United Community Banks Inc (UCBIO) 2011 Q4 法說會逐字稿

Good morning and welcome to United Community Banks' fourth-quarter conference call. Hosting the call today are President and Chief Executive Officer, Jimmy Tallent; Chief Financial Officer, Rex Schuette; and Chief Risk Officer, David Shearrow.

United's presentation today includes references to core pretax 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 are included on the website at UCBI.com. Copies of today's earnings release and investor presentation for the fourth 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 will begin the conference call with Jimmy Tallent.

Good morning, everyone, and thank you for joining us for our fourth-quarter earnings call. 2011 was another challenging year, but also one of improvement and United finished on a positive note with a profitable fourth quarter. I will briefly cover the financial highlights, and then David and Rex will share some comments before I return with concluding remarks and then open the call for your questions.

Core pretax pre-credit earnings were $26.6 million, up $152,000 from the third quarter. Our net income was $9.9 million or $0.12 per share. Included in fourth-quarter earnings were two one-time items that increased net income by $5.7 million.

Net charge-offs were $45.6 million, which included $25 million related to our largest loan relationship, which we specifically reserved for in the third quarter. OREO expenses were also elevated at $9.3 million; $3 million related to losses on sales and $4 million was due to writedowns to accelerate future sales.

During the fourth quarter, we made $182 million in new loan commitments, of which we funded $147 million. As a result of this growth, for the first time since March of 2008 we stopped the decline in the loan portfolio. We are achieving stability in the portfolio and believe we are approaching an inflection point from which we can begin to see positive growth.

During 2011, we increased core transaction deposits by $266 million, $186 million of which was in non-interest-bearing demand deposit balances; $121 million was commercial; and $65 million was retail. Core transaction deposits were down slightly in the fourth quarter compared to the prior period, although we saw improvement in the overall mix with positive growth in non-interest-bearing demand accounts.

Nonperforming assets were $160 million or 2.3% of assets at quarter end. The net interest margin was 3.51% and our capital ratios all remain solid.

As you are aware, a few weeks ago we announced that we would record a full valuation allowance on our net deferred tax asset and that we would restate our previously filed financial reports going back to the fourth quarter of 2010. This restatement results from an ongoing comment process with the SEC which we believe has now been resolved. This is disappointing; but our outlook has not changed nor has our positive momentum slowed.

The full valuation allowance results from a difference in judgment regarding the weighting of evidence supporting our deferred tax assets. We are now placing more weight on the objective negative evidence represented by our recent losses than the more subjective positive evidence represented by future earnings expectation.

The full valuation allowance reduced tangible book value per share by approximately $4.65 as of the end of the year. It will affect reporting earnings in future periods as our reported income tax expense or benefit will be minimal. We would expect to be able to reverse the valuation allowance once we have achieved several quarters of solid earnings with improved credit performance.

I will now ask David to provide additional details on our credit performance. David?

Thank you, Jimmy, and good morning. As Jimmy noted, our credit metrics this quarter were significantly affected by the $25 million charge-down of our largest loan relationship. In the third quarter, this relationship was classified nonperforming and a $25 million specific reserve was established against it.

During the fourth quarter, we updated our appraisals of the underlying assets and determined a $25 million charge-down against the previously established reserve was appropriate. The remaining book balance on this relationship was $50.4 million at quarter end, and the loan-to-value based on current appraisals and net of pledged cash was 67%.

With that update I will review our results for the quarter. This quarter, we provided $14 million for loan losses, down from $36 million in the third quarter. Net operating chargeoffs were $46 million in the fourth quarter, up $28.5 million from last quarter.

Nonperforming assets declined $29 million, from $189 million last quarter to $116 million this quarter. The decrease in the quarter was primarily due to the $25 million charge-down previously mentioned, although we did realize an $11 million reduction in foreclosed properties.

Nonperforming assets included $127 million of nonperforming loans and $33 million in foreclosed properties. The net inflow of new NPLs was $46 million this quarter compared to $103 million last quarter, which included $76.6 million related to our largest relationship. We had no accruing loans that were past due 90 days.

The ratio of nonperforming assets to total assets was 2.30% compared to 2.74% last quarter. In addition, our performing classified loans decreased $13 million from $341 million to $328 million on a linked-quarter basis.

Accruing TDRs totaled $106 million and increased $36 million from last quarter. Most of the increase in TDRs occurred in CRE and residential mortgage categories.

