Colonial BancGroup, Inc. Q4 2007 Earnings Call Transcript

| About: Colonial BancGroup, (CNB)
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Colonial BancGroup, Inc. (CNB) Q4 2007 Earnings Call January 23, 2008 9:00 AM ET

Executives

Lisa Free – Investor Relations

Robert E. Lowder - CEO

Sarah H. Moore - CFO

Kamal Hosein - Treasurer

Caryn D. Cope – CCO

Analysts

Todd Hagerman - Credit Suisse

Robert Patten - Morgan Keegan

Steve Alexopoulos - J.P. Morgan

Andrea Jao - Lehman Brothers

Chris Marinac - Fig Partners

Kevin Reynolds - Janney Montgomery Scott

Salvatore J. Dimartino - Bear, Sterns & Co.

Dave Bishop - Stifel Nicolaus and Company

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

Operator

Good day everyone and welcome to today’s Colonial BancGroup fourth quarter 2007 earnings conference call. (Operator Instructions) At this time for opening remarks and introductions I would like to turn the call over to Lisa Free, please go ahead.

Lisa Free

Thank you. We appreciate you joining us this morning for Colonial BancGroup’s 2007 earnings conference call. Our earnings report announcement was released this morning and many of you should have already received copies. If not, you can access the report as well as the slide presentation for this call under the Investor Relations section of our website, www.colonialbanc.com. With me today are Colonial BancGroup’s CEO, Robert Lowder, Chief Financial Officer Sarah Moore and Kamal Hosein our Treasurer.

First the advisory. I will remind you that any forward-looking statements made during this presentation are subject to risks and uncertainties. Further we have no obligation to update any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. If you are interested in factors that due cause our results to differ materially from any forward-looking statements, they are detailed on our website in our SEC filings and summarized in our press release from this morning. With that I will turn it over to Mr. Lowder.

Robert Lowder

Good morning everybody. First I’m going to give a summary of our results and then we’re going to talk about some specifics. Earnings per share of $0.06 for the fourth quarter including a $0.26 provision in excess of net charge-offs and $0.02 of merger and severance costs. Significant increase on loan reserve to 1.50% of loans at 12/31/07 compared to 1.14% at 9/30/07 and 1.13% at 12/31/06. Our Net charge-off ratio was 0.35% for 2007 and 0.88% annualized for the 4th quarter. We had $34 million in net charge-offs in the 4th quarter; $93 million in loan loss provision or 2.7 times 4th quarter net charge-offs. Our nonperforming assets ratio was 0.86% at the end of the year compared to 0.46% at 9/30/07. Our net interest income increased 1% over 2006, net interest margin of 3.55% for 2007 and 3.43% for the 4th quarter. We had strong core noninterest income growth of 15% over 2006. We had average deposit growth of 5% over 2006. We have closed and integrated the acquisition of Citrus and Chemical in December and Commercial Bank of Florida in June. Total assets at the end of the year were $26 million and we did increase our annual dividend rate to $0.76 estimated annualized.

On slide of four we’ll just give a summary of our loan loss experience. You can see our reserve ratios at 1.50% and gives us a total reserve of almost $239 million. Our coverage of nonperforming assets of 174%. As we said our net charge-off ratio to average loans at 0.35%. As we have talked about before credit cycles have deteriorated and we are returning to time periods before 2004, 2005 and 2006. Our nonperforming asset ratios total $137 million and as we said a ratio of nonperforming assets to net loans at 0.86%.

I thought that what we would do first because I think most people are going to be most interested in what is our credit condition and what is our outlook for 2008, so let’s first look at slide five, our nonperforming assets and net charge-offs. First on the left-hand side of the slide you’ll see our nonperforming assets at $138 million and we’ve divided those by property-type and you’re going to see very quickly that residential construction composes about 50% of that or $69 million. As we go through these types I’m going to give you examples of what these loans are like and some flavor of where they are.

So under the title of residential construction, we’ve got that divided into several sub types and we’ll talk about that for a minute. Sixteen percent of that total or $22.5 million is builder home loans. Some typical examples of that would be a home builder that, remember these are nonperforming assets, would be a builder in the Atlanta area with total indebtedness of less than $5 million; construction of 23 houses in four subdivisions. Their recent updated appraisal showed a loan to value of 83%. The builder simply had too much unsold inventory when he compiled all of his loans with different banks and he’s run into cash flow problems and he cannot carry these loans. And so the good news on these is they are completed houses and ready to be sold.

