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United Community Banks, Inc. (NASDAQ:UCBI)

Q4 2009 Earnings Call

January 29, 2010 11:00 am ET


Jimmy Tallent - President and CEO

Rex Schuette - CFO

David Shearrow- CRO


Kevin Fitzsimmons - Sandler O'Neill

Jennifer Demba - SunTrust Robinson Humphrey

Christopher Marinac - FIG Partners

Jefferson Harralson - KBW

Al Savastano - Macquarie


Good morning and welcome to United Community Bank fourth quarter conference call. Hosting the call today our 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 operating earnings and other non-GAAP financial information. United has provided a reconciliation of these measures to GAAP in the financial highlight section of the news release at the end of the investor presentation both have included on their website at 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

Please be aware that during this call forward-looking statements may be made about United Community Banks. Any forward-looking statements 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 SEC and included on its website.

At this time, we will begin the conference call with Jimmy Tallent.

Jimmy Tallent

Good morning everyone, thank you for joining us as we discuss United Community Bank's key events and results for the fourth quarter of 2009. First our financial highlights. The net operating loss for the fourth quarter was $39.8 million or $0.45 per share. This was driven principally by the $90 million provision for loan losses. Charge-offs for the quarter were $84.6 million. At year end our allowance for loan losses was 3.02% of loans.

During the fourth quarter we sold and disposed of $81 million in foreclosed properties and non-performing assets and the level of nonperforming assets decreased from $415 million to $385 million during this time. Our net interest margin for the quarter was 3.4%, up 70 basis points from a year ago. Our residential construction book continued to decline, down $429 million for the year. At year end our Atlanta book where most of the problems have been was down to a balance of $255 million. Core earnings continue to improve throughout the year. We did see a decline of $1.4 million in the fourth quarter compared to the third quarter, the largest factor being a 900,000 increase in FDIC insurance premiums. Rex will discuss this if more detail. Core customer deposits were up slightly for the fourth quarter and increased for the year by 10% or $205 million.

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

David Shearrow

Thank you Jimmy and good morning. This quarter we provided $90 million for loan losses and charged off $84.6 million in loans. Non-performing assets declined $30 million to $385 million compared to $415 million last quarter. Non-performing assets included $264 million in non-performing loans and $121 million in foreclosed properties. We had no accruing loans that were past due 90 days. The ratio of non-performing assets to total assets was 4.81% compared to 4.91% last quarter.

Our 30 to 89 day past due loans were 1.44%, down from 2.02% last quarter. The decline in past dues was across all categories except home equity, which increased to 1.27% from 0.66% last quarter. The market sale foreclosed properties to investors and retail buyers continue to improve in the fourth quarter. In the fourth quarter we sold $61 million of foreclosed property versus $47 million in the third quarter. In addition, we sold non-performing notes totaling 20 million in the fourth quarter compared to $8 million last quarter. Overall, the loss content on foreclosed property sales was flat compared to last quarter.

Net charge-offs were $84.6 million for the quarter compared to $90.5 million on a linked quarter basis. Foreclosed property write downs and losses on sales totaled $9.6 million compared to $4.1 million last quarter. The foreclosed property write downs were composed of $7.4 million related to losses on sales and $2.2 million of write downs on remaining foreclosed property inventory.

Overall, we continued the trend of aggressively recognizing losses. Foreclosed properties have been written down to 66% of book balance at the time of non-accrual at quarter end while non-performing loans were written down to 70% of book balance at the time of non-accrual will help expedite asset sales in the future.

Let me now provide some detail on our portfolio by segment. Let me start with commercial loans. Our total commercial loan portfolio of $2.5 billion has remained relatively flat over the past five quarters. However, we have shifted our concentrations from commercial construction which is down $137 million from a year ago to commercial real estate as construction projects were completed. Within our total commercial portfolio we had $61 million of NPL's down $20 million from last quarter. Total commercial net charge-offs were $8.8 million for the fourth quarter compared to $16.7 million last quarter.

