23, our average yield on loan balances for the third quarter was 5.62%, up 7 basis points from 5.55% a year ago. Being able to hold loan pricing was a key contributor to offsetting the impact of the decline in loan balances, coupled with lowering our deposit rates, which declined 58 basis points from a year ago.

All deposit category rates declined significantly as shown on Page 24. We still have a little room to continue lowering deposit rates, which will contribute to our margin expansion next quarter and into 2012. However, as we look at new loan relationships, we will continue to see pressure on loan origination pricing.

We continue to have downward pressure on our margin related to our significant excess liquidity position. Excess liquidity balances averaged $853 million in the third quarter compared with $1.1 billion during the second quarter 2011. We have been reducing these balances through the maturity of broker deposits and reducing time deposits by lowering our pricing.

We have continued to conservatively invest this excess liquidity in floating rate agency CMOs and other short-term funds at an overall negative spread. The impact of carrying this excess liquidity reduced our margin by 67 basis points in the third quarter compared to 76 basis points last quarter.

On Pages 21 and 22 of our investor presentation we show our margin trends for the past five quarters with the impact of credit costs and excess liquidity. Net interest margin for the third quarter was 3.55%, which was up from the 3.41% last quarter and down 2 basis points from a year ago.

The 29-basis-point impact of credit costs this quarter continued to lower margin, net interest revenue and core earnings and was about equal to last quarter. It had been on a declining trend and dropped significantly last quarter to 30 basis points due to the de-risking of the balance sheet at the end of the first quarter. Even with the increase in NPAs, we expect to see a further rise in our net interest margin to the 3.7% range for the fourth quarter of 2011. Our expected rise in the fourth quarter margin primarily relates to lower deposit pricing as we have further reduced rates this month. For 2012, we see further increase in the margin, mostly due to a reduction in excess liquidity balances.

Another positive factor impacting our margin continues to be core deposit growth as shown on Page 25. Core customer transaction deposits were up $112 million from the second quarter continuing our steady growth trend. The third quarter increase represents an annualized growth rate of 16%. And we have added over $800 million in core transaction deposits over the past 11 quarters. Core transaction deposits now represent 48% of our total deposits as compared to 30% at the end of 2008.

Turning to fee revenue and operating expenses. As noted on Page 27, core fee revenue of $11.3 million for the third quarter was up $213,000 from last quarter and down $687,000 from a year ago. Excluded from core fee revenue for the second quarter of 2011, as shown on Pages 29 and 58, were security gains of $783,000 and $791,000 of prepayment charges for the prepayment of Federal Home Loan Bank advances. Core fee revenue for the third quarter of 2010 excluded $2.5 million in security gains and $2.2 million of charges for the prepayment of the Federal Home Loan Bank advances. These transactions were offsetting and were part of our balance sheet management activities.

Also excluded from core fee revenue were gains related to the accelerated recognition of deferred income from terminated cash flow hedges that became ineffective. We recognized $575,000 of deferred gains this quarter compared to $2.8 million in the second quarter of 2011 and $336,000 a year ago.

Service charge fees of $7.5 million for the third quarter were down $74,000 from last quarter and down $114,000 year over year. The decrease from a year ago included lower fees associated with our courtesy overdraft services of $886,000 resulting from changes to Regulation E requiring customers last year to opt in before using these services. This decline in overdraft fees was partially offset by higher ATM and debit card usage fees that were $785,000 higher than last year.

As we are all aware, there is a risk of lower ATM and debit card fees relating to interchange fees on a debit card product resulting from the Durbin Amendment, which became effective October 1st. Although banks with assets under $10 billion are exempt from these regulations, it remains unclear how this will impact us. Currently, we have not seen an impact on these fees other than normal seasonal variations. Due to these changes and other pending rules, we are evaluating all elements of fee revenue, including revising fees, as well as restructuring our transaction accounts. We expect executing these initiatives will replace a significant portion of this lost fee revenue.

Looking at other components of fee revenue, mortgage loan fees of $1.1 million were down $923,000 from a year ago and up $196,000 from last quarter. Refinancing activities fell sharply from last year, down $42 million in volume resulting in lower mortgage fees. Recent record low mortgage rates resulted in an increase in refinancing activities for the third quarter and higher fee revenue. Other fee revenue of $1.8 million for the third quarter was about equal to last quarter and up slightly from a year ago.

