Bank Ozk (OZK) 2004 Q1 法說會逐字稿

Good morning. My name is Alexandria (ph) and I will be your conference facilitator. At this time, I would like to welcome everyone to the Bank of the Ozarks first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Susan Blair, Executive Vice President in charge of Investor Relations.

Good morning. The purpose of this call is to discuss the Company's first-quarter earnings press release, issued after the close of business yesterday, our results for the first quarter of 2004 and our outlook for the remainder of the year. Our goal is to make this call is useful as possible in understanding the future plans, prospects, and expectations for Bank of the Ozarks. To that end, we will make certain forward-looking statements about our plans and expectations and the future events, including statements about economic and competitive conditions; our goals and expectations for net income; earnings per share; net interest margin; net interest income; non-interest income, including service charge income; mortgage lending income and trust income; non-interest expense; our efficiency ratio; asset quality; nonperforming loans and leases; nonperforming assets, charge-offs, (indiscernible) loans and leases; interest rate sensitivity; future growth and expansion, including plans for opening new offices and the possible conversion of existing loan production offices to full-service banking offices; opportunities and goals for market share growth, loans, lease and deposit growth; the possible prepayment of certain trust preferred securities and the effect thereof; and the possible sale of investment securities and the possibility of gains thereon and the effects thereof.

You should understand that our actual results may differ materially from those projected in any forward-looking statements due to a number of risks and uncertainties, some of which we will point out during the course of this call. For a list of certain risks associated with our business, you should also refer to the forward-looking information caption of the Management's Discussion and Analysis section of our public reports filed with the SEC. Forward-looking statements made by the Company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements, and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of the future events, the receipt of new information, or otherwise. Now let me turn the call over to George Gleason, our Chairman and Chief Executive Officer.

Good morning and thank you for joining our call today. We are very pleased to report another record quarter at Bank of the Ozarks. This is our 13th consecutive quarter for both record net income and diluted earnings per share, and our 27th quarter of record net income out of the last 29 quarters.

Our first-quarter net income was up 33.3 percent and diluted earnings per share were up 28.6 percent compared to last year's first quarter. This strong earnings growth was driven by strong balance sheet growth. During the last 12 months, loans and leases have grown 30 percent, deposits 32.6 percent, and total assets 33 percent. Apart from the acquisition of RVB Bancshares in June of 2003, this growth has come from continued implementation of our growth in de novo branching strategy, which we have now been pursuing for 9.5 years. Growth for growth's sake is not our goal, but when 32 percent total asset growth results in 33.3 percent net income growth, we are achieving the kind of balanced and profitable growth we want.

Our growth in de novo branching strategy continued to produce the desired results in the first quarter. First-quarter annualized returns on average assets and average stockholders' equity were 1.70 percent and 23.45 percent respectively. In the past quarter, we again invested in the future, sacrificing some short-term earnings to pave the way for continued growth. But in the first quarter, our results suggest to us that we once again maintained a good balance between achieving our short-term earnings goals and our long-term growth objectives.

During the first quarter, we continued our de novo expansion, moving from two temporary offices in Conway and Cabot into new permanent facilities, and we also completed and opened our second Cabot office. We continue to be on track to add a total of eight Arkansas banking offices this year, and we expect to open three of those offices in the second quarter. These will include our second office in Van Buren, where we are at substantially full capacity in our original office, a fourth office in the rapidly growing Conway market, and a second Russellville office.

During the first quarter, we agreed to purchase a Texas bank charter for a $200,000 premium. This transaction is expected to close in the next few days, and will result in the relocation of that charter to our Frisco, Texas loan production office. This office will serve as a temporary banking office until we relocate to a permanent facility later this year or early next year. The charter will be immediately merged into our existing bank charter, and we will operate in Texas under the Bank of the Ozarks name. This is, of course, the first step in our previously announced plan to convert some or all of our three out-of-state loan production offices to full-service banking offices.

In the remainder of the call, I would like to provide more details about some of the highlights of the first quarter and our expectations for the remainder of the year. First, let's talk about growth. Bank of the Ozarks is a growth company and our growth comes from adding new customers every day. The first quarter was one of the best ever for adding new customers. Deposits grew at an annualized rate of 30 (ph) percent during the first quarter, well above the top end of our range of guidance for deposit growth. This growth was broad-based throughout the Bank.