Our challenges in the commercial portfolio have been dispersed across our footprint in a mixture of property tags with no clear concentrations. Overall, we continue to pay particular attention to commercial because the economy's impact on this sector has yet to fully play out. In the fourth quarter, we completed another extensive review of this portfolio including all relationships over 500,000. While we continue to experience some negative migration, the challenges have been manageable. That said, with 54% of our commercial real estate portfolio being owner occupied, a modest average loan size of 443 ,000, average loan-to-value of 63% and diversified property types we are well positioned to work through any challenges in this portion of our portfolio.

Moving on to our residential mortgage portfolio. We ended the quarter at $1.4 billion, a decrease of $34 million from last quarter and $99 million from a year ago. In this portfolio we had $59 million of NPL's and $7 million in net charge-offs in the fourth quarter. The rise in NPL's and charge-offs in residential mortgage portfolio is due to continued pressure from unemployment in our markets. Home equity is included within our residential mortgage portfolio. This portfolio which totaled $375 million did see a rise in early delinquency this quarter, but continued to perform well with $1.1 million in net charge-offs for the fourth quarter.

Home equity line usage increased by 1% from 62% in the third quarter to 63% in the fourth quarter. Overall residential mortgage charge-offs and NPL's were up from last quarter and we expect high unemployment to continue to impact this portfolio in 2010. Nevertheless, given the economic environment, residential mortgages continue to hold up fairly well. Our total residential construction portfolio of $1.05 billion is down $135 million from the third quarter and down $429 million from a year ago.

Looking at credit quality, our residential construction portfolio had $142 million of NPL's and $67 million in net charge-offs in the fourth quarter. Similar to the last several quarters the Atlanta residential construction market represented the majority of our net charge-offs totaling $40 million or 47% of the total. The Atlanta MSA represents $255 million of this loan category and breaks down into $84 million in houses under construction and a $171 million of dirt loans. The $84 million of houses under construction was down $29 million from the third quarter and consisted of $16 million in pre-sold and $68 million in spec. The $171 million of dirt loans was down $44 million from last quarter and included $76 million in acquisition and development loans, $52 million in finished lots, and $43 million in land loans.

Looking at our total loan portfolio, we saw a $25 million decline in our classified loans to $753 million in the fourth quarter. Residential construction continues to be our most challenged portfolio. Despite some deterioration that we are actively monitoring in the commercial and residential mortgage portfolios, we do not believe they will be as hard hit as residential construction. At quarter end, our allowance for loan losses was about $156 million or 3.02%, up $5.4 million from last quarter. Our allowance coverage to non-performing loans was 59%, excluding impaired loans with no allocated reserve our allowance coverage to nonperforming loans was a 190%, compared with 149% last quarter.

Looking ahead, we expect to see the challenges continue. However we were encouraged by the decline in past dues, classified loans and the NPA's this quarter. Majority of our credit challenges over the past two years both charge-offs and NPA's have been centered in the Atlanta residential construction portfolio. Default rates and loss content have been much higher in this portfolio than our other portfolios. With the rapid decline in the Atlanta residential construction book and the related problems largely behind us, our future charge-offs should continue to decline in 2010.

In terms of NPA's, we are hopeful our declining trend will continue given the portfolio runoff in Atlanta and the decline in past dues and classified loans. However, we expect to face more difficulty liquidating properties in our non-Atlanta markets which will put upward pressure on our overall level of NPA's. Of course one unknown is the ultimate impact of the downturn in the commercial real estate market. While we do expect challenges in our commercial portfolio we feel well positioned, given our diversified book with a low average exposures and heavy owner occupied composition.

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

Rex Schuette

Thank you David. As Jimmy stated earlier, we have made significant progress in 2009 to improve core earnings. Core earnings or our pretax pre-credit earnings exclude special and non-recurring items that assist us in analyzing our core run rate. Foreclose property costs, securities, gains and losses, and other one time revenue expenses are examples of items that we exclude from our core earnings run rate.