Our early delinquency remained stable this quarter. 30- to 89-day past due loans were 75 basis points compared to 70 basis points last quarter. These results are significantly below the delinquency rates reported prior to the first-quarter derisking of our balance sheet.

The market to sell foreclosed properties remained challenging in the quarter due to the large number of sellers and what remains a very soft market. We sold $20.6 million of foreclosed properties this quarter versus $13.8 million in the third quarter. However, the higher sales level this quarter was accompanied by a higher level of net losses on sales.

Foreclosed property expense totaled $9.3 million this quarter compared to $2.8 million in the third quarter. The fourth quarter included $2.4 million for maintenance cost, $3 million in net losses on sales, and $3.9 million in further write-downs on properties.

We continued to aggressively write down our remaining foreclosed properties this quarter in order to facilitate future sales and minimize potential losses. At quarter end, foreclosed properties had been written down to 36% of their original unpaid principal balance.

In addition, nonperforming loans were written down to 71% of their unpaid principal balance. As a reminder, our policy is to write down NPLs to 80% of current appraised value.

Let me now provide some detail on our portfolio by segment. First, commercial loans. Our total commercial loan portfolio of $2.4 billion increased $45 million or 8% on an annualized basis over the third quarter.

Commercial real estate loans were the primary driver of growth in the commercial portfolio this quarter. New loan commitments totaled $182 million this quarter, and $131 million of the total were in commercial categories. Owner-occupied real estate loans represented 70% 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 $78.6 million of NPLs, down $7.8 million from last quarter. Total commercial net charge-offs were $27.2 million for the fourth quarter, compared to $4.2 million last quarter. Commercial net charge-offs tied to our largest relationship represented $20.1 million this quarter.

Moving on to our residential mortgage portfolio, we ended the quarter at $1.1 billion, flat from last quarter and down $144 million from a year ago. In this portfolio we had $22.4 million of NPLs, flat from last quarter. Net charge-offs were $5.9 million for the fourth quarter, down from $6.1 million last quarter.

Home equity is included within our residential mortgage portfolio. This portfolio, which totaled $299.5 million, declined $1.5 million from last quarter. Home equity line usage was flat at 61% in the fourth quarter compared to last quarter.

Overall, residential mortgage early delinquency increased to 1.44% in the third quarter from 1.36% last quarter. We expect high unemployment and property devaluation to continue to impact this portfolio throughout 2012.

Our total residential construction portfolio of $448 million is down $26 million from the third quarter and down $247 million from a year ago. The residential construction portfolio breaks down into $356 million in dirt loans, $59 million in spec houses, and $33 million in presold houses.

Looking at credit quality, our residential construction portfolio had $25.5 million of NPLs, down $9 million from $34.5 million last quarter. Net charge-offs increased to $12 million this quarter from $6.4 million last quarter. $4.2 million of net charge-offs this quarter were tied to the charge-down of our largest relationship.

At quarter end, our allowance for loan losses was $114 million or 2.79% of loans. Our allowance coverage to nonperforming loans was 90% compared to 101% last quarter.

In summary, we continue to make progress in working through our credit challenges. As we anticipated last quarter, the $25 million net charge-down of our largest relationship significantly impacted our credit metrics in the fourth quarter.

New NPL inflow, excluding the largest relationship, increased in the fourth quarter. However, the inflow from residential construction, which has been our greatest source of loss, continues to decline.

Our NPAs have been written down to levels which should allow for continued liquidation without significant losses. In addition, our past dues held steady again this quarter.

Looking ahead, we expect our credit metrics to improve over the next several quarters, 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 new NPLs inflow and net charge-offs could have some lumpiness.

While we continue to see some strengthening of our commercial and industrial base, the drag from real estate devaluation and unemployment continues to impact our markets. Nevertheless, based on our visibility today, overall credit trends are expected to gradually improve during 2012.

With that, I will 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, highlight for the fourth quarter. Core pre-tax pre-credit earnings for the fourth quarter of 2011, as shown on page 20 of the investor presentation, were $26.6 million, up $152,000 from last quarter and down $527,000 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 $59.1 million was down $231,000 from last quarter and down $1.1 million from a year ago.

A key element in the margin declining this quarter was the 23 basis point decrease in the yield on our securities portfolio. We were unable to reinvest cash flows from the prepayment of mortgage-backed securities at the same rate. This increase in prepayments of mortgage-backed securities lowered our margin by 7 basis points.

On the positive side, besides lowering our funding costs again this quarter, we were able to hold loan volumes relatively flat with last quarter, and we believe we are at or near an inflection point. We haven't seen a flat or growth quarter in loans for nearly four years.

