United Community Banks, Inc.
Q4 2007 Earnings Call Transcript

Published: 23 Jan 2008

[Operator:]

Good morning and welcome to United Community Bank's 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. Also participating this morning is Gary Guthrie, President of Atlanta's Residential Construction. United's presentation today includes references to operating earnings and other non-GAAP financial information. United has provided a reconciliation of these measures to GAAP in the Financial Highlights section of the news release included on its website at ucbi.com. A copy of today's earnings release was filed on Form 8-K with the SEC, and a replay of this call will be available on their Investor Relations website at www.ucbi.com. Please be aware that during this call forward-looking statements may be made about 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 will begin the conference call with Jimmy Tallent.

[Jimmy Talent:]

Thank you for joining us, and good morning. In addition to providing a recap of the fourth quarter, our focus this morning will be on credit quality, margin, capital and core earnings, as well as guidance for 2008. On December, the 27th, we announced that during the fourth quarter, we were experiencing negative pressures on some of our key credit indicators. We also announced that we would significantly strengthen our allowance by increasing the provision for loan losses to $29.5 million, which included a special $3 million provision for Spruce Pine. As noted in the announcement, during the fourth quarter, we took $13 million of loan charge-offs and $3.8 million of write-downs and costs for OREO properties. We also charged off $18 million of lot loans for the Spruce Pine development in North Carolina. You'll recall that in the second quarter, we made a special $15 million provision for these fraud-related loans. And combined to the $3 million this quarter, we have charged off all the allocated reserve for Spruce Pine. We feel the remaining $5 million is fully collectible. David will talk about Spruce Pine later in the call. So let me sum up the actions impacting the allowance for the quarter. I will exclude Spruce Pine since we have fully charged off the allocated reserve. We increased the allowance by a $26.5 million provision. We charged-off $13 million, leaving a net increased to the allowance of $13.5 million. That increased our allowance as a percentage of loans to 1.51% at year-end, up from 1.28% last quarter. Non-performing assets declined this quarter from $63.3 million or 77 basis points at the end of the third quarter to $46.3 million or 56 basis points at year-end. The decrease from the third quarter in non-performing assets was the result of aggressively moving problem loans and assets out of the bank and taking charge-offs and write-downs when necessary. As you would expect, these actions significantly lowered our performance for the fourth quarter of 2007. For the quarter, net operating income was $6 million. Diluted operating earnings per share were $0.13, and GAAP earnings were $0.09 per share, which is $0.4 lower than operating earnings due to the special provision for Spruce Pine. Now, an overview of loans, deposits and mortgages. Total loans were flat year-over-year when you exclude the loans added by the acquisition of First Bank of the South during the second quarter of 2007, and down slightly on a linked-quarter basis. As expected, the growth of residential construction loans has slowed significantly in this weak housing market, especially in the Atlanta region. In fact, on a linked-quarter basis, residential construction loans were down by $110 million. On the positive side this quarter, we saw $90 million in loan growth in the commercial and residential mortgage portfolios. So we are getting growth across all of our markets, but the growth is more than offset at this time by construction paydowns. To both enhance growth and diversify our loan portfolio, we are focusing on small business lending and the expansion of C&I lending. The key to this strategy is to continue to add experienced lenders in those markets that we've made good progress over the past quarter. However, we expect that slower than normal loan growth will continue until the residential housing and construction market stabilizes. With these uncertainties, we expect core loan growth in 2008 to be flat to 4% and growth in the first quarter at the low end of this range. Total deposits were down year-over-year when you exclude the acquisition of the First Bank of the South. Deposits decreased by $265 million as our banks intentionally let high rate, non-relationship time deposits run off. Excluding these time deposits, customer deposits were up by about $25 million from the prior year, but down $77 million from the third quarter. The number of customer accounts is up 5% over last year, and our customer satisfaction scores remain at historic highs. For these reasons, we believe that the linked-quarter decline is temporary and directly related to the economic environment. Out net interest margin was 3.73% for the fourth quarter and declined 16 basis points from 3.89% for the third quarter. The margin compression was primarily due to the higher of non-performing assets coupled with increased funding costs due to the elevated LIBOR rates and pressures on retail and brokerage CD pricing due to the lack of liquidity in the markets. With the Fed's actions yesterday, and the outlook to continue lowering rates and liquidity remained intact, we expect to see moderate margin compression in the coming quarters. As a reminder, in a few minutes, David will address credit quality, the residential construction market, our loan portfolio and an update on what we are doing to manage through this environment. Now, I will turn the call over to Rex for a review of the fourth quarter financials, margin, interest sensitivity and capital. Rex.