Our new deposit growth initiatives in our Western and Northern divisions produced excellent growth in new accounts. Our newer markets of Conway, Russellville, Cabot and Benton all achieved excellent deposit growth, and we continue to see steady account growth in most of our other markets. We were very excited by the stellar first-quarter deposit growth.

Loan growth was also strong in the first quarter, with loans growing at an annualized rate of 19 percent. While this growth rate was in the lower half of our guidance range, it has to be viewed in light of our historical experience for first-quarter loan growth. In recent years, the first quarter has proven to be challenging for loan growth due to seasonal factors. For example, in 2002 and 2003, first-quarter loan growth was less than 1 percent and 8 percent annualized, respectively. While 19 percent annualized loan growth is a solid performance standing on its own, this growth rate looks even better when viewed from an historical perspective. Our loan growth was broad-based throughout the Bank, including good contributions from our loan production offices, our relatively new leasing division, and our new central division consumer lending initiatives.

While our loan and deposit growth percentages will vary from quarter-to-quarter, we continue to expect that our loan and deposit growth for the full year of 2004 will be from the high teens to the mid-20s in percentage terms. In our last conference call, I discussed in detail five reasons why we were optimistic about loan and deposit growth. Let me briefly summarize those reasons, as we believe they still apply.

First, we opened more offices in 2003 than ever before, and these offices are well located in larger markets, where we expect to generate good loan and deposit volume. Second, our offices opened prior to 2003 still have great growth potential, as we believe that only seven of our total 42 banking offices are at substantially full capacity. Third, as of June 30, 2003, we had a weighted average deposit market share in our 16 Arkansas counties of about 6.5 percent, and over the long-term, we think we can increase our weighted average market share in those counties to between 15 percent and 18 percent.

Fourth, we believe that we have substantial growth potential from our recently introduced deposit growth initiatives in our Northern and Western division markets. And lastly, there are a number of factors suggesting that our future loan and lease growth will be very good, including our additions of experienced lenders in our established markets and the new lenders hired for offices opened in 2003, as well as our new leasing products and new direct-to-consumer lending initiatives in the central division. Let me repeat what I said last quarter. We think it is important for you to understand that we have had 9.5 years of great results with our growth in de novo branching strategy, but we believe our best opportunities are ahead.

Now let's talk about interest margin. Our net interest margin improved from 4.45 percent in the fourth quarter to 4.48 percent in the first quarter. This three basis point improvement was consistent with our most recent guidance, in which restated that we are cautiously optimistic about our prospects for more a stable net interest margin in 2004. At the same time we enjoyed this small improvement in margin, we also continued our efforts to increase the percentage of variable rate loans in our portfolio. We expect that rates will rise at some point either later this year or early next year, and we have been working diligently to increase our percentage of variable rate loans for more than two years. We have made progress in this regard every quarter, and we continued to do so in the first quarter, with variable rate loans accounting for 33.56 percent of total loans, which is an 83 basis point improvement from 32.73 percent of total loans at year-end.

Of course, we typically get lower rates on variable rate loans that fixed-rate loans, so this continued shift in our portfolio has the short-term effect of putting some pressure on margin. On the positive side, this also tends to lower interest rate risk and should be very helpful in maintaining margins when rates eventually rise.

You should also understand that our loan and lease portfolio is much more rate sensitive than you might think, if you focus solely on this percentage of variable rate loans. In addition to our variable rate loans, we have a substantial volume of fixed-rate loans and leases, which mature or pay down each year. If you look at our total loan and lease portfolio, 54 percent of all outstanding loan and lease principal is scheduled to reprice or repay in one year or less. This includes variable rate loans that reprice under their contract terms; fixed-rate loans that mature and are thus subject to being repriced; and principal cash flow from regularly scheduled payments on amortizing loans and leases, which can of course be reloaned at new rates.

If you look at the two-year time frame, 68 percent of all outstanding loan and lease principal balances are scheduled to reprice or repay, and that percentage goes to 80 percent for the three-year (ph) time frame. These percentages do not include unscheduled payoffs and principal payments, which should push these numbers even higher. Thus we believe that the repricing of our loan and lease portfolio is much more closely aligned with our expected repricing of deposits and other liabilities than one might assume if you considered only the percentage of variable rate loans.