Achieving quality loan growth in 2012 is key to growing net interest revenue. The $1.1 million decrease in net interest revenue from a year ago was primarily due to a $593 million decline in average loan balances, which was substantially offset by lower deposit costs.

Our average interest-bearing deposit rate was 70 basis points this quarter, compared to 120 basis points a year ago. As shown on page 23, our average yield on loan balances for the fourth quarter was 5.49%, down 6 basis points from 5.55% last year.

Being able to hold loan pricing was a key contributor to offsetting the impact of the $593 million decline in loan balances, coupled with lowering our deposit rates, which declined 50 basis points from a year ago. All deposit category rates declined significantly from a year ago, as shown on page 24, and we were able to lower them a little further early in January 2012. At this point, there is little room to lower our rates, so improvement in our cost of funds will come from maturing CDs and improving deposit mix.

We have about $570 million of CDs maturing in the first quarter of 2012 at 95 basis points, and $430 million maturing in the second quarter at 77 basis points. Both should reprice in the range of 40 to 50 basis points. Additionally, $650 million matures in the second half of 2012 at rates between 75 to 90 basis points.

Achieving flat loan growth during the fourth quarter was encouraging, with $182 million in new commitments, of which $147 million was funded. However, pricing remains extremely competitive, especially in our metro markets.

We also continue to experience downward pressure on our margin related to our significant excess liquidity position. Excess liquidity balances averaged $906 million in the fourth quarter compared with $853 million during the third quarter of 2011. We have been reducing these balances through maturity of brokered deposits and reducing time deposits by lowering our pricing.

At the end of the third quarter, we had projected a runoff of $150 million of excess liquidity in the fourth quarter, which was a significant part of our projected fourth-quarter margin improvement to 3.7% range. That did not happen; instead we had sizable inflow of public deposits due to tax receipts, which added $55 million to our excess liquidity. This was the primary factor why our margin did not increase in the fourth quarter.

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 fourth quarter compared to 66 basis points last quarter.

On pages 21 and 22, we show our margin trends of the past five quarters with the impact of credit costs and excess liquidity. For 2012, we see our net interest margin continue in the 3.5% range.

Obviously, if excess liquidity declines, it will have a significant impact to raise our margin. However, as I have explained in the past, it would only have a small impact on net interest revenue. The key to improving net interest revenue will be growing our loan portfolio while maintaining our loan pricing in this competitive market, especially commercial loans.

Another positive factor that will benefit our net interest margin when rates begin to rise is our core deposit growth. While core customer transaction deposits were down slightly from the third quarter, we saw a favorable change in the mix, with higher demand deposits. As shown on page 26, core transaction deposits rose $266 million this year or 10% and represented 48% of our total deposits as compared to 30% at the end of 2008, and demand deposits comprised over two-thirds of the growth in 2011.

Turning to fee revenue and operating expenses, as noted on page 27, core fee revenue of $11.4 million for the fourth quarter was up $133,000 from last quarter and down $294,000 from a year ago. Excluded from core fee revenue from the fourth-quarter 2011, as shown on page 29, was a $728,000 gain from the sale of low-income housing tax credits, hedge ineffectiveness gains of $313,000, and a $180,000 positive mark-to-market adjustment of our deferred compensation plan assets.

Core fee revenue for the third quarter of 2011 excluded hedge ineffectiveness gains of $575,000 and a negative mark-to-market on deferred compensation plan assets of $386,000. Core fee revenue for the fourth quarter of 2010 excluded a $682,000 gain from the sale of low-income housing tax credits, $400,000 in hedge ineffectiveness gains, and a $212,000 positive mark-to-market on deferred compensation plan assets.

On page 27, total service charge fees of $7.2 million for the fourth quarter were down $286,000 from last quarter and up $209,000 year-over-year. The decrease from a year ago included lower fees associated with our courtesy overdraft services of $295,000 resulting from lower volumes. This decline in overdraft fees was partially offset by higher ATM and debit card usage fees that were $434,000 higher than last year, and down $333,000 from the third quarter due to seasonal variances.

Mortgage loan fees of $1.8 million were up $677,000 from a year ago and down $43,000 from last quarter. Recent record-low mortgage rates resulted in an increase in refinancing activities in the third quarter that continued through the fourth quarter. We closed $79 million in loans this quarter compared to $57 million last quarter.

Looking at core operating expenses on page 28, they totaled $43.8 million for the fourth quarter, down $250,000 from last quarter and down $261,000 from a year ago. The decrease from last quarter was spread among several categories.