Another example, a builder in the Birmingham market, a $2 million balance, has also run into cash flow problems; six homes, four of them complete and two of them almost complete. Two of the six are under contract. Our new appraisal shows a loan to value of 94%. So that’s examples of the 16% of $22.5 million builder home loans.

Residential land compiles 13% of that 50% total or almost $18 million. First example of that would be a developer in the west coast of Florida; this is primarily land that is just sitting there. We took a $5 million charge-down at the end of December on the $10 million loan and now we think the $5 million on the books reflects the value. We do have a current appraisal showing that and what the market value now is. Example two would be a loan in approximately $10 million on land in the Pan Handle, Florida. We took a $5 million charge-down on the fourth quarter. We think the $5 million left on this loan reflects what the present appraisal is and what the value of the land presently is in that market. Again, the borrower ran into cash flow issues in both these cases. Due to the decline in the market, the guarantors were able to support interest for some time but because all of our loans are short-term in nature, they’ve been coming to settlement points during the last quarter and they just cannot carry. It’s a liquidity. They cannot carry it any further and so we took it in, in nonperforming with a charge-down, so that’s 13%. Six and a half percent or right at $9 million is residential development. Example of that would be again on the west coast of Florida, we have a $5 million loan on 215 residential lots that we financed for A&D. We charged that loan down $2.5 million in the fourth quarter to bring it in line with what the new appraisals and current market conditions are. There is some interest in buying the lots at these prices. Again the borrower ran into cash flow problems due to the slow down in the market, was able to carry it for a period of time but just could not carry it any longer. A second example in this category in the Pan Handle, Florida, would be a $2.1 million on 19 lots in the Destin area. Again the borrower ran into cash flow problems when the market slowed because he had various other ongoing projects. We charged the loan down $2 million and we think it’s in line with what the current appraisals and market conditions are.

Builder lots is another $8 million or 6% of this. This is mainly smaller loans secured by purchased lots which builders had planned to build on. None of the loans are very large. Many of them are just like one lot per builder and again these builders have run into cash flow problems and liquidity and cannot continue to make payments on them. We think that these lots are valued now, with the charge-down, we think they are valued at what they should be valued at to move them over a period of time.

Individual home loans, these are loans that we financed for individuals to be their primary residence, that’s $6.5 million. Again people just caught in cash flow problems and then another $4.8 million of consumer lots. These are lots that were owned by consumers that they planned to build primary residences on and they just ran into cash flow. So that’s 50% of the portfolio, that’s a total of approximately $69 million is in that category of residential construction.

Next category in the nonperforming is condo construction. You can see we’ve got $27 million in that or right at 19.9%. Virtually all of that is in one loan. It is not a high-rise condo. It is a four-storey, luxury condo project that is complete. We could have sold this project for $0.64 on the $1. We just could not bring ourselves to do that because we feel like we can move this project over the next four our five quarters. We’ve already had one sale close this month already. The loan to value ratio now based on what is on the books is at 92% on recent appraisals. Again, borrower ran into cash flow problems. We think this is a project we will recover all of our money and the interest on. Over time, we will take projects onto our books and not sell them if we think that there’s no need in taking a write-down.

Next category is our commercial construction at 10%. That’s about $14 million. Most of that is in commercial land. Example of that would be on the west coast of Florida, we’ve got $2.1 million in land that was originally under contract for a commercial development but the contract fell through or ran into cash flow problems. A most recent appraisal shows the loan to value of 60% loan to value on this property. We think that we’ll be able to move that. Another example is in south Florida, a $1.6 million land loan on some property closer to the Treasure Coves. We have a 54% loan to value on a new appraisal. The guarantor had planned to develop it but due to cash flow problems was not able to do it. So that’s another $13.9 million.

The next category is commercial real estate. This totals about $6.3 million. This is made up of $1.6 million in warehouse, $1.6 million in an office, $1.2 million in a farm, less than $1 million on multi family and industrial. So that adds up to $6.3. Those are various projects that we have taken into nonperforming. All of them are for sale. We’ve marked them to what we think the values are to move those properties.

Next category is residential real estate consumer. That’s about $18 million. This is all consumer home loans, a first mortgage on consumer loans that we’ve taken into the portfolio. We think that we can move those out at the [base] that we’ve taken them on the books.