[Rex Schuette:]

Thank you, Jimmy. During the fourth quarter, net operating income totaled $6 million. This is down substantially from a year ago and from the third quarter of 2007 due to the increase in the provision for loan losses and OREO expense that Jimmy mentioned a moment ago. These actions resulted in diluted operating earnings per share of $0.13 for the fourth quarter compared with $0.46 last quarter and $0.44 for the fourth quarter of 2006. For the fourth quarter, tax equivalent net interest revenue was $69.7 million, up $7.2 million or 11% from the fourth quarter of 2006. The key driver was the 19% growth in earning assets attributed primarily to two acquisitions, which were offset in part by margin compression. Net interest margin for the third quarter was 3.73% compared to 3.89% for the third quarter of 2007 and 3.99% for the fourth quarter of 2006. Contributing factors for the 16 basis point decrease this quarter were higher carrying costs of non-performing assets, CD pricing and lower core deposits. Deposit pricing over the past two quarters has been extremely challenging as large mortgage banks have aggressively competed for liquidity by offering CD rates substantially above the wholesale rates. The liquidity issue started early in the third quarter when LIBOR rates moved up, and in fact, widened further when the Fed lowered its rates by 50 basis points in September. This abnormal LIBOR spread and liquidity shortage continued through year-end and has impacted both the retail and broker CD deposit rates. Due to these pricing pressures, it did not allow us or other banks to reduce CD rates proportionally as the Fed lowered rates in the past five months. We expect continued challenges to our ability to maintain CD deposits due to the aggressive pricing by other depository institutions in our markets, as well as the brokered CD markets. We have however seen relief in January as the one-month LIBOR rate has been moving back into the normal spread compared to the fed funds rate, although CD rates are still at a premium to the LIBOR swap rates. We've also seen some DDA balance attrition, and we believe that it is directly related to the current economic cycle. At the same time, we have been able to grow the number of core deposit accounts, but have seen a decrease in customer balances. Again, we believe that the lower balances are brought on by the economic environment and are temporary and that deposits will eventually flow back into the bank since we are not losing relationships. Also, you may recall that we built up liquidity in 2006, which enabled us to let deposits run off and be more selective in deposit pricing in 2007. We've actively managed our wholesale borrowings and brokered deposits to maintain an appropriate level of liquidity as we balance interest sensitivity in this down rate environment. We believe that the Fed will continue to ease rates in the near term, which in turn will put pressure on the deposit pricing and margin. Based on the Fed's actions yesterday and our outlook for continued easing of rates, we would expect moderate margin compression in the first quarter. Turning to interest rate sensitivity, we continue to manage our balance sheet towards a neutral interest rate sensitive position, and have added $200 million and received fixed rate swaps during the fourth quarter. This brings our total received fixed rate swaps to $785 million and our interest rate, of course, to $500 million. At quarter-end, our interest rate sensitivity reflects a 130 basis point increase in net interest revenue over the next 12 months, based on a 200 basis point ramp-up of interest rates. This is down from the 190 basis point increase a year ago and up from the 30 basis point increase last quarter. Also, at year-end, a 200 basis point ramp-down in interest rates would cause a 150 basis point decrease in net interest revenue as compared to a 70 basis point decrease last year and an 80 basis point decrease last quarter. The effective