The decrease a year ago was primarily caused by lower professional fees of $1 million and a lower FDIC assessment of $700,000, which was partially offset by higher staff cost accruals. Professional fees were elevated in the fourth quarter of 2010 in connection with our capital transaction that closed in the first quarter of 2011.

The $2 million increase in staff expense was primarily due to an increase in incentive costs, with a $500,000 accrual this year, compared with $800,000 reversal of incentives last year. The balance was primarily a lower credit of $400,000 for the allocation of lending costs associated with the deferral of loan fees.

Page 29 of the investor package reconciles core earnings to our net income and net loss for each period. The primary items excluded from core operating expenses were for closed property costs of $9.3 million in the fourth quarter, $2.8 million in the third quarter, and $20.6 million a year ago. Also excluded from core operating expenses in the fourth quarter of 2011 was a one-time $2.2 million credit adjustment for prior-period expenses and the related reclassification of unamortized actuarial gains and losses and prior service costs to other comprehensive income for United's modified retirement plan.

Turning to capital, as shown on page 31 our regulatory holding company ratios were as follows. Tier 1 risk-based capital was 13.6%; total risk-based capital was 15.4%; and leverage ratio was 8.8%. Also, our tangible common equity to asset ratio was 5.4%; total tangible equity to asset ratio was 8.2%; and tangible book value in our earnings release was $6.47.

The last item I will comment on, as noted in our earnings release, relates to our restatement of our deferred tax asset valuation allowance and clearing of open comments with the SEC. As we have previously announced, we reached resolution with the SEC and agreed to record a valuation allowance.

As we have commented in prior quarters, we strongly believe that our documentation thoroughly supported that there was no need for a valuation allowance and that, more likely than not, we would fully realize the deferred tax assets well before their expiration. However, after further reviews and discussions with the SEC, we determined that without several quarters of profitability to support our forecast of earnings, the weight of the negative objective evidence of our cumulative loss carryforward outweighed the subjective evidence of our future earnings forecasts; and we therefore provided a valuation allowance as of December 31, 2010.

We were disappointed with the SEC comment process, restatement, and non-cash charge for the valuation allowance. As credit metrics improve and we continue to record quarterly profits, we would expect to fully utilize our deferred tax assets, which amounted to $268 million at year-end.

This lowered our tangible equity to asset ratio I commented on earlier from 10.9% to the 8.2% reported; our tangible common equity to asset ratio from 8.2% to 5.4%; and our tangible book value from $11.12 to $6.47.

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

Thank you, Rex. You have heard a great deal about the fourth quarter and 2011 as a whole. Not all the news has been positive, but we have made significant progress in a number of key areas.

We have continued to grow core deposits, with 15,600 next new core deposits accounts in 2011 alone. That translates to $266 million in net new core deposit growth and thousands of new customers.

We have stabilized the runoff in our loan portfolio and are beginning to have traction that we believe will lead to growth in the future. We continue to improve our loan portfolio composition, and to grow owner-occupied commercial real estate and small-business loans while reducing our higher-risk construction portfolios.

Throughout 2011, we were able to maintain our loan portfolio yield within 6 basis points of the fourth quarter of 2010, while decreasing deposit costs by 50 basis points from 120 to 70. This helped to offset the impact of the $593 million reduction in average loan balances compared to the fourth quarter of last year.

We continue to see excellent customer satisfaction ratings at 95.5%, the highest in the nation as reported yesterday by Customer Service Profiles. I make these points to say that we have laid a strong foundation for continued improvement in 2012.

Through the efforts of our dedicated bankers I am confident that we will continue to grow core deposits. We will continue to be vigilant on pricing, although we expect pricing pressure on good credits.

On the subject of loans, the leveling off of our loan portfolio is encouraging and is due primarily to the addition of seasoned commercial lenders focused on owner-occupied commercial real estate in our metro markets. And you will see more of this. We expect all of these factors to contribute to revenue improvement.

In addition, I want to emphasize that our number-one focus and top priority in 2012 must be and will be expense reduction. Within our footprint, there are very few signs of economic expansion. In an economy that has improved slightly but remains weak, we must review and improve process efficiencies.

We have successfully reduced expenses in the past, but in 2012 we must draw a line in a sand. It is imperative that we take a serious and diligent look at every single aspect of our business -- every process, every location, how we do every single job, all in the name of operational efficiency and revenue growth.