The final category in that is non real estate related. This would be all C&I secured loans that are secured by something other than real estate; that’s the largest category of $1.7 million and that is secured by equipment or vehicles and then we’ve got C&I unsecured and consumer secured. So you can see we’ve got very little exposure.

So you can see from that slide of nonperforming, our biggest nonperforming asset is in the category that we call residential construction and I’ve explained how we have divided those things up.

Now let’s look at the right hand slide and let’s look at the fourth quarter net charge-offs of $34 million and let’s see what that was composed of. And again if you take the two categories of residential construction at 84%, that was $29 million, and commercial construction, excuse me 4%, that accounts for 88% of our charge-offs; the residential construction and the commercial construction accounts for 88% of the charge-offs. Now let’s break that down and see what that was. Twenty-five percent of that 88% was residential development. The largest loan in that was on three loans amounting to $5 million that were loans that were made in central Florida and these came through an acquisition a couple of years ago and they just deteriorated in the guarantor being able to support them and we charged them off as we disposed of these loans at 25%. Forty-eight percent is in residential land. Again that is land that was charged down and most of that relates to the charge downs that we took on what went into nonperforming that we already talked about on the other side of the page, so that’s 48%.

Twenty percent is in residential home construction. An example of that would be $2.4 million charge we took on a home builder in Atlanta. He just simply had too much inventory and could not support the loan. Five percent is on condominium construction and 2% is on residential lots. So you can see from that, again our biggest exposure from a net charge-off ratio was again in the residential construction category. Residential one to four families was 4%, that’s home loans to consumers. Commercial was 3%, that’s C&I loans, all of these are very small loans. The largest was $300,000. Residential commercial was 2%. None of those were large, all small loans and then consumer was 3% and that was all basic consumer-type loans on automobiles or mobile homes or whatever. The largest of those loans was $59,000.

So you can see from those numbers in our entire portfolio, our problem is in the category that we call residential construction. So if that’s where our problem is then where do we stand in this? So the next slide is a snapshot of what we call our residential construction outstandings, it’s total is right in that $2.9 billion, it’s 18% of the total loan portfolio. Let’s talk about where we think we are if most of our charges are there and most of our nonperformings are there, let’s talk about what we think our exposure is going forward.

Now remember again, I said most of our loans are on a short-term type nature and so hopefully we’re to the point where we can look and we can tell where our problems are. I’ve asked all of our people for the last 45 days to do a complete inventory of every loan we have of any size and any nature, and particularly in these categories. We’ve had conference calls over the last several weeks going over individual loans in quite detail and we think we have a very firm handle on where we are and what our problems are and what we need to do. And basically it’s all centered in this portfolio. So let’s look and let’s see what that portfolio has in it. We called, our largest breakdown is what we called A&D; that’s $1.2 billion. An example of a loan in that category and again we’ve looked at all of these loans, would be a typical loan would be in our Texas region, a $4.5 million loan there to develop 258 lots in San Antonio. So loan to value is 65% and the first phase of this project was 100% presold to major home builders. None of them backed out of the commitments as this market is very supportive and the guarantors are also very supportive. That is a typical loan in that portfolio.

Our national home builder exposure is $59 million, that’s all to one national home builder, 75% of that is in the state of Texas. All of Texas as far as we’re concerned is still doing very well. A typical loan there would be in the Texas region, would be a $10 million lot residential development loan there to this large national home builder. It’s in three phases; the loan to value is 59% on a new appraisal. Phase one of 155 lots is already completed and now sold completely out and they’re doing phases two and three. The market is very supportive to absorb these lots.

Next category is land or residential land. A typical example of that would be in the Georgia region, a $6.5 million to purchase some 700 acres in Atlanta area. Loan to value is 35% based on a new appraisal. The guarantor has substantial liquidity and has a tremendous amount of equity in the loan as you can see by the 35% loan value ratio. Residential spec is $588 million. An example of that loan would be in the Alabama region, a $7 million line to a home builder in the Huntsville market. The outstanding balance on that is less than $5 million, actually less than $3 million. Its four spec homes that the inventory is turning. The market is supportive and the loan to value is 80% and the guarantor is supportive. Residential presold is $263 million. An example of that would be in the central Florida market, a $20 million line to a builder with approximately a balance of $4 million. There are 24 homes under this line all presold. Loan to value of 85%. The inventory is turning and the borrower and guarantor financials are very supportive.