However, these items are included in our net operating loss that totaled $39.8 million for the fourth quarter. We have provided a five quarter summary of core earnings on page 26 and net operating earnings on page 27 of our investor presentation package that was filed on form 8-K and is available on our website.

We believe these summaries provide a better view of our overall performance trends and quarterly run rates. We have also provided a schedule at the end of the investor presentation package that reconciles core earnings and other key ratios to our net operating loss and the reported GAAP net loss. I'll be commenting on the drivers of core earnings from these pages as well as other areas of the investor presentation package.

Core earnings for the fourth quarter of 2009, was $30.4 million, up $13.1 million from the fourth quarter of 2008. The primary drivers of core earnings growth has been our margin expansion in 2009, supported by expense controls and reductions. For the fourth quarter, our margin was 340, up one basis point on a linked quarter and up 70 basis points compared to our margin of 270 for the fourth quarter of 2008.

On page 8 of the investor presentation package we show our margin trend for the past five quarters and the impact of credit costs. Historically, credit costs have lowered our margin by 8 to 12 basis points, so the 64 basis points of credit cost this quarter or drag has significantly lowered our margin and net interest revenue.

Even with this margin drag, we expanded our margin by one basis point this quarter, driven by further lowering our money market and time deposit pricing, while maintaining the level of loan pricing. Our margin was also negatively impacted by the 425 million build-up on average of excess liquidity during the quarter. We made a decision to invest the liquidity and commercial paper and other short-term funds at a slight negative spread that reduced our margin by about 20 basis points for the quarter. We believe that it was prudent not to leverage these funds into investment securities that could have extension risks later in 2010 if rates move up.

Most of the excess liquidity will run off in early 2010, as we further lower our CD pricing. As we continue to lower time deposit pricing and reduce excess liquidity and credit costs, we expect to see further margin improvement throughout 2010, up to the 360 to 380 range by year end.

Another positive factor on our margin expansion was core deposit growth. Year-to-date core customer transaction deposits were up 205 million or 10% on an annualized basis. This growth excludes the 53 million of core transaction deposit accounts, acquired from Southern Community bank.

Turning to fee revenue and operating expenses, as noted on page 26 of the investor presentation package core fee revenue of $14.5 million for the fourth quarter was up $1.9 million from last year and equal to last quarter. The $1.9 million increase from last year related to several areas as noted in our earnings release.

Consulting fees of 2.8 million were up 1.5 million compared to last year. The increase was due to growth in regulatory and advisory consulting services and to the fact that last year's consulting services were reduced by the internal services provided to United, which were eliminated in our consolidated numbers.

Mortgage loan fees of $1.7 million leveled off this quarter, compared to last year and the prior quarter. We closed 552 loans in the fourth quarter of 2009, up from 459 loans last year and down from 610 loans last quarter. The linked quarter and year-over-year increases in service charge fees were driven by higher ATM and debit card fees related to the increase in transactions and a number of customers utilizing these products.

Page 27 of the investor package reconciles core earnings to our net operating loss and highlights credit related costs and non-operating fee revenue and expense items. Excluded from core fee revenue were security gains of $2 million for the fourth quarter. We sold 45 million of securities at a net gain in an effort to reduce extension risk in the securities portfolio.

Looking at core operating expenses on page 26 of the investor package, they totaled $48.1 million for the quarter and were up $855,000 from a year ago and up $2.4 million from the third quarter. The only item excluded from core operating expenses were foreclosed property costs that I will comment on later. The detail of operating expenses, are in the income statement and commented on in our earnings release. Here are some of the key items.