To this end, I have charged 75 of our senior managers with benchmarking best practices and examining current operations. This process is underway, and responsibility does not rest solely on the shoulders of these 75 leaders. Our entire management team is committed to make United more efficient and profitable on a sustained basis.

Our target is a $10 million annual run rate improvement by the fourth quarter of this year, primarily in the expense reductions and growth in fee revenue. This will be an ongoing process, so expect to see a disciplined focus on cost efficiencies going forward into 2013 as well.

We will be tenacious in every sense of the word. Tenacity is a good way to describe how United Community Bank has approached these past four turbulent years. We have worked diligently through these difficult years, while strengthening our business and returning to profitability as quickly as possible.

Before I open the call to questions, I want to welcome Cliff Brokaw to our Board of Directors. Cliff is a managing director of Corsair Capital, which is our largest shareholder, and is a former managing director of the financial institutions group of Goldman Sachs.

He succeeds Peter Raskin, who is expected to be named a director at one of the nation's largest banks. Under regulatory requirements he is unable to serve as a board member simultaneously on more than one large bank holding company or bank board. We have been fortunate to have Peter involved with United and have benefited from his extensive banking expertise. We thank Peter for his counsel, and we welcome Cliff to the United Board.

Now, Rex, David, and I will be pleased to answer any questions.

(Operator Instructions) Jefferson Harralson, KBW.

Thanks, guys. I wanted to ask David a question. Just going through my notes of the marks you are talking about in the NPLs and the OREO, I think I heard you say $0.71 on the dollar currently for the NPLs. I just had for my notes that the last two quarters were $0.57 and $0.62 respectively.

Are my numbers right? And if so, is there a mix change going on there where the newer stuff coming in is higher quality and being marked down less or something?

Yes, well, first I think your numbers are right. I don't have the historical numbers right here in front of me, but I think directionally those are accurate and they're probably exactly on. The real issue, Jefferson, is our process on the NPL side is getting current -- we get a current appraisal as soon as a loan goes to classified status. And our process is to write it down to a minimum of 80% of that new appraisal.

So what it is telling me -- and you can see it -- it is really a shift in the mix as much as anything and the collateral that is behind it. If you go back several quarters we had a higher percentage in residential construction. We have continued to see the inflow out of that portfolio decline, and of course that is where our greatest losses are.

So more than anything else, it's the mix shift. But the science behind it really comes down to what is that current appraisal telling us, and that is how we take the mark.

Okay. Is that similar for the OREO? I had it at $0.33 last quarter, and it increased to $0.36, even that you took a decent negative mark there.

No, it is the same on it; let me just add to it. The OREO process, again we would start at a baseline at 80% of the current appraised value. However, we might take a deeper mark based on a reduction in sales price. We always take the lower of either that 80% of appraisal or 90% of the current sales price.

So for example when you see us with -- you saw the OREO expense climb here in the fourth quarter. About $4 million of that related to additional write-down on the remaining OREO on the books.

Most of that had to do with our desire to go ahead and mark that down, to position us to more aggressively move those assets in the coming quarter, as opposed to new appraisals, although there is a piece of it that would tie to new appraisals.

So that is the flow there. But ultimately when you back into that percentage look at, it has more to do with what is the market value, the current market value tied to appraisals, than anything else.

All right. One more. Accruing TDRs, is that a subset or is that separate from performing classifieds?

It is a subset of performing classifieds. So yes, you've got that $328 million of performing classified. Virtually all of our accruing TDRs are classified. There is a very -- I think it is less than $1 million is not classified.

In future quarters, you will begin to see some of that probably get upgraded because a lot of them have been restructured. They are performing well and will go back to better credit grades. But as of today virtually all of it is in the performing classifieds.

All right. Thank you.

Michael Rose, Raymond James.

Hey, good morning. Just had a question on the expense reduction that you talked about, $10 million. I was wondering off of what base you are basing that off of? Does that include credit costs on some of the other items this quarter? Or is it a full-year run rate of 2011? Just some guidance there or clarity would be great.

No, the $10 million, this would exclude the credit cost out of that, Michael. Our expense base is roughly -- if you remove the FDIC fees -- is roughly $100 million on salaries and $70 million on the remaining business. So $170 million is what I would look at as the overall operating costs.

Okay, thanks.

Bill Young, Macquarie.

Morning, guys. Right now I am just looking at your efficiency ratio, and you're operating at about 71% in the fourth quarter. Is there a long-term target that you are trying to manage towards with this new expense program?