Next is consumer owned lots of $140 million. Typical loans in this category are under $100,000 in size, the average loan size is $92,000 and average loan to value is approximately 65%. Average Beacon score of these borrowers is 706 and net to income ratio is under 40%. And the final category is builder lot inventory of $200 million. A typical example of this would be a $630,000 loan in the Atlanta area, loan to value of 71% in 19 lots held for construction on homes.

So that is a breakdown of what we consider our largest exposure and where we are seeing by far the largest problems in our loans. Our past dues at the end of the year were 2.23% greater than 30 days. That’s higher certainly than it has been but certainly at 2.23% in this market that we’re in is not bad.

What do we see for 2008? I personally think the first two quarters are going to be times when things, when its judgment day on a lot of loans. I think that charge-offs will increase. I think nonperformings will increase. I think that nonperformings will get to higher levels because we’re going to make decisions that we’re managing this company for the long haul. We’re not going to manage it to take quick losses and report hundreds of millions of losses. I cannot bring myself to selling a project and taking a $5 million or $10 million loss on it if I think we can get our money back in four to six quarters. I just can’t do that. We’re managing the company for the long haul so nonperformings going to go up. charge-offs will go up and I think in the third and fourth quarter things will begin to turn normal again and hopefully by the end of 2008 we can go into 2009 and things will be back to where they should be from a standpoint of being able to move projects and have reasonable timeframes for things like that to happen.

If rates continue to be slashed as dramatically as they were yesterday, I’ll let Sarah and Kamal talk about net interest margins, but if rates are slashed that quickly, that certainly helps the type of borrowers we have because we have home builders that are selling the lower priced houses and with those rates coming down dramatically, those buyers will be back in the markets. And again we’re in the best markets from a job growth standpoint and a population growth and so it’s an absorption situation and those houses will begin to be absorbed again and we think that our builders and our projects are where they will go to first.

So we look for 2008 to be a challenging year, for the first two quarters especially, but we’re going to manage through it. We’ve beefed up our reserves to reflect that at 150%. And we think that with those ratios we can manage to that and we will review our loan reserve each quarter because we have a very detailed analysis of what our reserves should be and we will deal with those accordingly. With that, Sarah and Kamal can talk about margins and income but I think that what most of you wanted to hear the most about was credit quality. I tried to give you a complete picture as best I could on where we stand. I am very confident that our people are on top of all of our situations and I’m very confident that Colonial will come through this as it has come through all cycles in the past. I am very confident that our people know exactly what we’re dealing with. We have a great team of lenders out there and we have a great team of work out people that have been through these cycles many times and I’m very confident that Colonial will come through this and again be the shining star.

So with that we will open it up to any questions that you may have about any of this or any other things that we did during the quarter.

Question-and-Answer Session

Operator

Your first question comes from Todd Hagerman - Credit Suisse

Todd Hagerman - Credit Suisse

Good morning everyone, just a couple of questions. First just in terms of the classified loan list, I think in the third quarter queue you referenced roughly about 3% of loans were classified, can you give us a sense just in terms of the migration that you saw this quarter, where that balance stands when we think about the charge-offs here in the quarter and the migrations with nonperforming.

Robert Lowder

Yes, it will go up this quarter Todd. We’ve been very aggressive in classifying our loans and whenever you’re in those kinds of credit cycles the regulators who live with you on a regular basis are very diligent at doing that so those classifieds will go up.

Todd Hagerman - Credit Suisse

Okay and then just, you didn’t make reference to the secondary loan market this quarter unlike the previous quarter, can you give us a sense of again as you walk through the portfolio this time around, again with the secondary market the appetite there is did you utilize that market to any degree this time around?

Robert Lowder

We utilized it some, but because it was the end of the year, people get greedy and they think that they can hold you over a barrel and like I said, we could have sold one project for $0.64 on the $1 but again I don’t think we’re going to have any loss in that. I could not bring myself to do that. There is liquidity out there. There are large funds. There are buyers out there. Of course they’re trying to get the lowest price. We’re seeing prices on the projects they’re looking at as far as ours are, between $0.50 and $0.65 on the $1 is about what they’re doing now. Although they got real greedy at the end of the year and they were trying to get, they were really low balling you because they though they had banks over the barrel and maybe they did in some cases, but we just didn’t bite on that. We would rather our nonperformings be higher because we’re managing the bank for the long haul and to take losses that we think that we can recoup in a relatively short period of time.

Todd Hagerman - Credit Suisse

Terrific thanks very much for the color.