Salaries and employee benefit costs of $26.2 million is higher than the 24.4 million last year. However, last year included bonus accrual reductions of $3 million, and a deferred compensation credit adjustment of $700,000. Excluding these reductions in credits, salary and benefit costs were actually down $2 million from last year, primarily due to lower salary and group medical costs related to the reduction in work force. Also for the fourth quarter 2009, advertising and printing costs were down in total about $800,000 from last year, reflecting our ongoing focus to reduce controllable costs.

Other expenses this quarter totaled $4.5 million. That was down $2.5 million, primarily reflecting the accrued cost last year for the surrender of our bank owned life insurance policies. As noted in the second quarter this year we reversed our decision and canceled the surrender transaction and recorded a $2 million reduction in other expenses. Offsetting these cost savings compared to last year were higher FDIC insurance premiums at 1.7 million due to rate increases for 2009 and professional fees that increased 258,000 due to higher workout cost for non-performing loans and foreclosed properties.

Turning to staff levels and the reduction in work force announced in the first quarter 2009, excluding the Southern Community bank acquisition total staff at December 2009 was 1,821, down 173 positions from year end 2008. During 2009, we had 10 further employee reductions that were offset by ads for staff for two new banking locations and for our credit workout teams.

We are on target to meet the total reduction of 191 positions or 10% of our work force that was announced in the first quarter. Foreclosed property costs for the fourth quarter totaled $14.4 million. That compared to $5.2 million for the fourth quarter of 2008 and $7.9 million for the third quarter of 2009. foreclosed property costs this quarter include $9.6 million for write downs of foreclosed properties and $4.8 million for maintenance, property taxes and other related costs as shown on page 27 of the investor presentation. The only write downs have been significantly lower than the fourth quarter of 2009 and have been in the range of $2 million to $4 million depending on the volume of property sold. This quarter we have $7.4 million of write downs related to sales which was above the upper end of the range due to the high volume of property sold this quarter. We also took $2.2 million of additional write downs on existing foreclosed properties as noted by David earlier to help expedite future sales.

Maintenance property taxes and other related costs for managing foreclosed properties has risen over the past four quarters due to the increase in the number of foreclosed properties being handled by our workout teams.

As noted earlier, core operating expenses which exclude foreclosed property costs and goodwill impairment charges increased $2.4 million from the third quarter 2009. The largest three items were FDIC insurance premiums that increased $900,000, other expenses that increased $600,000 primarily due to higher property taxes and appraisal costs. And professional fees were up $300,000 due to higher legal costs for workouts.

Turning to capital, all of our capital ratios were strengthened significantly by the $222.5 million common offering that closed on September 30, 2009. At year end our tier one ratio was 12.4%, leverage was 8.5% and total risk base was 15.1%. And our tangible common equity to assets was 7.4%.

Before I close I want to comment on our SCAP analysis on pages 23 and 24 of the investor presentation package. We have updated the SCAP analysis to reflect actual charge-offs through 2009.

Based on the updated models we continue to demonstrate capital adequacy through 2010. Even in the most severe SCAP more adverse model, in fact we remain significantly above the regulatory well capitalized levels for all of the stress models and even in the more adverse SCAP model a tangible common equity to asset exceeds 6%.

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

Jimmy Tallent

Thanks Rex. Now I'd like to discuss our view on certain key areas as we move into and through 2010. First, our credit; over the past eight quarters we have reduced our residential construction book by $800 million. I mentioned earlier that the Atlanta portfolio totaled $255 million at year end. This compares to $538 million at the beginning of the year.

While we expect additional losses, we believe, we are largely through the major challenges in the Atlanta portfolio. At year end we had the fewest slots and houses in inventory that we have seen in quite some time in the Atlanta market and our projected foreclosures are the lowest we have seen in both numbers and dollars since the beginning of the downturn.

Now let me address residential construction outside of Atlanta. Sales on foreclosed houses have been strong and we believe this trend will continue. In regards to foreclosed land and lots we expect to face more challenges. The fact is we just don't have the large group of buyers in these markets we have seen in metro Atlanta. The loans are generally much smaller, but because of slower sales our foreclosed property balance could be more elevated than we would prefer in the near term.