Actually, what we are trying to do is to remove the -- or get that number down in the upper 50% range, which is where we have been in the past. What we have done basically has continued to look at our overall expense base, look at the growth potentials and so forth. But in pulling our group together the real focus has been on our process improvements, our operating efficiencies, whether that is on the deposit side or on the lending side.

We believe there is considerable savings in revisiting those and becoming much more efficient. That process on the deposit side is well underway and certainly believe we will get significant benefits.

But we will also be -- benchmarking will become a tool to help and ensure and calibrate our Company relative to our size and expense base. We will look at everything across the board from our branch network, the overlap; those branches that have significant growth potential, those that don't; cost structures within those branches as well as cost structures within the Holding Company. So everything is on the table.

Bill, this is Rex. I'd like to add to that. The 71% that you are looking at includes the elevated level of foreclosure costs. So as Jimmy indicated, as we look at it, we are looking at reducing the other core expenses in the $10 million he talked about.

That would probably with the $10 million we talked about, with a good portion of that being expenses, would probably put us in the mid-upper range, 55% to 58% on efficiency. Again, with a lower run rate on foreclosure costs in that number.

Got you. Then switching over to credit, I know some of the reserve release this quarter was related to your large NPL. But how do you look at your reserve going forward as we go into 2012?

Right, yes. Well, $25 million of the reserve release this quarter was the release of the specific reserve from last quarter that was charged off. But as we -- looking forward really our reserve is going to be dictated by the methodology we use, which is really heavily driven by historical loss experience in these portfolios. And as the credit metrics improve, we would expect to see a little bit of a relief in that.

Now that will be offset of course by judgmental factors and our desire to be cautious in terms of how much that reserve will come down and environmental factors in terms of what is going on in the economy, etc., early leading indicators. So all those things will bake in.

There isn't an absolute target that I can give you. I think based on what we are experiencing there is probably a pretty good likelihood we will continue to see some notching down of the overall reserve. But I don't expect it to be a real rapid decline.

Okay. Just one last question if I may, just on a core basis chargeoffs ticked up sequentially, excluding the large writedowns. Can you just comment if that is more you guys being a little bit more aggressive in marking down assets for sale? Or are you seeing anything systemically in the portfolio?

No. Really, I think excluding the large one this quarter, net charge-offs, yes, were up a little bit this quarter. It is more of a function of just this NPL inflow had come up some in the quarter, again if you exclude the large relationship.

Valuations on real estate properties are still very distressed. In some parts of our geography I think I am not sure that we are at the bottom yet. Other parts I believe that we are. So it really depends on where the asset is coming in from, in terms of the impact on the overall level of charge-offs.

However, I do think that the overall net charge-offs and the inflow are really at the higher end of the range from what I would expect over the next few quarters. Generally if you look at the trends in our portfolio in terms of what is going on with past-dues and performing classifieds and even our watch list, we are seeing improving trends.

The thing that is so hard to predict is there is going to be some lumpiness on credit. Some of that comes out of credit that you show adequate capability, but then the willingness of the borrower isn't there; and we still encounter that from time to time.

So I guess I say all of that to say -- kind of reiterate what I said in my opening comments, which is I do believe that generally the credit metrics will continue to improve; but I think you could see a little bit of a variation from quarter to quarter. And again I do think we are at the higher end of that range, what you saw in the fourth quarter.

Great. Thanks a lot, guys.

Jennifer Demba, SunTrust Robinson Humphrey.

Thank you. Good morning. I was just wondering; I have two questions. One, can you just talk about how you have been able to hold your loan yield up so well in the last several quarters?

Then two, David, could you give us some color on the nature of the inflows you are seeing right now in the fourth quarter? And what you are seeing in first quarter too, if you can give us any color.

David, do you want to (multiple speakers)

Yes, you can hit the (multiple speakers)

Yes, Jennifer, on the loan pricing, I think it really comes down to a mix that we have in the portfolio. We have seen probably two-thirds of it being fixed coming through; the other third is prime daily, and that probably three or four -- three years ago was reversed.

Again, I think additionally being able to still hold in our floor pricing as it renews, as it comes back through, we are seeing with the new loan portfolio, with new loans coming on, more competitive pressure especially in our metro markets, with those coming down. But the mix still is holding in.

If you saw the one page there, I think we're at 5.01% on the new and renewed over the past quarter, so we are still able to hold it in well. Where our maturing loans coming off are probably in 5.20% or 5.30%, so it is still around the same blended rate, so we are not having a significant negative impact with that.