The first quarter was our 12th consecutive quarter of record net interest income. With our cautiously optimistic outlook for a more stable net interest margin and our expectations for continued good earning asset growth, primarily in the form of loans, we expect -- or we believe prospects are favorable for continuing to achieve records in net interest income in each quarter of 2004.

Before we leave net interest margin, let me comment on one other matter. As discussed in the press release and our last two conference calls, we will very likely prepay our $17.3 million of outstanding 9 percent trust preferred securities late in the second quarter. These trust preferred securities are prepayable subject to regulatory approval on or about June 18. As we have previously disclosed, this prepayment will result in a pretax charge for approximately $852,000 of unamortized debt issuance cost.

As noted in the press release, we expect to offset 82 percent or more of this charge with gains realized from sales of investment securities. In fact, we have already sold $10.9 million of investment securities this month and generated $697,000 in pretax gains. We may or may not have additional sales or gains, depending on bond market conditions, but even without additional gains, the net after-tax impact of the charge and the securities gains combined would reduce earnings per share by about 6/10 of one cent.

The investment securities which we are selling are predominantly among our longer-term, fixed-rate securities. We think that makes good sense from an interest rate risk management point of view, since we are paying off longer-term fixed-rate borrowings. Of course, that means that the securities we are selling are also among our higher-yielding securities. The investment securities sold so far had an average yield of 8.23 percent and an average remaining term of 20.5 years. Since the securities sold today will settle in April, we will lose the benefits of these favorable yields until we prepay the trust preferred securities on or after June 18, and this will substantially offset any benefits of such prepayment on the second quarter's net interest margin. However, the aggregate effect of these two transactions -- the prepayment of the trust preferreds and the sale of the investment securities -- will tend to increase third-quarter net interest margin by approximately 9 basis points from the first quarter level, assuming all other things are equal.

Of course, these transactions are only two of many factors affecting net interest margin, and I am not trying to give you a specific projection of second- or third-quarter net interest margin. I'm only trying to explain that the early sales of the investment securities will offset any benefit from the trust preferreds prepayment in the second quarter, but the combined effect of these transactions should have a positive influence on net interest margin in the third quarter and beyond.

With that said, let's now turn to non-interest income. Service charges on deposits are our primary source of noninterest income. The first quarter was our fourth consecutive quarter of record income from service charges on deposit accounts. In fact, service charge income was up 25.9 percent compared to the first quarter of last year. While there may be some volatility from quarter to quarter, we expect that service charge income will continue to grow in 2004 as a result of both growth in customers and improved pricing.

Our second largest category of noninterest income is mortgage income. We stated on our last conference call that we felt our fourth-quarter mortgage income reflected a more normal level of business after the great refi boom. Our first quarter mortgage income fell slightly from the fourth quarter level, which we attribute to mostly seasonal factors. Normally, the first quarter and the fourth quarters are less favorable mortgage quarters due to seasonal factors, so in the past two quarters, we think we saw both the cyclical slowdown of the mortgage business and the seasonality of this business. We have a strong mortgage origination platform and we are cautiously optimistic that second-quarter mortgage income will show improvement from the first quarter level, as it is typically a more favorable quarter for home purchases in our markets.

While first-quarter trust income was up 27 percent compared to the first quarter of last year, it was well off the pace of the previous two quarters. As I stated in our last conference call, during the last quarters of 2003, we benefited from a high level of Arkansas municipal bond issuance, which resulted in us being named trustee on a number of new bond issues. Schools and other governmental entities took advantage of last year's low rate environment to issue new debt and refinance old debt, which was very good for our corporate trust income. There was a substantial decline in Arkansas municipal bond issuance in the first quarter, and this greatly reduced our fees from new corporate trust.

We believe our first quarter results are a good baseline number, and we think the trust income is likely to remain at approximately the same level in the second quarter as in the first quarter, and we expect that it will show some improvement in the second half of the year. In the past month, we have seen good signs of growth in our personal trust area, which should contribute to third-quarter fee income. We are optimistic about our prospects there, and also hopeful that the corporate trust business may improve a bit from the very lean level of the first quarter.

Now let's talk about noninterest expense. I think we did a good job with noninterest expense in the first quarter. While noninterest expense was up 24.1 percent in the first quarter compared to the first quarter of 2003, we consider that acceptable, since revenue on a federal tax equivalent basis was up 26.9 percent. Our goal is to grow revenue at a faster rate than overhead expenses, and we achieved that goal again in the first quarter. As a result, our efficiency ratio improved to (ph) 45.3 percent in the quarter, which is very good and the best efficiency ratio that we have posted in any quarter since we went public in 1997. Although this ratio will bounce around from quarter-to-quarter and the expected charge for unamortized debt issuance cost will negatively impact it for the second quarter, one of our most important goals is to continue to improve that efficiency ratio over time.