In regards to our commercial portfolio, we reviewed every performing credit of 500,000 or more last month. We do this review quarterly as we have for the past six quarters and see some issues, but generally speaking feel very good about our commercial portfolio. The average loan size is relatively small, the book is well diversified, and 54% of our commercial real estate loans are owner occupied.

In respect to loan growth, we added $273 million in new loans last year. We believe loan growth will be slow until the general economy improves. And our pipeline suggests about the same pace for 2010 as we had in 2009. As to our margin, we made solid progress with the 70 basis point expansion from the fourth quarter of 2008 to the fourth quarter 2009. Our goal for 2010 is first to maintain the margin and then be able to expand it, which we believe we can do.

We benefited greatly from our loan pricing during 2009. During 2010 we expect to benefit primarily from reduced deposit costs, particularly on the CDs while maintaining our loan pricing. Two other factors will influence our margin, the amount of decline in our loan book and our decision to invest our excess liquidity short term. We believe now would be the wrong time to extend our securities portfolio. The bottom line, our goal for 2010 is to expand the margin. Pretax, pre-credit earnings will continue to be a priority.

Given the significant improvement in 2009 and a declining loan book we expect modest but sustainable growth in 2010. Acquiring new customers and growing core deposits remain a primary focus. Our initiatives in 2009 produced 10,000 net new core deposit accounts and $205 million in new core customer deposit balances, an increase of 10%. This cross sale activity and core deposit growth were the strongest in the history of the company and this is encouraging news for the future. With the deposit generation tools and the programs that we have implemented we believe 2010 will be another successful year for core deposit growth and an improved deposit mix.

Finally, capital, assuming we take the SCAP test that Rex provided a few moments ago and let's assume the top of management's range at $243 million in charge-offs, our tangible common equity to assets would be 6.9% and our leverage ratio would be 8.1% at year end 2010. The economy is still very difficult and challenges remain. But we made good progress at addressing problem assets while improving our underlying core earnings capacity during 2009. Our ultimate goal is to return to profitability as soon as possible. And we are relentlessly focused on achieving that goal.

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

Question-and-Answer Session


Thank you. (Operator Instructions). We will take our first question from Kevin Fitzsimmons with Sandler O'Neill.

Kevin Fitzsimmons - Sandler O'Neill

I was wondering if you could give us a little bit of an outlook or expectation on disposition activity going into the first quarter and then looking at the second quarter specifically how we should. Rex you mentioned how that OREO cost really jumped up this quarter and that reflected the aggressive approach, but do you think that will continue, should we look at that kind of OREO cost as that’s going forward. Thanks.

David Shearrow

Kevin this is David. On the OREO cost as it relates to the write downs, about $9.5 million, the jump in the fourth quarter was largely due to the fact that we moved as much as we did in the quarter. And so that ramped it up. My sense is that I would expect probably those write downs to be if you think about where we had been running say in the $3 million to $4 million range, $5 million. Closer down to that end of the range as opposed to where we were at this quarter. But I would hedge that with the thought that depending on transactions that could come in it could pop up a little bit towards the higher closer to what we experienced in the fourth quarter if we could move more.

Now having said that, when I look at kind of disposition activity in the first quarter, I think what we're trying to say is that as more of our foreclosed properties are located outside of Atlanta now, it's more difficult to move some of this property. And so I am expecting between the normal seasonality of the winter, coupled with where these properties are located that the pace of sales, it's going to be difficult to achieve the same level of sales in the first quarter that we did in the fourth. So, I know that's a little bit gray, but that's about as good of guidance I think I can give you.

Kevin Fitzsimmons - Sandler O'Neill

Okay, I appreciate that. David, can you also touch on just restructured loans or TDR's and where they are, if you're doing them number one and number two, where they're trending? Thanks.