On the inflow question, Jennifer, the largest inflow category is residential mortgage here this past quarter, and we saw that tick up. Part of the reason for the rise this past quarter was oftentimes we have full-relationship borrowers who -- where we may have a commercial relationship along with their house, and so it may impact more than one category.

That was part of the reason for the driver. Yet overall, resi mortgage continues to just be a source of inflow for us, and I think it's going to continue to be one of the larger segments for us.

On residential construction, we continue to see that decline. It has declined every quarter really for the past four quarters, and I think if you went back it is probably now at least eight quarters down.

I don't have those year-prior quarter-by-quarter numbers in front of me, but certainly over the last four it has ticked down sequentially. And I really expect that trend to continue both because the size of the portfolio has shrunk, but also the default rate out of that portfolio appears to continue to improve.

CRE was the second largest inflow category this past quarter. So when I -- and then commercial construction I guess would be in there as well. The actual numbers, if you want me to give you the breakdown, it's commercial construction was $7.9 million; C&I was $2 million; CRE was $12.1 million; resi construction was $8.4 million; and resi mortgage was $14.7 million.

Generally, my expectation is that residential mortgage will probably stay at an elevated level for some time. The residential construction will continue to tick down.

CRE I think will bounce around, up and down. I think we are probably at the higher end of the range because, frankly, the three prior quarters we have been down in the $7 million to $9 million range, and I really don't think we will see it as high in the coming quarters. But it could on a given credit, could impact that.

Then commercial construction, I think we will see that drop as well. Because that land content, while we still have a fair amount of land content, the default rate there appears to be dropping. I think we had -- we had been at $900,000 in the third quarter; we jumped up to $7.9 million, so it's going to be lumpy I guess is a better way to say it.

So generally speaking, the most predictable is resi mortgage, and then CRE probably following that.

Thank you.

Kevin Fitzsimmons, Sandler O'Neill.

Good morning, guys. Just a few things here. Rex, could we -- could I just get some clarification on the margin outlook? I think I heard you right, you said 3.75% for 2012. Does that mean averaged over the year? Does that mean reaching it at some point? Does that mean reaching it in the first quarter?

And it seems like it is based on the assumption that loan growth is going to continue to improve, but also this excess liquidity is really going to fall off. I know that was the main thing didn't play out this quarter. Is there the risk that that happens again to your outlook in the next few quarters? Thanks.

Yes, let me clarify it again, Kevin; I know sometimes I talk pretty fast. I did note in my comments earlier that we had projected the fourth quarter at about 3.7%; and again that was with a significant amount of excess liquidity coming off the balance sheet, which is about 67 basis point impact right now.

I did comment that our outlook for 2012 is staying in the 3.50% range. It might tick to the upper end of that. But I think as I indicated, the pressure is out there. Jennifer raised a question earlier, that loan repricing is obviously a concern. We are holding it in well. I commented that we are repricing CDs still down further, and we have a significant amount maturing that will give us benefit in 2012.

The bottom line with it is if you look at it, is again in the context of what drives net interest revenue. And what drives net interest revenue, again, is our loan repricing, holding in loan pricing, getting a little more out of our CD repricing.

And what makes it complicated when you look at our margin is the significant amount of excess liquidity. Again, we will benefit from that in 2012, but it really is not going to have a material impact on the bottom line.

That is where it's a little more difficult in trying to project out, because then you have to project out what is the real margin that relates to net interest revenue versus we will get benefit as excess liquidity comes off the balance sheet and going forward.

So I do think if you look at our margin underneath it, I guess we are saying we look to see net interest revenue holding pretty steady. Again, it has some loan repricing pressures; but we have the benefit of CDs repricing.

And again, if we can continue to grow the mix, which is key, both in more demand deposit mix in our funding as well as again adding more loans, and next year hitting this inflection point with some growth.

Okay, so I heard it wrong. So you said in the 3.50%s range, so it's really more of a maintaining the margin.

Exactly.

But with a focus on dollars of net interest income.

Right.

Okay, great. If I could also ask, David, just if you could give a little more color on disposition plans. If you could repeat what you disposed of this quarter.

But then with this -- it seems like you guys took a very aggressive approach to writing down properties this quarter. And that is not just for what you disposed of, but what you hopefully have teed up for the next two or three quarters. Can you give us some idea of timing of how that is going to work?

Is it going to be a slow, steady bleed of OREO? Or are we going to see maybe in the second quarter, because of the strong selling season, would you expect more of a sizable step-down in OREO? Thanks.