Looking at core operating expenses on Page 28, they totaled $44.1 million for the third quarter, down $1.6 million from last quarter and down $790,000 from a year ago. The decrease from last quarter was primarily due to lower operating expenses for FDIC assessments, advertising and professional fees.

Page 29 of our investor package reconciles core earnings to our net income and net loss for each period. The primary items excluded from core operating expenses were foreclosed property costs of $2.8 million in the third quarter, $1.9 million in the second quarter and $19.8 million a year ago. Foreclosed property costs this quarter included net losses of $1 million and $1.8 million for maintenance costs. The net losses included $1.8 million for write downs that was partially offset by $804,000 in net gains on sales. With foreclosed properties written down to $0.33 on $1, we expect these losses to remain at lower levels in the near future.

Also excluded from core operating expenses last quarter was severance costs of $1.2 million related to the 44 staff reduction in workforce. Core operating expenses for the third quarter of 2010 also excluded the goodwill impairment charge of $211 million.

I will now briefly cover some of the core operating expense variances. Salary and employee benefit costs of $25.6 million increased $1 million from the third quarter of 2010 and $369,000 from last quarter. The $1 million increase from last year was primarily due to higher incentive costs and retention awards. FDIC assessments of $2.6 million for the third quarter were down $1 million from last quarter and $653,000 from last year, primarily due to the new asset-based formula and a lower assessment rate. Other core operating expenses of $4.6 million were down $778,000 from last year and mostly flat from last quarter. The decrease from last year was primarily due to lower collection costs.

Turning to capital, as shown on Page 31, our regulatory capital ratios were as follows. Tier I risk-based capital was 14%. Total risk-based capital was 15.8%. And our leverage ratio was 9%. Also, our tangible common equity to asset ratio was 9.1%. Total tangible equity to asset ratio was 11.8%. And tangible book value was $11.26.

The last item I will comment on, as noted in our earnings release, relates to two registration statements that are in the process of review with the SEC. The remaining open point of discussion concerns our deferred tax assets of $264 million. The SEC has questioned the necessity of some level of a valuation allowance. As we have commented in the past, management and our audit committee, as well as our independent auditors, strongly believe that we have documented thoroughly that there is no need for a valuation allowance and that we more likely than not will fully realize the deferred tax assets well before their expiration. We have had multiple comment letters and discussions with the SEC staff and are awaiting further comments and direction. At this time, as I said, we believe no valuation allowance is needed. But it is uncertain as to the final outcome of the SEC. And there is not much else we can comment on as to what level of valuation allowance might be required, if any. I wish I could comment further, but anything else we would say would be speculative.

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

Thank you, Rex. I began the call with some positive numbers as to our growing market share and core deposits and new loans and our customer service, which leads the industry. The addition of a large classified loan this quarter is not to be minimized, but it should be placed in the context of the larger picture of this organization.

So far, in 2011, which we all know continues to be a very difficult economy, United Community Banks has increased net core deposit accounts by 11,200, including over 9,500 checking accounts. We have increased the number net business checking accounts by almost 3,400. Year-to-date, we have grown core transaction deposits by $270 million. Since our United Express sales campaign began in 2009, we've grown core deposits by $812 million. The facts are, United continues to expand its customer base and core transaction deposits, which are now half of our total deposits compared to 30% at the end of 2008. Since 2008, the number of services used per customer has increased 24%. That translates into nearly three services per customer, which makes for relationships that are more lasting and more valuable.

The latest FDIC market share reports show that United Community Banks is Number 1 in North Georgia. In Western North Carolina, we're Number 3. On the Georgia coast and in the markets that we serve in Metro Atlanta, we are seventh. And in East Tennessee, we're tenth. In some places, we're dominant. And in others, we can and will do better. There is opportunity for a bank that, in this environment, has grown the way I've just described and has the best service in the entire country.

We know how to increase market share. Again, the FDIC figures show that we have gained share in more than 50% of our market since last year. These numbers represent steady, systematic and long-term organic growth. We have a staff that I believe is truly extraordinary. But what I think isn't important. What's important is what our customers think. And they believe our people are the best at what they do. Our customer satisfaction scores validate this quarter after quarter.