I would be remiss if I closed the call without some mention of asset quality. The first quarter was a very good quarter in regard to asset quality. Our ratio of nonperforming loans and leases as a percentage of total loans and leases was 0.36 percent, down 11 basis points from the previous quarter end. Our ratio of nonperforming assets as a percentage of total assets was 0.28 percent, down 8 basis points from the previous quarter. Our annualized net charge-off ratio was 0.05 percent, or just 5 basis points, which is the lowest annualized net charge-off ratio we have reported for any quarter as a public company.

Our ratio of loans and leases past due 30 days or more, including past-due non-accrual loans and leases, stated as a percentage of total loans and leases was 0.46 percent at March 31, which is also the lowest past-due ratio we have reported at the end of any quarter as a public company. I give great credit to our loan and credit personnel for the excellent job on asset quality in the first quarter, and I think these numbers pretty much speak for themselves.

In summation, let me say that the first quarter was, in our opinion, a very solid and workmanlike quarter. To say that it was routine would seem to trivialize the great efforts and hard work of our excellent team and the results that were in many respects record-setting for our Company. However the quarter was routine in the sense that they were no significant unusual items in the quarter and we spent most of our efforts doing the normal blocking and tackling of our business -- adding customers and trying to build our business everyday, while maintaining an intense focus on execution of our growth in de novo branching strategy.

The first quarter results are results on which we believe we can build in the upcoming quarters. As I have stated many times, our goal is to continue to improve net income each quarter. This means reporting record income each quarter compared to the preceding quarter. We've achieved this goal in 27 of the past 29 quarters, including the last 13 in a row. Of course, the target gets higher after each successful quarter, and that keeps us working hard for our shareholders. Despite the higher bar, we believe is a reasonable goal for each quarter of 2004, and we are looking forward to pursuing that goal in the coming quarter. At this time, we should probably entertain questions. Let me once again ask our operator, Alexandria, to remind our listeners how to queue in for questions.

(OPERATOR INSTRUCTIONS) Joe Stieven.

John Rodis. How are you doing? Congratulations on another great quarter. I had a couple of questions. Maybe you could talk about a little bit, with all your success you have had and your markets, could you maybe touch upon a little bit on the competition you're seeing? Have you seen an increase in competition? And maybe just talk about some of the different markets you are in. And then I was also curious too if you could give a little update on the loan pipeline at the end of the quarter.

I would be happy to do so, John. First in regard to competition, I don't think we've seen a significant change in competition. As we have said in response to similar questions many, many times in quarters past over the last several years, we think we are in very competitive markets. We have a lot of competitors. Some of them very good competitors. We have not seen any real intensification or change in competitive strategies from those folks in a material sort of way over the last quarter or two. So fairly stable, although continues to be an intensely competitive market.

In regard to the loan pipeline, we are very pleased with the loan pipeline as we enter the second quarter. Our commercial and corporate loan pipeline for our portfolio loans looks very good, a very strong pipeline -- probably as strong as it has ever been. And our mortgage pipeline, which of course has a forward-looking view of about three or four weeks on it, looks very good at the outset of the quarter. Now, with the rise in rates that we've had over the past few days, it remains to be seen how strong that pipe will be in mortgage. But at the outset of the quarter, it looks very strong and we are very pleased with it.

Okay. And I think on the call you mentioned that the Western and Northern locations, some of your newer locations, are doing extremely well. Is there anyplace else that's really doing a little bit better than you anticipated?

Again, we are pleased with the new deposit initiatives. As I mentioned, I think in earlier calls, we have introduced some of our more aggressive deposit products starting October 1 of last year in a number of our Northern and Western division markets. And the response there has been very strong and that has had a very favorable effect on deposit growth in those markets. The more substantial new markets that we are in -- Conway, Cabot, Benton, Russellville, Mountain Home -- those markets are all producing very good results for us. We are very pleased with the loan growth, particularly, coming out of our Dallas loan production office. And we are continuing to see good loan and deposit growth in our Metro Little Rock area market. So it really is broad-based growth coming from pretty much throughout the Company.