Operator

Your next question comes from Robert Patten - Morgan Keegan

Robert Patten - Morgan Keegan

Where could you be wrong, I mean obviously you guys have done probably the most thorough portfolio review of any bank reporting to date and you obviously know the portfolio, where could we be wrong, a severe recession?

Robert Lowder

We will be wrong on things that we don’t have any control over and that would be a complete collapse of the economy and deterioration of jobs, cut backs where a lot of people don’t have jobs. I think that’s where we’d be wrong. I feel confident we know where we are as far as what we have to do about our credits and what our credits are and we’re realistic about which one of those credits is good and I think we have graded them accordingly. But where we could be wrong is just things, and again, the same answer to that question is what I would have answered at the end of second or third quarters and what we have seen is, we have seen people just run out of liquidity. Again the good thing about our portfolio is very short term in nature so as long as this thing has been going now, the people that were going to run out have run out of money. And so we’ve been able to identify those and we know where they are and we know what we have to do about them. Another good thing is we don’t have a lot of projects that are half way complete. If we’ve taken over houses, they’re houses that are complete and they’re ready to be sold. They’re ready to be moved rather than taking on something that’s 25% or 30% complete so where I could be wrong is things that I don’t have any control over.

Robert Patten - Morgan Keegan

And then one quick one, on the secondary loan market and your sense of the vulture funds and we haven’t seen a lot of vulture funds coming out the last two or three cycles, that’s always what sort of brought us out of those cycles is asset prices get set, what’s your sense for how things are setting up in ’08?

Robert Lowder

Well I think there’s going to be a lot of money out there to buy things. The question is going to be what are they willing to pay and are you willing to take what they want to pay and I think, we feel like what we have to offer is probably better quality than some they’re going to look at. As I said, we’re seeing prices $0.50 to $0.65 on the $1. I’m sure others are seeing less than that. There’s money out there, a lot of money out there that’s willing to buy things.

Robert Patten - Morgan Keegan

Thank you.

Operator

Your next question comes from Steve Alexopoulos - J.P. Morgan

Steve Alexopoulos - J.P. Morgan

Hi good morning everyone. Bobby first, could you just clarify for me when you said you expect net charge-offs up in the first and second quarter, do you mean from the 88 basis point level we saw this quarter?

Robert Lowder

Well I’m talking about our year to date last year was 0.35%. We think annually when you get to the, as you get to the end of 2008 that percentage will be up.

Steve Alexopoulos - J.P. Morgan

And I’m curious now with the tangible equity ratio below 5% how should be think about capital management the next couple of quarters, whether it be buy backs or acquisitions and maybe you could address the need to potentially raise capital here?

Sarah Moore

Well as you know, we did close on the Citrus and Chemical acquisition the first week of December and that was the primary reason why our capital ratio diluted tangible capital from the end of September to the end of December, half of that consideration was in cash. So we expected that. Our capital ratios remain within our targeted levels. We are in a very solid position looking out the next 12 months. And so we’re not in a have-to-capital-raise mode. Likewise we do not believe it would be a prudent time in the credit cycle to buy back shares. We want to retain our capital to be conservative so that we have the financial flexibility to manage whatever conditions are thrown at us throughout 2008 and 2009.

Steve Alexopoulos - J.P. Morgan

Great, thanks Sarah.

Operator

Your next question comes from Andrea Jao - Lehman Brothers

Andrea Jao - Lehman Brothers

Good morning everyone. Just wanted to get a better idea of how much loan loss provisioning, especially in the first half of 2008, how much of a drag would that be given nonperformers and a charge out should still be elevated in the first half of 2008.

Robert Lowder

We’re just going to evaluate that each quarter Andrea. We’re not going to give guidance on that, we’re just going to evaluate it each quarter as we go through.

Andrea Jao - Lehman Brothers

Okay, and then, what gives you a lot of comfort that things would start to get better or start to improve by the back half of ’08. All things considered that’s a relatively short period of time.

Robert Lowder

Well again because our loans are short-term in nature. I think we have, as I’ve said, we’ve been through every loan virtually in our entire portfolio of any size, particularly in the residential construction outstanding where we have, as we have documented, we have most of our problems. And we’ve been through every loan. Our credit folks have been through that. We’ve talked about it. Caryn and her senior people have met with me and we virtually have spent many hours trust me, many hours going through every document, every loan and we feel like that’s why we have a strong handle on what it is and so we can see that the first two quarters is going to be the peak of everything and we think it’ll get better from there. And again my belief is if rates continue to be cut, then at some point; the type houses that our developers build sales are going to pick up again. The Texas market continues to be a good market for us. We really haven’t seen any dip there to speak of. So Texas continues to be good for us.