duration of our investment securities portfolio was 3.1 years at year-end, up from 2.8 years at September 2007 and 2.7 years at December 2006. The average life of our investment securities portfolio was 4.1 years at year-end as compared to 3.7 years at September 2007 and 3.8 years at December 2006. Fee revenue was $16.1million for the quarter, an increase of $2.9 million or 22% and was up in nearly in every category when compared to the fourth quarter of 2006. Consulting fees totaled $2.6 million, which exceeded our record set last quarter. This represents a 23% increase from a year ago, and the increase was primarily driven by the advisory service practice. Brokerage fees of $1.1 million were up 63% from a year ago, which represents our second highest quarter on record, exceeded only by the second quarter of 2007. Our customer retention rates have been very strong, and they continue to grow our customer base. Mortgage loan fees were down $434,000 from last year as demand for mortgage loan began to taper off, reflecting a slowdown in the housing market. During the forth quarter, we sold investment securities that resulted in gains of $1.4 million. These gains were mostly offset by charges from the prepayment of higher rate federal home loan bank advances. These transactions were a part of our ongoing balance sheet management strategy to reduce cost of funds and improve interest sensitivity as we move into 2008. Looking at operating expenses, they totaled $49.3 million for the quarter. This was an increase of $6.8 million or 16% over the fourth quarter of 2006, and an increase of $1.2 million over the third quarter. Our press release schedule shows the changes by each expense category. The key drivers of the overall growth and expenses for the full year, and quarter impact were the acquisitions for the First Bank of the South in the second quarter of 2007, the Southern National Bank acquisition late in the fourth quarter 2006, the higher level of OREO expenses and write-downs taken in the fourth quarter of 2007, the additional costs to operate 13 de novo offices opened in 2006 and 2007 and the increase in costs related to the new FDIC insurance premiums. These growth areas were partially offset by a decrease in bonuses and profit sharing expenses in the fourth quarter of 2007. For the quarter, the two acquisitions accounted for approximately $2 million of the year-over-year growth in expenses. And the new FDIC insurance premiums resulted in additional $927,000 in expense. OREO write-downs in the fourth quarter of 2007 added $3.7 million in expense, most of which was offset by reductions in bonuses and profit sharing expense of $3.5 million. In spite of the items I just mentioned, we were able to keep all other expenses down to a very small linked-quarter increase. We are continually balancing our expense growth with revenue growth and controlling discretionary spending where appropriate, to achieve positive operating leverage. Our focus on controlling expense growth resulted in a 57.7% efficiency ratio for the quarter, which was within our long-term goal of 56% to 58%. Now to discuss capital. We know that maintaining a healthy capital position is important, especially during these uncertain times. United's strong core earnings and capital levels allowed us to purchase 2 million shares over the past two quarter. This brought our capital ratios down slightly from last quarter, but they are still comfortably above regulatory well-capitalized levels at year-end. Our regulatory total capital ratio at year-end was projected at 10.85% with our tier-1 leverage ratio at 6.84% and our tier-1 risk-based capital ratio at 8.55%. Further, our tangible equity and asset ratio was 6.58% and well above our target. Additionally, the Board of Directors approved the first quarter 2008 dividend of $0.09 per share consistent with the level of 2007. We look to continue to maintain our strong capital position going forward. Now, I'll turn the call over to David.