David Shearrow

Sure. Yes, we are doing those. We ended the year with $60 million in TDR's. That was up from the third quarter where we were just under 34 million. Out of that $60 million TDR's, about $7 million of that was non-performing, the balance was performing. We expect to see more TDR's, as you'd see that number come up again probably over the next couple of quarters. Most of that activity is going to be in commercial real estate. Typically what goes in here are credits that have cash flow that there is a workable solution where you are probably having to adjust the interest rate down to accommodate the borrower or perhaps reduce the level of principal payment occurring to give them time. Say if it's a office or a retail center that needs to release up and we might back off on the principal amortization to allow them time to try and release back up. So that's the kind of thing that's going in here for the most part. On the residential construction side, generally there is not a really good solution in most cases to throw it into a TDR, so that's why you don't see a lot of that in there. Hopefully that's helpful.


And, we'll take our next question from Jennifer Demba of SunTrust Robinson Humphrey.

Jennifer Demba - SunTrust Robinson Humphrey

David, you mentioned that it's tougher to sell problem assets that are located outside Atlanta. Can you give us a sense of what kind of severities you are seeing in those non-metro markets versus what you've experienced in Atlanta to date?

David Shearrow

Well, the severity on loss is really not all that different when you look at it to date. We have of course, the buildup has really occurred over the last couple of quarters outside, but generally overall, we haven't seen a big difference in what we have liquidated. So to date I would say they are very similar. It's just that the number of buyers and the type of buyers are different when you get outside of Atlanta.

Jennifer Demba - SunTrust Robinson Humphrey

So it's more of an individual buyer?

David Shearrow

Yeah, there is a less margin, we have a lot of investment funds that are interested in the larger metro markets. We have found very little of that outside of Atlanta. So you are generally looking at, just wealthy investors outside that have an interest outside the area or perhaps they are looking at a land tract, that type of thing. Now, on one thing let me caveat too is on housing, just selling vertical construction, we continue to have excellent success outside of Atlanta. That's really not the issue. When I'm talking about the slowness it really pertains more to the land and lots. And so that's where more of the challenge is.


Our next question comes from Christopher Marinac with FIG Partners.

Christopher Marinac - FIG Partners

David I was curious the increase in payments that you saw in the quarter was that at all one time related or could that be a new trend for this year.

David Shearrow

The increase in payments, I'm not sure, could you clarify that Chris.

Christopher Marinac - FIG Partners

This is on the NPA activity just showing us the walk through of NPA is beginning to end, that the payments increased during the quarter from (inaudible) almost 27 million?

David Shearrow

Just the higher level of payments you're saying.

Christopher Marinac - FIG Partners


David Shearrow

Yeah, I mean it's like everything else, all these, there are lot of credit indicators this quarter that showed improvement. And, you know, we are very cautious to say in any sense that's a trend, because it's very early. But again that's just one more example of classifieds being down, the payments on non-performers did increase, with payoffs, etcetera, the past dues down. Total watch list down. You know, so yeah, I think it's another component of what we saw kind of across the whole portfolio. And hopefully all of these are early indicators of moving through this.

Christopher Marinac - FIG Partners

Okay. And then just a follow up I guess for either you or Rex or even Jimmy is about the expense levels. Are there other room for you to cut expenses beyond just the credit piece, of the OREO that you mentioned earlier?

Rex Schuette

Chris, everything's on the table. We will continue to look at the entire operating expense. Certainly as our company has contracted we constantly are looking at other methods of savings. I think we've demonstrated in 2009 our commitment to do whatever is necessary relative to our people cost. But, we are constantly reviewing that expense base and will continue throughout 2010.


And now we'll take the next question from Jefferson Harralson with KBW.

Jefferson Harralson - KBW

Rex I want to ask you about the DTA from a regulatory standpoint, I guess is there any DTA accounting towards regulatory capital ratios right now.