Andrea Jao - Lehman Brothers

Okay thank you.

Operator

Your next question comes from Chris Marinac - Fig Partners

Chris Marinac - Fig Partners

Thanks good morning, Bobby you’ve got some good examples and a lot of the color and the credit quality, I was curious if you could tell us specifically within the residential spec and also the A&D, how much of those two would be in Florida?

Robert Lowder

Well Florida is 70% of our portfolio so, Caryn’s just sharing that with me right here, of the $2.9 billion 45% is in Florida, 17% is in Texas – that’s good, 14% is in Georgia, 14% is in Alabama, 7% is in Nevada and 3% is scattered with customers we have that have done small projects other places. So 45% is in Florida and the rest is scattered pretty evenly between Texas, Georgia and Alabama.

Chris Marinac - Fig Partners

Okay and on the residential spec?

Robert Lowder

Resident spec, of the $2.9 billion how much is residential spec?

Chris Marinac - Fig Partners

No, I’m sorry, so the $2.9 billion is a combined A&D and residential spec, is that right?

Robert Lowder

The $2.9 billion includes residential spec right.

Chris Marinac - Fig Partners

Okay and then my follow-up just had to do with the mortgage business and your perspective on do lower interest rates now begin to kick off and some refinance business and can that be a possible positive as to 2008 unfolds?

Robert Lowder

It’s going to be a positive for us as most of you know we were able to pick up Market Street Mortgage over in Atlanta that was a subsidiary or affiliated with Net Bank. We picked up that outstanding group of individuals. They were either the second or largest originators last year in the greater Atlanta market of government backed mortgages. We took over all of those offices and we feel very good about that and we think that is going to be a big addition to especially through them and then throughout our entire franchise. We’re really pushing especially FHAVA type loans through our offices and we thank that’s going to be a big push for us. We deal with those kinds of customers and we deal with those kinds of builders and we think that’s going to be a big plus for us. We think that markets are going to get better and if these rates continue to come down, it will get much better.

Chris Marinac - Fig Partners

Great, thank you very much.

Robert Lowder

Your next question comes from Kevin Reynolds - Janney Montgomery Scott

Kevin Reynolds - Janney Montgomery Scott

Good morning, Bobby you’ve been through this before in one form or another you know given your career and all and I just wanted to kind of ask you, I know we’re talking about the FED cutting rates yesterday, maybe they do some more, maybe that helps us out sooner rather than later, in your opinion, what causes the situation to get better? Is it just time if we can’t rely on the FED to do something in addition to that or if it doesn’t have the desired affect, how long are we going to have to work through it and if you could, maybe even offer some contrasting points back to ’90, ’91 and what you see, what may be different today than it was back then. Or maybe things may be the same at this point.

Robert Lowder

Well I think that the big difference in this cycle is most of the banks larger than us have spent all their time [inaudible] off balance sheet items. Kamal can expand on that. I mean if you look at most of the earnings releases that are coming out, banks our size or larger they’re not even talking about the kind of credits I’m talking about. Now I’m sure they’ve got them. But they’re not talking that, they’re spending their time talking about the money markets….you can help me with that.

Kamal Hosein

Good morning, I think for us as banks I think people understand the value proposition of a bank and in shareholder banks, there are credit cycles and these things are going to come and they’re going to go. I think for us, how we’re trying to differentiate our self is from the point of view that obviously we’re showing here that we have a very good hold on our credits and our credit quality situation, but we don’t have any of the broader issues with regard to problems with our investor portfolio, problems with off balance sheet on balance sheet situations, problems with our asset manager business and overall problems with liquidity. That really hasn’t been discussed here but the breathe of liquidity issues for the larger institutions is a significant overhang going into 2008 and that’s something that’s going to have to be rectified here before we can kind of fully get out of this from the point of view that all the institutions need to be in a decent situation where they can lend money and there are a lot of them out there who are still working through those issues.