[David Shearrow:]

Thank you, Rex, and good morning. I want to talk to you about the fourth quarter increase in the loan loss provision and charge-offs as well as an update on Spruce Pine. I also will give an updated perspective on how the economic environment is affecting our loan portfolio, and how we are managing through this challenging environment. And as much as possible, I want to look to forward and give our best estimate as to what the first quarter of 2008 will look like. Let me first address the fourth quarter loan loss provision. In the fourth quarter, we completed an exhaustive review of the entire residential construction portfolio with particular emphasis on the Atlanta region. As a result of this review and a continued deterioration in the housing and construction markets as well as uncertainty of where we are in the current economic cycle, we determined it was appropriate to increase the provision for loan losses and bolster our loan loss reserve. As you have heard, the fourth quarter provision for loan losses was $29.5 million, including a $3 million special fraud-related provision for the Spruce Pine development. This compared with provisions of approximately $4 million in the fourth quarter of 2006 and third quarter of 2007. During the fourth quarter, we aggressively wrote down problem loans and assets in order to move them out of the bank. By aggressively dealing with these problem assets, we believe we are now better positioned to continue to work through this difficult credit cycle during 2008. As Jimmy mentioned before, in the fourth quarter, we saw a decline in non-performing assets. As of December 31st, we had $46.3 million in non-performing assets compared with $63.3 million at September 30, 2007. Non-performers included $28.2 million in non-accrual loans, $18.1 million in OREO, and no loans that were occurring that were 90 days past due. The ratio of non-performing assets to total assets was 56 basis points compared to 77 basis points last quarter, which includes 6 basis points and 28 basis points respectively for Spruce Pine. In terms of dollar size, we had three non-performing loans greater than $1 million. The largest exposures were $2.2 million and $1.7 million. Both loans were to separate residential housing developers. The largest exposures in OREO were $3.4 million and $2.4 million, both are our residential housing developments. Currently, $9.7 million of NPAs are under contract to sell or refinance, including our top two non-performing loans in the largest OREO exposure. Segmenting our NPAs, the largest market concentration at year-end was the Atlanta region at 56%. The largest loan category concentration was residential construction loans at 59%. Net charge-offs excluding Spruce Pine were $13 million for the quarter. The ratio of net charge-offs to average loans was 87 basis points excluding Spruce Pine and both, 35 basis points we reported in the third quarter and the 15 basis points we reported the year ago. Again, the significantly higher charge-offs in the fourth quarter were primarily due to the deterioration of the residential construction housing markets concentrated in the Atlanta region. Excluding Spruce Pine, Atlanta comprised 69% of our total fourth quarter charge-offs. The higher level of charge-offs in the fourth quarter also reflects the continued softness in the residential real estate market, and our commitment to move these foreclosed properties quickly off of our balance sheet. Most of the foreclosures that were transferred to OREO in the fourth quarter were residential real estate properties. Historically, we've been able to turn such properties at a fairly rapid pace. However, while we're still seeing demand for foreclosed properties, uncertainly about the duration of this current economic cycle, has caused us to take some larger losses in order to ensure quick disposal. We believe our strategy of aggressively and quickly moving out problem credits simply makes good long-term business sense. Let me now give you some updated information on our residential construction portfolio in Atlanta. Of our $1.8 billion residential construction portfolio, the Atlanta region represents $864 million or 47%. This Atlanta portfolio is down 8% from last quarter. Of this $864 million, we had $82 million in pre-sold houses, $286 million in spec houses, $311 million in acquisition and development loans, $131 million in finished lots and $54 million in the land loans. In terms of our risks management process, we are aggressively managing our entire loan portfolio. We continue to review in detail all of our credit exposures greater than $500,000. We hold quarterly meetings with all of our banks to review in detail the status of all watch list credits. Residential construction in Atlanta is reviewed more frequently. These meetings are attended by all of executive management. Additionally, Jimmy; Rex; Guy Freeman, our Chief Operating Officer; Glenn White, our President of the Atlanta Region Banks; and I meet with our workout team every week to review the status of all of our NPAs, so that we can bring quick resolution to problem credits. You'll be interested to know that we have added experienced personnel to our workout team, including two individuals with development and construction experience. We have also intensified our independent credit review examination process to include more targeted reviews in the Atlanta region. All of these processes and our intense management focus have been a part of the culture at United for years. We believe in quick identification of problems and equally quick resolution with full engagement and accountability by our entire management team. Now, let me update you on Spruce Pine. Following the $18 million charge-off, our remaining balance totaled $5.3 million. While the legal process moves slowly, over the past 30 days, we have reached settlement agreements with several borrowers, and we are hopeful about the continued progress for resolving these loans. Our strategy for Spruce Pine lot loans continues to be consistent with what we've discussed over the past two quarters. We are aggressively pursuing all avenues of collection, including lawsuits and arbitration even if a portion of the loan is charged off. We are working with borrowers who are willing to work with us and recognize their obligations. We also continue to cooperate with the other banks involved and with the North Carolina Attorney General and had met recently with the FBI in the discovery process. In terms of credit outlook, we expect continued challenges over the next several quarters. While we proud ourselves of maintaining excellent credit quality, the housing slowdown has created a difficult environment for builders and developers and clearly has had an impact on our loan growth and credit quality. We've continued to experience upward pressure in classified assets and our past dues at year-end were 1.2%, of which residential construction loans accounted for 55%. Based on these indicators, uncertainties about market liquidity and the legal delays which come from bankruptcy, we expect volatility in the level of our NPAs during 2008. However, looking into the first quarter, we expect NPAs to remain below 1% of assets. Furthermore, we expect net charge-offs to range from $5 million to $7 million for the first quarter. Before I turn the call back to Jimmy, let me speak to the adequacy of our allowance for loan losses. As you're aware, we review our allowance quarterly based on the current risks identified in the portfolio. Our fourth quarter allowance was 1.51% of loans. The allowance coverage of non-performing loans was 3.2 times. We believe that the current level of allowance is adequate to conservatively cover our losses. Our expectation is that the allowance will remain at a similar level, and the provision for loan losses should roughly equal net charge-offs for the first quarter. With that, I'll turn the call back over to Jimmy for closing remarks.