On the lending front, we're beginning to see production from our new lenders, as I mentioned. During the third quarter, we closed $140 million in new loan commitments and funded $88 million. Year to date, we've secured loan commitments of $359 million and funded $245 million. Loan balances have continued to decline. However, because of residential real estate runoff reaching the inflection point where loan portfolio gains exceed runoffs remains a challenge, but we are narrowing that gap quickly. We are continuing our successful strategy of seizing opportunities to add experienced loan production teams throughout our footprint. Very importantly, while we work to grow assets, we remain focused on reducing our cost structure. This is undoubtedly a key to United returning our long-term efficiency to the mid-50% range.

With that, we'll open the phone lines and take your questions.

Thank you, sir. (Operator Instructions) One moment for questioners to queue. Our first questioner in queue is Jefferson Harralson with Keefe, Bruyette & Woods. Please go ahead.

I wanted to ask David a question about credit. I think in the past you guys have talked about performing classifieds. Can you talk about what that category did this quarter versus last?

Sure, Jefferson. This is David. Our performing classifieds were up $28 million in the quarter. When you kind of look at where the increase came, it was primarily in commercial real estate credits and it would be primarily income type properties where you see that increase. There are some smaller increases in just resi mortgage, very small increase in residential construction. But really, the largest driver would've been income property commercial real estate.

And just a follow up on the Fletcher. Can you talk about the $25 million charge, where that leaves you on kind of cents on the dollar where the Fletcher loan is marked? And how do you come up with 25?

Well, our largest relationship, and we address it that way, when we originally -- those assets were sold. The original unpaid balance was about $149 million. We're taking a $25 million special reserve against that. The original loan that we put on the books was just over $80 million and is down to $76.6 million today. Effectively, when you look at the cash collateral we've got and then you look -- which we would net against the loan balance, we end up writing these. Our analysis takes us down to a $0.31 on the original unpaid principal balance of the loan. Because keep in mind, we've still got I believe it's $9.4 million of cash held against this loan to help service the credit. And we'll keep it performing for some time yet to go.

So we're at $0.31. The rationale behind that is a number of factors. One is looking at the assets underlying the credit and some analysis that we did on our own. Of course, we do have appraisals, which are a little bit dated now. They're '09 and '10 appraisals. Those appraisals reflect that we're down, well, about 48% loan-to-value on just the real estate alone, not including the cash. And we're getting those appraisals updated.

So we feel comfortable that we've taken a sufficient mark. And we also balanced it back against the bulk sale we did in the spring. And our mark on that was down to $0.31 on the original unpaid balance. So we're right in line with that.

Okay. Thanks, guys.

You're welcome.

Thank you, sir. Our next questioner in queue is Bill Young with Macquarie. Your line is now open. You may proceed.

Hey, good morning, guys.

Good morning, Billy.

Could you just give us an update on what your net DTA looks like this quarter and your NOLs?

DTA and NOLs.

Oh, net DTA and NOL. Our DTA at quarter end, as I mentioned earlier, is $264 million. And the other part?

NOLs.

Oh, the NOL portion of that is probably around $220 million approximately.

Okay. And the second part of the question, just give us a sense of CD maturities and just how far down you're re-pricing them maybe next quarter and over the next 12 months. Just give us a frame of reference for your margin guidance.

I'd be glad to. If you look at our CD portfolio, we have about a $1.1 billion maturing in the next six months. And it's about equal in Q3 and Q4. And it's coming off at about 1.02%. Our current re-pricing is right around 46 to 50 basis points right now. And that would give you some indication of the differential in our new and renewed to what's rolling off right now. And we have another probably about $250 million in the following two quarters coming off. And, again, part of that is about at 106 and the other is at about 90 basis points, four quarters out, rolling off.

Thanks. That's helpful. And my last question is just could you just let us know what the excess liquidity number was again. And just how aggressive do you expect to deploy that over next year?

The total, as I mentioned, at quarter end was $826 million. And, again, we see that coming down in combination. Again, you have to reduce the liability deposit side for that to shrink right now. And we see it coming down with brokered deposits rolling off. We still have a little over $200 million of brokered deposits. And about half of that comes off over the next six months. And, again, we're seeing our time deposits come down in the $30 million range a month, which we expect probably will continue with us, again, continuing to lower the pricing. So that's where the primary reduction will come from.

Conversely, on the other side, we do see core transaction deposits increasing. As we mentioned, we had $112 million increase. So we're still net declining as you saw from Q3 to Q2. And we'll see that blend and come down through the balance of 2012 is what our expectation is.

Great. Thanks, guys.

Thank you, sir. Our next questioner in queue is Kevin Fitzsimmons with Sandler O'Neill. Your line is now open. Please go ahead.