Rex Schuette

It's 69.5 million at quarter end and that's up from about 39 million last quarter. Jefferson

Jefferson Harralson - KBW

Okay. On the GAAP DTA I assume your main defense of it is the past to relatively near the medium term profitability or is there some other new answers that we need to know about, regarding the valuation of the GAAP DTA.

Rex Schuette

We went through extensive review at year end with our auditors on this also Jefferson, and I think its generally you are not going to see probably many banks out there by taking DTA evaluation allowances. But I think as we look at it we feel it's more likely than that we are going to realize the DTA assets and that the positive factors outweigh any negative factors that relate to our current losses we are incurring as well as the carry forward that we have right now.

And I think that all boils into just Jefferson I think just simply our strong earning history that we have had before the credit, our core earnings improvement that we continue to have, core deposit growth, strong service levels, and I think as well as, a successful stock offering, so I think it isn't a matter of survival, we are on the other side, and I think there is all kind of go into the picture. But overall the positive factors outweigh any negative factors.

Jefferson Harralson - KBW

Okay and do you think that you have to reach profitability by any certain time or do you think that it's kind of all in the soup of what you just talked about?

Rex Schuette

It's somewhat all little bit all in the soup but I mean part of what you are looking at is the outlook out there with respect to when you return to earnings and are you on track to hitting that within a reasonable time period. So that is part of it, but again keep in mind all the banks have, 80 quarters to realize this or 75 quarters. And it really is longer term, do you think you will realize the tax benefit. But that part does come into the equation if things turn and extend out a long time.


We will take the next question from Al Savastano of Macquarie.

Al Savastano - Macquarie

Just couple of questions on the reserve bill this quarter can you give us an idea of what was driving that with classified assets down?

Rex Schuette

Well, it really has been just a function of the ongoing, if you look at the loss, the loss content overall on defaulted loans as we have gone through '09, there has been a gradual creep up. And the way we build that reserve is based on kind of a rolling average on those losses. So as those losses have climbed we had to set aside a little bit more reserve. So although yes, classifieds were down it's really a function of the actual losses, the climbing average.

Al Savastano - Macquarie

Does that mean reserves are going to continue to build out from here as you work through the lower losses, lower quarter losses, overall from the higher quarter losses roll on?

Rex Schuette

My expectation right now Al is that you would not see any significant reserve build going into '10. You know, unless obviously if something changes, we are not seeing today. However, I don't see any near term relief on the reserve meaning over the next two to three quarters. Mainly because I think we are going to be fairly cautious in that approach. And there is some judgment involved in terms of, when we, there is the mathematics and there is also the judgment. The judgment as we come out of this at some point we may choose to start releasing, but I just don't see that near term.

Al Savastano - Macquarie

Great. And then just in terms of charge offs going lower in 2010, if you can maybe just provide a little color, I mean do you think, do you expect them to go incrementally lower in each quarter during the year or are they going to be lumpy, any color there would be helpful.

Rex Schuette

You know, it's very hard to forecast. My sense is that we'll see a gradual steady decline as we go through the year. My only caveat to that really would relate more to our ability to dispose of more assets on a given quarter that might involve additional charge that were to occur. So, I just hold that back. But generally as I look out through the year my expectation is a gradual steady decline.


And at this time we have no further questions in cue.

Jimmy Tallent

Thank you operator. Let me say in closing how much I appreciate the hard work of our employees continuing day-after-day to set this company above most others, particularly relative to the service, given the challenges of 2009 that we faced and we faced head on. In looking at our customer satisfaction scores at year-end were the highest in the history of the company, so I want to thank our employees for their continued hard work in support of this company.

Also I'd like to say thank you to our investors, our research analysts for being on the call today. We look forward to talking with you at the end of the first quarter and hope all of you have a great day.


And that does conclude today's conference ladies and gentlemen. Again we appreciate everyone's participation.

And that does conclude today’s conference. And we thank you for participating.

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Source: United Community Banks, Inc. Q4 2009 Earnings Call Transcript

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