[Jimmy Tallent:]

Thanks, David. As I am sure, it is now clear to everyone that 2007 was a very difficult and disappointing year for all of us at United. We hold on our sales to warehouse standard, and 2007 did not measure up. Everyday, we make decisions that we believe to be in the bank's best interest, and we feel it deeply when our actions do not bring about positive business results. Dealing aggressively with the fraud and the loan provision was hard on the bottom line, but we are certain that we did the right thing for the bank. With the United family holding 25% of our stock, I don't say that loudly. We know very well how investors feel when the stock is down about 50%, as we are all deeply vested ourselves. We have always spoken openly with our investors in order to reassure you that we have taken important steps and will continue to take more to keep United Community Banks on the path of powerful stability and growth. To move this forward, we have robust structures and processes for the early identification and quick resolution of problem credits. Managing these, we have an exceptionally skilled and talented risk management team. Underlying all of this, we have strong reserves with an allowance for loan losses, that we feel is adequate and sound. Now, let's look to the near future. As you might imagine, it is very difficult to provide guidance for the entire year when there is so much uncertainty and volatility in both the housing market and broader economy. With this environment and our commitment to provide accurate guidance, we simply do not have a clear enough long-term view to provide meaningful guidance today beyond the first quarter. At this time, we plan to continue this short-term quarterly guidance for the remainder of 2008. Based on our assumptions about credit conditions and the overall economy, as discussed earlier, we expect core annualized loan growth to be flat for the first quarter. Also, we expect further margin compression and net charge-offs of $5 million to $7 million. As a result, we anticipate operating earnings per share of $0.34 to $0.38 for the first quarter. During times like these, we don't do knee-jerk fixes. Instead, we remember and remain focused on what got us this far, our experience and talented employees and rock solid customer relationships. All these great people are the basis of what has become our proven community banking model, one that has been successful for more than two decades. We support that model by remaining well capitalized for the very strong core earnings machine. Strategically, we are well positioned in some of the country's best markets with strong, current and projected job and demographic growth. Because of these facts and our 2000 top-notch bankers, I continue to remain extremely optimistic about United and our future. With that, I will ask the operator to open the call to your questions.

[Operator:]

(Operator instructions) And we will take our first question from Jennifer Demba from SunTrust.

[Jennifer Demba:]

Good morning.

[Jimmy Tallent:]

Hello, Jennifer.

[Rex Schuette:]

Good morning.

[Jennifer Demba:]

How are you doing? I wanted to thank you for all the loan portfolio breakdown that you gave in this quarter's release. And looking at that, it looks like you've been able to dispose of more actual home loans, than acquisition, development or land and lot loans. I just wonder if you could give some color behind that, and what you are seeing in terms of demand for those types of credit versus the finished homes?

[Jimmy Tallent:]

David, you --.

[David Shearrow:]

Sure. I'll take that Jennifer. Yes, you're right. We are seeing more runoff in the housing stock versus the lots, and it's really a function of what the builder community is doing. The builders have pulled back on starts. The fourth quarter annualized starts in the Greater Atlanta market were about 32,000 on a four quarter annualized basis, down from about 38,000 third quarter. And of course, starts are what drive the runoff in the lot side. So, it's really just a function of the builders continuing to reduce their inventories to a great cash to they keep themselves running.

[Jennifer Demba:]

Okay. Can you give us an idea of the type of discount you're taking to dispose of some of these credits? I am sure it varies widely, but can you give us some kind of idea, David?

[David Shearrow:]

Sure. Jennifer, it's a wide range. And frankly, it's driven like all real estate by location as much as anything. In the housing stock, we have not seen big discounts to date. And I think that the numbers on what's going on with average sales price in Atlanta, pretty much would support that based on recent statistics down there, which show prices have held in pretty well. On the development side, it is where we've had more charges and it's a pretty wide range, again, depending on where we are. It could be from no loss, up to a project that maybe has a lot of work yet to be completed and it's far out. And you could see a 40% or even a 50% loss. But Gary might want to just follow on to that and just give his view as well.

[Gary Guthrie:]

Well, David, I think you covered it pretty well. We have certainly had better success selling housing, and lots are a little more difficult proposition and certainly no two projects are the same, location or quality. But it would be hard to generalize a particular loss percentage, and it really has been all over the board.

[Jennifer Demba:]

One more question. Of the $864 million in res construction of Atlanta, is most of that, I am assuming -- and can we give any generalities in terms of where it is, how far out it is?

[David Shearrow:]

Yes, we can. If you look at our Atlanta portfolio, roughly 70% of our portfolio is going to be on the north side of the city, 30%-35% on the south side and which is good. I mean while the whole market is soft, there is more softness on the south side than the north. So it would be unfortunate than that. We're also more concentrated in the closer-in counties. We have more exposure in Gwinnett and DeKalb county, less in the farther out counties. So we think while we're experiencing slowness, we think our portfolio concentrations are in the better counties and in the better side of Atlanta as well.