Robert Lowder

In layman’s terms what Kamal just said is we reported that we added $93 million to our loan reserve, but we didn’t say “oh by the way, we’ve got $200 million or $300 million over here in something else, in XYZ Fund or CDOs” or whatever all those things are. We don’t have any sub prime exposure. We don’t have any off balance sheet stuff; we don’t have any of those things. So that’s why when I sit here and talk to you about the loans that Colonial have I venture to say you won’t have another bank our size or that’s going to give you these kind of details in depth because they’re not talking about those for you. Trust me if they’re in the lending business and with the economy the way it’s been for the last six to 12 months, they’ve got the same issues we have and more so. But they’re talking to you about all these other things. We don’t have all those other things. So that’s the difference between us and somebody else and that’s good for us, that’s good news for us, that’s good news for our shareholders because we will work through this cycle and that’s one reason it’s different from previous cycles. It’s all these other things, you know with the Merrill Lynches and the Citigroups of the world are charging off $15 billion and $20 billion in papers and you know they don’t have anybody to go to, to get something. We do. If we’ve got a builder that’s got six houses in Birmingham, Alabama and those houses are complete and they’re sitting there in a good location and the economy in Birmingham is still pretty dead-gum good, but because of all the factors he just can’t pay us any more interest because he doesn’t have enough liquidity to carry us any further, at least we can go take those houses and sell them over a period of time and we can get our money or at least a large portion of our money back. So that’s why we’re different from somebody else. As far as cycles, it’s a very similar cycle, it’s just time is what you’ve got to have to work through it but again I think that if the economy would [gen] back up some and there’s new job growth and the rates are down, there’ll be people that want to buy houses. And that will be good for us.

Kevin Reynolds - Janney Montgomery Scott

Okay and then you may have answered this in one form or another a little earlier or maybe Sarah did, you talked about net charge-offs peaking in first half of 2008 and nonperformers continuing to go up first half of 2008 before you start to see some improvement. You added, you’ve obviously built reserves this quarter, would one expect you to continue adding or having elevated provisioning level, maybe not at the same level as this one, but if charge-offs continue to go higher have we already reserved for what you expect, what you reasonably expect charge-offs to be in the first half of this year or are we going to have more provisioning as we go through the first couple of quarters to compensate for those things?

Robert Lowder

Well we’re going to review it every quarter, but we feel very good as we said in the beginning, I said in the beginning, I feel very good about where our reserves are to absorb what we have coming. But this is something that we review every quarter and we will have to do that. But right now we feel very good about where our reserves are. But it’s something we will have to review every quarter as we have to do.

Kevin Reynolds - Janney Montgomery Scott

Okay, thank you.

Operator

Your next question comes from Salvatore J. Dimartino - Bear, Sterns & Co.

Salvatore J. Dimartino - Bear, Sterns & Co.

Hi good morning everyone. Most of my credit quality questions have been asked, but maybe if we can shift just for a moment to the net interest margin, I think in the press release you mentioned that there still continues to be significant deposit competition in many of your markets. But we did see a sequential decline in your cost of deposits. I’m wondering maybe if you can give a little color on sort of the moving pieces to the margin going forward, especially in light of the aggressive FED easing?

Sarah Moore

Sure, I’ll be glad to talk to you about that. I think Kamal can help me out. But with the recent rate reductions being so deep and so quick and we may have other reductions next week that will hurt us in the short-term because we’re slightly asset sensitive. We became a little bit more asset sensitive in the fourth quarter than we were in the third. And that is given the current shape of the curve and a static balance sheet. We are [incenting] all of our folks, commercial lenders and all of our different retail banking officers to go out and raise deposits. And we believe that that could be a significant benefit to us and help our margins by focusing on commercial accounts which are typically non interest bearing DDA and that could be a significant driver to our earnings in 2008. Another issue is that we have paid off our mortgage warehouse securitization. The first part of the year our mortgage warehouse assets, we had $1 billion funded in off balance sheet at year end and we did pay that off the first week of January and that is net interest income accretive to us, it is margin diluted. The other big driver a shift our growth in securities, if we get a little seepening in the yield curve then we’ll opportunistically acquire securities as we did in the third quarter. We did not buy any securities in the fourth quarter. We kind of pre-bought if you will when spreads were wide in the third quarter. So if the curve steepens as we all hope it will, that will certainly help us, help our margins and help our earnings in 2008. We did end the year at a margin of 3.55% for 2007. We do expect to have some margin compression because the fourth quarter was at 3.43% so as we’re looking out the first half of the year, unless the curve dramatically steepens, we expect some margin compression in 2008. But that’ll be mitigated by our other efforts that we’re taking and sending all of our people to get out there and raise the commercial deposits and that can certainly change our outlook on margins.