Good morning, guys. Two questions. I guess one is for David. You mentioned how the disposition activity is a little softer, just the interest level out there. With the addition of the large loan that you're putting on this quarter, do you feel any more pressure or urgency to get out there and try and do something on a bulk basis just to try and get those reported NPAs back down to where they were? Or do you feel that the pricing out there is just too punitive on a bulk basis and we're just going to have to wait to go about it in a local buyer sort of way over the next several quarters? Thanks.

Well, we obviously, earlier in the year, did the big bulk sale. We continue to look at all options, Kevin. Nothing is off the table. However, having said that, I think the pricing differential on one of these large bulk sales and the retail approach, or smaller bulk pieces.is pretty wide. And so our inclination would be to continue to try and do these one or two at a time and move through that.

Now, as it relates to our largest relationship that you referenced, we will continue to work with our borrower to move assets. Obviously, the loan is performing. And those decisions ultimately rest with our borrower. We will work with them to try and help expedite the sale down of that to a degree we can. Our hope is to continue to chip away and knock down some of these, the NPAs. But given the market, it's pretty difficult. And we're I think more inclined to just take them one at a time and try to maximize the return at this point, rather than really force out a large bulk sale.

Jimmy, just one follow up for you. We've talked before about you guys returning to profitability and showing credit improvement and getting back to an eligibility status to take part in some of the FDIC-assisted deals that I'm sure there's plenty more to come in your home state. With what just is getting announced, the preannounced loss on the large loan and this inquiry with the DTA, where does that stand? Is it mainly a little bit of a speed bump? Or does it really set you back maybe toward later next year to getting there? Thanks.

Good question, Kevin. Well, first of all, in regards to the speed bump and our largest borrower, I think we've explained our reasoning to go ahead and move forward on that. On the one hand, it does take and provides clarity to that particular relationship that we've talked about a number of times. And therefore, we believe the loss content has now been identified and we've reserved for it. Now, having said that, I think that probably gives more comfort and clarity from a regulatory standpoint. Our focus has been all along to continue to take advantage of the market opportunities, certainly with the failed banks, our organic growth, that we continue to see very positive results.

But the question is does that delay us another quarter or two? It's just hard to answer that. I know what this company is focused on is to continue to drive our earnings base, continue to revisit and maximize cost reductions, driving our pre-tax and pre-credit. We continue to see the credit improvement. But we want to make sure that we're fast forwarding the health of the Company with the absolute focus on organic growth. The FDIC transactions and the M&A in my view will last for a long time. And at the appropriate time, we'll certainly be taking advantage of that.

Okay. Thank you.

Thank you, sir. Our next questioner in queue is Michael Rose with Raymond James. Your line is now open. Please go ahead.

Good morning, everyone. I just wanted to get a sense, if you look at your portfolio outside of this large relationship, if you go down the line a little bit to maybe the top 10 or top 20 credits, can you give us a sense of the complexion and the current credit quality? Are any on nonaccrual, et cetera? Any color there would be helpful. Thanks.

Now, are you referring, Michael, to just generally in the portfolio past credits? Are there other large potential exposures?

Yes, that's what I'm trying to get at.

Our portfolio is very granular. And as I think you know, we have a house relationship exposure limit of $20 million, of which we've only got probably less than, well, less than 5 credits above that threshold. And even then, I think the largest -- the highest relationship there is $27 million behind this one we just referred to. None of those top-tier credits are at risk currently of any kind of immediate downgrade. All of them are currently pass rated at this time, not criticized, not classified. So we don't see any other large surprises, so to speak, coming out and hitting us here in the next few quarters. So what we continue to see, and when you look at the little bit of a tick up in performing classified this quarter, is it's the credits that are $2 million and $3 million, $4 million type credits and more heavily concentrated in income property deals is where we still have some in migration in the classified status.

Okay. That's really helpful. Thanks.

Thank you, sir. And at this time, I'm showing no additional questioners in the queue. I'd like to turn the program back over to Jimmy Tallent for any closing remarks.

Thank you, Operator. I'd like to thank everyone for being on the call this morning. David, Rex and myself are available for additional calls. And please don't hesitate to do so. Again, thank you for your supporting United Community Banks. We look forward to talking with you at the end of the fourth quarter. Hope everyone has a great day.

Thank you, sir. Ladies and gentlemen, this does conclude today's program. Thank you for your participation. And have a wonderful day. Attendees, you may disconnect at this time.