[Jennifer Demba:]

And do you have approximation of how much is the closer-in counties versus the outer counties or guesstimate?

[David Shearrow:]

I was just kind of eyeballing or granular detail here. I would say just eyeballing, probably better than 70% are in pretty close counties, with 30% in farther out counties.

[Jennifer Demba:]

Thanks a lot.

[Operator:]

We'll move to next Kevin Fitzsimmons with Sandler O'Neill.

[Kevin Fitzsimmons:]

Good morning, everyone.

[Jimmy Tallent:]

Hello, Kevin.

[Rex Schuette:]

Good morning, Kevin.

[Kevin Fitzsimmons:]

Can you give us a sense, I think you mentioned earlier that with closings exceeding starts that, I guess that's what you need to kind of whittle down that inventory in Atlanta. And I am sure there is some that you're watching closely all the time. But, based on the pace that you've seen that happen, or you're kind a projecting outwards or based on what you are seeing now, how long would it take to whittle down that inventory to a level that's more normal? Are we talking years at this point, and is that something that's just too difficult to do?

[Jimmy Tallent:]

No. We have some pretty good statistics, Kevin, on what's going on in the market down there. The housing inventory was up in the fourth quarter, but not a lot. We went from 10.3 months, and finished houses up to 10.7 in the fourth quarter. So a slight increase there. That's about two months longer than where you would normally see a stabilized market on the finished housing. The problem that we have been talking about, the real problem in Atlanta is the number of lots on the ground. And right now, there is about a 146,000 lots on the ground in Atlanta. That's up from a 140 last quarter. If you look at that relative to absorption, you have to keep in mind that, and I'll tell you that vacant lot inventories are about 56 months at the end of the fourth quarter, up from 45 months into the third quarter. Well, the big driver there, you only have 6,000 increase in lots, but the big driver was starts fell off substantially in the fourth quarter down to 132,000. So, you have two factors that affect that month supply. What I would walk away with is there is still a lots problem down in Atlanta. At some point in time, the overall starts will start to pick up, because as you correctly pointed out, closings have exceeded starts really for a year consistently. So, at some point, we're going to see builders start to increase their takedown on lots and we'll see those numbers get better, but we're still in a pretty tough time right now.

[Kevin Fitzsimmons:]

But just based on what you're trying to model going forward, do you have any estimates based on the pace that at this number of months out, or this number of years out, builders will be kind of reaching the point where they will have to pick up, start increasing starts again? And I know there are a number of assumptions that go into that, but is there any kind of analysis like that is being done?

[Jimmy Tallent:]

We have not been able to come up with anything really scientific on that, Kevin, and maybe because this has really been a very unusual market that's month-to-month. Gary, you might want to get some play from your builder clients about what you are hearing

[Gary Guthrie:]

Well, I thought if you're talking about the lot inventory, if you look at the fourth quarter of '06, it was roughly 26-month supply of lots. In a year's time, we went to 55 months, and 26 months was considered a relatively healthy supply. So, it took about a year to get where we are. And really those numbers are only affected by start rates and it's really, virtually impossible to predict start rates from the builders in the market. And Kevin, the only conclusion you may draw is it took about a year to get out of the [whack] to the extent that it is now. So, you'd hope if you get back to our normal start rate, you'd begin to get back in equilibrium maybe in a year to 14 months.

[Jimmy Tallent:]

This is Jimmy, Kevin. One of the other components that will drive that, and we still feel very fortunate job growth in the metro Atlanta is still very strong, projected 53,000 year-over-year and increasing, as well as population growth. And certainly, that's what will be the major driver in absorbing some of the oversupply.

[Kevin Fitzsimmons:]

Can you also comment on just the issue of interest reserves, and what you're observing on that in terms of being any kind of leading indicator on borrowers or developers that might be tomorrow's problems?

[Rex Schuette:]

Well, Kevin, when we go into a development loan, of course, there we have a full budget that has hard and soft costs. And part of that soft cost budget is interest carry to completion of the project. We've got roughly 20% of our development loans that still have some degree of interest reserve in them, which is to say 80% are paying current either on the sale of lots of those developments and/or other resources as well. So, that's kind of where we are at right now. That's the normal cycle on the development cycle project that you would go through, and half carry until you complete the project, and then cash flow does get generated as those lots are delivered to the builder.

[Kevin Fitzsimmons:]

Okay, great. And lastly, Jimmy, can you just comment on, and I apologize if you've already spoken on this, de novo plans, and maybe what you were anticipating before, and maybe how it's changed now with the environment?