Salvatore J. Dimartino - Bear, Sterns & Co.

Okay and as a follow-up, I know it’s still early but have you seen any change in the competitive environment especially on the part of a certain non-bank financial?

Kamal Hosein

The general answer to that is no, I mean the first couple weeks of the year has still been difficult and challenging if you look at where people are posted versus say [inaudible]. There are institutions out there who are taking on further commitments and that means that I think that they’re going to still have things to work through along with the commitments that they still have on their books come the end of the first and second quarter. With the move yesterday and the expected move next week, we’ll just have to see how it shakes out. The treasury and swop curve is moving very aggressively each day including today and yesterday. It’ll be two weeks, three weeks after the move from yesterday and the expected move next week, before we see how folks shake out. But the reality of the situation is, is there’s still many market participants in the space who have a very difficult liquidity situation they’re trying to work through. We’re hopeful that they can get their situation taken care of. We’re very pleased to have been in a FED fund sold position of 1231 and to have been in a position to pay off our warehouse securitization as easily as we did it in the first week of the year. As that happens during the year, we’re expecting that will happen, it’ll be helpful for the margin but it’s just difficult to know when it will happen.

Salvatore J. Dimartino - Bear, Sterns & Co.

I understand, thank you.

Operator

Your next question comes from Dave Bishop - Stifel Nicolaus and Company

Dave Bishop - Stifel Nicolaus and Company

Good morning, Bobby good color in terms of the write-downs you were taking there in terms of the updated LTVs just want to get a sense in terms of when you are establishing these appraisal values, I mean how is that sort of being mark to market there, I mean are we talking about sort of the stressed auction pricing and sort of the floor that’s being established there or maybe just give us some sort of sense what those appraisals are driving on?

Robert Lowder

They are brand new appraisals that we have gotten on these projects. We have appraisal review process here within the company and we review every appraisal. If we detect any problems with somebody we cut them out from doing appraisals. That’s one of our approved appraisers so we have a very select list of appraisers that we accept so we feel like, and I think that because of what’s going on in the markets, appraisers are now being very conservative about what they’re doing. I think that at one point they were not, [inaudible] at some point, but I think that they’ve gotten concerned them selves and so I think they’re being ultra conservative with their appraisals.

Dave Bishop - Stifel Nicolaus and Company

And one follow-up maybe for Sarah, in terms of sort of the housekeeping and other income, looks like there’s a little bit of an unusual spike there, anything unusual in terms of some unusual gains in that line.

Sarah Moore

Yes, we benefited as you know, we have some joint ventures and we benefited from some joint venture income in the quarter that was a little bit bigger than the third quarter and we also sold a couple of branch properties that we had moved the locations and recognized the gain but it wasn’t anything that significant. It was just many little things that added up to the larger increase in that category.

Dave Bishop - Stifel Nicolaus and Company

Thank you.

Operator

Your next question comes from Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

Hi thanks, Sarah I want to follow-up on the, it sounded like did you say you paid the conduit off? Is the conduit no more and is now, those loans are on the balance sheet?

Sarah Moore

That’s correct.

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

And did you, to pay that off, did you sell an asset or did you increase a liability to pay that off?

Sarah Moore

We just borrowed FED funds to pay it off.

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

Okay so does that balance sheet $1.5 billion bigger than it was at quarter end?

Sarah Moore

We had reduced it, it was $1 billion at year end, so its $1 billion bigger.

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

Okay that’s helpful. And a question maybe for either Bobby or Caryn, on the interest reserves, is interest reserves running out part of what’s driving the losses to occur, the timing of the losses, is that something to look at and is the interest reserves running out? Is that building momentum here or if the loans are so short, are we seeing a decrease now in the amount of interest reserves are scheduled to run dry?

Caryn Cope

I mean that has happened. I mean we’ve had projects where the interest reserve has run out. Fortunately, as you remember when we have personal guarantees on all of our loans, we’ve had guarantors come to the table and provide that additional interest that they’ve had to liquidate assets, refinance assets, provide additional plus collateral, whatever the case is. And if that cannot happen, then that’s the point that the loan becomes impaired and those are the ones that you’re seeing in nonperforming.

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

Alright, thanks a lot.

Operator

And there are no further questions at this time I’d like to turn the conference back over to our speakers for any closing remarks.

Robert Lowder

Well we appreciate your attention this morning. We were happy to have answered your questions and we wish all of you a very good day, thank you.

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