Thanks, George. Nice quarter.

Arielle Whitman with Sandler O'Neill.

Kudos on another great quarter. My question -- I have a few questions -- stems on the branch expansion idea, and the decision to move into these other states came much earlier than we originally anticipated. The question is why? Had anything changed to move that up? And the second part of it stems on are there any metrics that you can provide to us related to growth expectations in these states versus what we're seeing in Arkansas?

Okay, Arielle, good questions. We expect the vast majority of the growth to continue to come from Arkansas over the next five years. We currently have 42 offices, after opening our 42nd banking office, in 16 Arkansas counties. The continued rollout of offices in those counties, I believe, will add about 18 additional offices in those existing counties, primarily in the next 2.5 to three years. One or two of those offices may drag out to year four or five; but primarily in the next three years, we will complete the buildout of our franchised footprint in the 16 counties that we're currently in. And we know approximately where each of those offices needs to go. We don't have exact sites tied (ph) down for all of them, but we have a large number of those sites that we already own and are developing now. So we will add 18 offices to our current 48 in our existing 16 counties.

At the same time, there are eight other counties in Arkansas in which we expect to open a total of 23 offices, giving us 41 more offices on (multiple speakers) we already have in Arkansas. And we expect to build all that out pretty much over the next five years. Starting in 2009 (technical difficulty) -- in 2009 and 2010, we anticipate that to continue our growth in de novo branching strategy, we're going to need to really begin to look at other states to achieve optimal results with each branch. And we didn't want to get in a situation where we were dependent upon substantial growth in Texas or North Carolina or any other state in the future until we had tested those markets and started a slow buildout in those markets.

So the opening of the Frisco, Texas office, which we hope to accomplish literally in the next few days, will just be a first-stage exploration of that market. We want to get one office open there, get it running, get boots on the ground, so to speak, test our strategy in that market in a very low-intensity sort of way with a single branch, and then add another branch and then add another branch, one or two a year, and prove out and demonstrate that our strategy will work in that market before we become dependent upon that market for further growth.

It may be necessary for us to tweak our strategy a bit in these more densely urban markets. If it is, then we want to be able to figure that out while we've got one or two branches there instead of five or 10. So we think it is a very low-risk strategy to begin to test and explore those markets and get a beachhead there, so that in 2009, 2010, when we really need those markets to continue the kind of growth that we want to continue as a Company, we will be in a position to do so with confidence.

Barry McCarver.

Stellar quarter. Most of my questions have been answered, so just a couple little ones. George, in the press release, some new terms that I guess the last couple quarters I haven't heard -- temporary offices moving to permanent. Tell me what you mean by temporary. And if you're moving to a permanent office, am I to assume there were some expenses during the quarter that we might not have going forward, given that transition?

That is accurate, Barry. What I mean by that is when we entered the Conway market a couple of years ago, we had our personnel before we were able to get our sites constructed, and we were very anxious to get into the market because we had what we thought and continue to think and have proved, I think, is a winning team of personnel in that market. So we rented an office in a multi-tenant office building there, and operated initially out of a temporary facility in downtown Conway. Subsequently, as we began to build our branches in Conway, the first branch that we built was on the north side of Conway and the second branch was more on the south or east side of Conway.

So we retained the original office, original temporary office downtown, while we were searching in that downtown area for a permanent site. And there were not a lot of sites right in the heart of downtown, and we finally located a satisfactory site and completed construction on that building. So while we have had two permanent offices already operating in Conway over the last year, we just moved that initial temporary office to a permanent facility, with drive-ins and ATM and all the amenities of a banking facility. And when we did so, of course, we promptly saw our new accounts volumes and transaction volume through that office nearly double almost overnight, just because of the higher convenience factor.

The second temporary office that we located was in Cabot, and again, we had an excellent team assembled and there was some dislocation going on because of the acquisition of a small local bank in that market. We wanted to get on the ground there quickly, so we moved a double-wide mobile banking facility in there on our permanent site; our permanent site fortunately was large enough that we could put the temporary facility to the back of it while we were building the permanent facility in front of it. And we don't do that normally because there's 100 to $150,000 of just lost cost when you set up, locate, and begin operation in those facilities. But we felt like the Cabot market was an important enough market to justify that additional expenditure and that getting there 6 to 10 months earlier was a valuable enough advantage to justify the additional cost. So we did that, and in January, we moved into our permanent Cabot facility, and within six or seven weeks later, opened our second permanent Cabot facility at the other interchange there in Cabot. So that is the explanation for that.