[Jimmy Tallent:]

Well, Kevin, we've always said that we would certainly want to expand as we find the right people with the right opportunities as long as feel we can afford it. We have a strong obligation to our shareholders relative to earnings per share, which we have stated for years. That hasn't changed. I will not say we won't expand, but it would have to be something very profound that would entice us to take own additional investments. So, I don't think 2008 will have a very limited, if any, de novo expansion. What you will see in '08, is some of our temporary locations that we started a year or 18 months ago, and we have three or four those that have been extremely successful. Probably about mid-year, we will start building during the brick and mortar, where we can move them out of the temporary location into the permanent. It won't have as large of a financial impact, but in order to continue to have these de novos to be successful, you've got to show and make that commitment of putting true brick and mortars. So de novo expansion in '08, we will build out some of our temporaries.

[Kevin Fitzsimmons:]

Okay, all right. Great. Thanks, guys.

[Operator:]

And we'll go next to Christopher Marinac with FIG Partners.

[Christopher Marinac:]

Thanks. Jimmy and David and Rex, I want to ask about your outlook from the reserve perspective. Have we seen the reserve building that you want or can we anticipate perhaps some slight building charge-offs from Spruce Pine?

[Jimmy Tallent:]

I'll take that. David, you can certainly add on. We feel very comfortable, Chris, with our reserve at above 1.5%. Quite honestly, that is the strongest that it has been in 10 years. Certainly, this is a fluid, and we are watching it very closely. And, as we have purposely made that decision in the fourth quarter to be aggressive in write-downs, be aggressive in going ahead and taking discounts on OREO to move it out, as well as bolster the reserve, we feel pretty confident about where we are at this point.

[David Shearrow:]

I would just add to that. If you look our reserve relative to our non-performers, 320%, which we feel is a very strong place in setting our yearend reserve. We've gone to extensively look at our portfolio to make sure we've got portfolio risk rated correctly. And, so we feel pretty comfortable where we're at right now.

[Christopher Marinac:]

Good. And I guess a follow-up just to get some more color, if you will, on sort of South Atlanta versus North Atlanta, as well as North Georgia, from the construction perspective.

[Gary Guthrie:]

I am not sure I know exactly what you would like comment on. Could you --?

[Christopher Marinac:]

Well, from the residential portfolio, how much softer can South Atlanta get relative to your exposure there compared to any potential issues that are still lurking in North Atlanta versus North Georgia?

[Gary Guthrie:]

Yes. Well what I would tell you is, first of all, let me address, and I think it's important we spend so much time talking about Atlanta, which is roughly 40% of our loan growth, but 60% is not in Atlanta. And frankly, our portfolio outside of Atlanta has held up very well. There is slowness occurring in North Georgia, but it has not impacted our clients in the same fashion as Atlanta. And part of that is that the nature of our clients outside the North Georgia area tends to be smaller. A lot of single construction loans to a single borrower and that type of things. So, it's a different type of client that's held up very well. In terms of South Atlanta versus North, there is some difference there and certainly the lot inventory is longer in the South side. I think the South side lot supplies is north of 60 months, whereas it's in 53-54 months on the north side to give you perspective. So, it will be more challenged on the South side. On the other hand, Henry County, for example, is one of the fastest growing counties in the country, which is on the South side of town. So, I think, again, we have more of a supply issue than a demand issue, although demand is softer. But I think longer term, I think we will see a turnaround down there on the South side come and hopefully in the not too distant future.

[Christopher Marinac:]

Great. That's all. Thanks very much.

[Operator:]

(Operator Instructions) And we will go to Matt Olney with Stephens Incorporated

[Matt Olney:]

Yes, good Morning, guys. Thanks for all the details you have given us on the construction news in Atlanta. But I want to kind of look beyond that, and get your take on if there are anymore worrisome credit trends that you guys see developing recently excluding construction in Atlanta.

[Jimmy Tallent:]

You are talking about within our portfolio, Matt?

[Matt Olney:]

That's correct.

[Jimmy Tallent:]

David?