Sure. Yes, we saw $30 million in the fourth-quarter; losses on sales that was right at about $3 million. And yes, the remaining inventory that we were carrying at quarter end, we took another $4 million write-down in the fourth quarter on the retained -- on the OREO yet to be sold. It was to position us to hopefully move it out of here more quickly and with minimal or no loss going forward.

I think the challenge, Kevin -- and we have two challenges. One is the first quarter tends to slow down, and we are aware of that, yet we will be moving hard.

The other thing that -- as we have gone through this, we have less larger parcels that we are selling. It is a much more granular portfolio of OREO today than it would have been a year or two years ago. That is good in that you can attract more buyers; but it's a lot more transactions to get -- to move off the same kind of dollars.

So I guess I say all of that to say I would expect I don't think we will hit $30 million in the first quarter if I had to -- excuse me, $20 million in the fourth is what we did. I don't think we will hit $20 million in the first; but we could.

I think it will probably be somewhere in the $15 million to $20 million if I had to guess. It is really a guess at this point.

Second quarter I think will pick up and we will see a much stronger quarter, because that is just historically what has happened. So hopefully that gives you a little bit of flavor.

At the same time, I'd tell you that we are always looking at various options. We have people approach us about bulk purchases and that type of thing, that we weigh into the mix, which could change it in any given quarter. But generally our strategy is going to be more of a retail strategy.

Okay. One last question. I don't know for Jimmy or Rex. You mentioned how you are going to be focused on improving credit, continuing to put up profitable quarters, and that in theory that would result in the reversal of the DTA allowance. Is there any sense for how long that takes?

I know we have seen a few companies out there where -- have put up five quarters of consecutive profits and have gotten it. Is that your sense? Or is there a chance that that would be even faster for you all? Thanks.

Kevin, this is Rex. I think it is still I think a difficult one to project out. I do believe that it takes several quarters of sustained profitability with improvement in both credit coming to the bottom line over that period of time.

And the key really underneath it then is the evaluation and looking at that as objective evidence that you are through the credit, you are earning solid profits to support that in the context of the cumulative loss. So I don't think there is a time period specific to that, but we do look at that in the future, continuing with profitability and being able to utilize the DTA.

Okay. Thank you, guys.

Christopher Marinac, FIG Partners.

Thanks, and Rex, I guess I had a similar question that Kevin did on the DTA, just to ask it in a direction. Does the absolute level of profitability in terms of dollars drive how much you can recapture in a given year or quarter? Should we be focused on that as well?

Yes. I mean the simple mechanics of it, if you look at each quarter, is basically your pretax income or pretax loss -- and we hopefully don't expect losses. But your pretax earnings will fall to the bottom line. There will be some little breakage in there between allocation in some of the OCI components.

But I think that is the way -- we commented that in the press release, that we expect minimal provision, rather expense, in '12 relating to our pretax income. So basically that falls right to the bottom line.

Okay, great. I guess my other question for Jimmy was just more from the regulatory relationship standpoint. Where are you in terms of where they want you to be on classifieds?

As well as just if you have opportunities externally that come along, can you look at those? Or what is I guess the thought on timing of just looking at external opportunities this year or next?

Well, you know, the classified, the Tier 1, Chris, is a very key number for us as well as the regulatory side. My guess would be that that needs to be down into the low to mid 50%s; and right now I think at the end of the Q4 we are about 66%, 67%.

Certainly, I believe our relationship with the regulators, because we stay very close in touch with them, is very solid. And certainly we would -- we have a strong interest in participating at the appropriate time on the consolidation.

We are working down this classified to Tier 1 just as quickly as we can, managing the efficiency and the cost of capital in doing so. But we are very mindful of that ratio, and we have not been given a number specifically from the regulators. That is our best assumption.

Great. That's helpful, Jimmy. Thanks very much.

Michael Rose, Raymond James.

Just one quick follow-up for David. I noticed in the performing classifieds, the owner-occupied CRE ticked up a little bit. Was there anything that drove that?

No, it was -- it is really not any particular one name, Michael. It's just a general tick up in a few different names that popped it up. I really wouldn't expect that trend to continue. But we will see as we work through the quarter.

But no, it was not any particular one name or anything like that.

Okay, that's helpful. Thanks.

Thank you. I'm showing no further questions in queue. I would now like to turn it back over to you, sir, for any further remarks.

Well, thank you, operator, and we want to thank everyone for being on the call this morning. Rex, David, and myself will be around all day and certainly encourage you to give any of us a call if you have additional questions. Thanks again for your interest in United, and we look forward to talking with you next quarter.

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