[David Shearrow:]

Yes. I'm going to address that, Matt. Again the challenges have been residential construction in Atlanta, if you look at commercial at this point in time, we have not seen any challenge there. Having said that, we're concerned about what's going on in the market and the economy, and we're watching it closely. But if you were to dissect our past dues, for example, and we gave you some of that in our opening comments, our past dues were up, but 55% of our overall past due dollars over 30 days were in residential construction predominantly in the Atlanta area. And in fact, commercial past dues in the fourth quarter were down from the third quarter. So, that's holding up well. The core residential portfolio, which is about 25% of our book, continues to hold up very well our losses are nominal. Past dues are up slightly in the fourth quarter. And I think that's probably a function of what's going on in the economy and gas prices, et cetera. But nevertheless, today, it's holding up very well. Having said all that, we are keeping a close eye on it. We are concerned about what's going on the greater economy as a whole.

[Matt Olney:]

Okay. That's helpful. And would you say that you've timed your underwriting standards for non-construction credits, therefore move your traditional C&I credits that you are seeing? Have you tightened those up at all given that the possibility of credit concerns in that side of the portfolio?

[David Shearrow:]

I mean I think we have maintained a conservative underwriting posture on a consistent basis, but when we are underwriting in the current times on the commercial side, for example, say, we are talking about commercial retail center, we would probably be more careful about in extending that kind of credit right now, knowing that there's some slowdown going on in the economy. So, I guess the answer is yes. Yes, I think we maintain a fairly conservative posture all of the times. I don't know that it's significantly tightened.

[Matt Olney:]

Okay. Thanks, guys.

[Operator:]

And we'll go next to Adam Barkstrom with Stern Agee.

[Adam Barkstrom:]

Hi, guys, good afternoon.

[Jimmy Tallent:]

Hello, Adam.

[Rex Schuette:]

Hello, Adam.

[Adam Barkstrom:]

I was curious, you guys gave a lot of loan detail. It was certainly helpful. But are you looking at the net new MTA flow for the quarter? It was looking like that $14 million of new loans flowed into the non-performers. I was just wondering given all the colors you've given, if you could talk about that a little bit as to what slowed it down obviously?

[Gary Guthrie:]

Again, it would be predominantly residential construction in Atlanta. I believe if you looked at our NPA, total NPAs on the books at the end of the year, I thinks 56% was concentrated in the Atlanta region. And so, if you think in terms of what came on, that's where most of it was, and that's where most of it's tied as far as the category and the location.

[Adam Barkstrom:]

Okay. And then just curious with the recent rate cuts there in your press release and in your comments that we're going to see some continued margin pressure here, just wondered if we could tighten that up a little a bit, and what in particular you're looking for? It was in a range in 1Q as far as margins go.

[Rex Schuette:]

Yes, Adam, this is Rex. I think when we look at the margin and most banks probably were somewhat surprised a little bit in the fourth quarter with liquidity pressures in particular. And again, that's driven by some of the large banks pushing up CD pricing, and that's how, I guess, all banks fairly consistently in the fourth quarter. So, that was a big part of where you saw a 16 basis point compression in the fourth quarter. About half of that was related primarily to additional funding cost, driven primarily again with respect to CD pricing. We did have a small impact of higher level of NPAs, as I mentioned. That was about three basis points in our mix in lower DDA. Our balances have another five basis point impact. So that in perspective looking at the first quarter, I think we are seeing, as I mentioned in the call earlier here that we're seeing some improvement in the market with respect to LIBOR pricing. And that has come down much closer to the longer-term rates that we see out there in the wholesale market. That eventually I think will help with respect to CD pricing. However, the broker deposit pricing even as of this morning is still probably 80-90 basis points higher than the 12-month curve out there. But I still think again there is some opportunity to see that loosening up a little bit into the first quarter. The other key driver with it though, underneath it is, on Monday, in our Atlanta paper, we have a full page color out by WaMu having one-year CD out there at 6.50. So that's the problem. We continue to see that the pressures from the large banks have not to come down yet. It'd probably come down with the 75 as of yesterday. And also community banks that we still see in the market are over 5%. So, that is the real driver underneath. Sort of looking at expectations for the first quarter, it won't be 16 basis point. We don't expect to have. We do see some improvement. Could it be half of that from compression? It probably could be. But, again, if we see improvement earlier even at the 75 basis points and we're able to pull down CD pricing, which we are doing, it might level that off a little bit too.

[Adam Barkstrom:]

Okay, great. Thank you.

[Operator:]

And there are no further questions at this time. I would like to turn the conference back over to Mr. Tallent for any closing remarks.

[Jimmy Tallent:]

Well, let me just say thank you for being with us this morning. Thank you for your interest in United Community Banks. We look forward to speaking with you in April and hope all of you have a great day. Thank you.

[Operator:]

Thank you, everyone. That does conclude today's conference. You may now disconnect.