This will not be a frequent pattern that you see because it is a costly process, but there will be occasional situations where we feel like the cost of setting up our temporary facility is justified based on the opportunity to gain some quick market share before we get there in a permanent way.

Is there any other facilities like this out there right now?

We have one temporary facility. We opened a loan production office in Mountain Home, because again we were able to put together what we thought was our ideal banking team. They are doing a great job operating now for the last, I guess, four to six months out of the temporary banking facility. We have acquired two sites in Mountain Home which we own. One of them we expect to open probably in the fourth quarter -- maybe late third quarter of this year; and the second Mountain Home site will be later -- next year.

That is a temporary facility that is a small office building, and again, it originally started as an LPO, but because of the success we were having in the loan production office and the opportunity we saw to get a nucleus of deposit customers there, we felt like it would be beneficial to go ahead and convert that to a full-service branch. We did that in a much less costly manner. We will have very, very little cost, probably $25,000 or less of actual cost, that it cost us to equip that for a very limited service banking facility.

And of course, we are doing the same thing in Frisco, Texas later this week or early next week as we open there. Again, it will be very small cost and those costs are paid for as we go, so it's not anything we're writing off when we relocate those two branches.

Okay. Thanks, George. That's all I had right now.

I would add that it is very helpful to starting a branch if you can from one of these temporary facilities get 300 or 500 or even 800 or customers on the deposit side that can (multiple speakers) when you open that branch -- a lot of cross-sell opportunities. That just gives you a tremendous start and lets you ramp up the profitability of that permanent branch much more quickly.

Okay.

Kevin Reynolds.

Good morning, George. I did have a question on deposits, or your deposit campaign. I think you have covered it fairly well, but I do have one remaining question -- or actually, two -- I'm sorry. Other expenses or the other operating expense line was down fairly significantly quarter-to-quarter. Was there any one material event that impacted that or was it spread across a number of categories?

Kevin, the first quarter number is pretty much, we think, a baseline formalized number. The prior two quarters, the third quarter of '03 and the fourth quarter of '03 had some fairly significant impacts. If you look at the breakdowns of it, in the third quarter of '03, we had a boost in our compensation -- personnel and compensation expense, and that high level of personnel and compensation expense was because of the very high level of mortgage income in the third quarter of last year and the high level of trust income, both of which had incentive comps -- the people in those areas are compensated significantly, directly based on the volume of business they are producing. So our personnel and comp reached a very high level in the third quarter of last year because of a high level of mortgage and trust income, and just the high earnings level triggered a higher level of bonus accruals for us in the third quarter.

In the fourth quarter of last year, the other operating expense, as we discussed in our conference call last quarter, was impacted by two things. One is we had a $400,000 charge which we took related to an accounting problem in Trust. And two, we had about a $300,000 impairment charge -- $350,000 impairment charge related to an investment that we made that generated a lot of tax credits. And the tax credits basically reduced our state tax liability by virtually 50 percent for the full year of 2003, and that investment was made in the fourth quarter, and we took a proportionate impairment charge related to that investment, and that was also all in the fourth quarter. So the fourth quarter noninterest expenses were abnormally high.

The first quarter of 2004 noninterest expenses are basically, we think, a very normalized, stabilized number. We have some first quarter expenses such as annual report and proxy material and all that sort of stuff, and a little disproportionate chunk of audit and so forth that all falls in the first quarter. But that's a fairly normalized number. We did, in connection with the Trust accounting problem, we indicated in our last conference call that we felt like we were reserving at the maximum possible exposure for that accounting problem in the fourth quarter.

We did have in the first quarter of this year approximately $96,000 of that charge reversed, and that did come back as credit to noninterest expense. So there was a $96,000 item to the good there, which on an after-tax basis is between 3 and 4/10 of 1 cent per share. So it would not affect our EPS number. The EPS number was still rounded to 36 cents, even had that reversal not occurred. We have continued to clarify and recover -- clarify our maximum exposure on that Trust issue and recover some of the funds. We expect a roughly comparable recovery second quarter; in fact, already in the last two weeks, we have recovered or identified the opportunity to reverse an additional $70,000 of that provision (ph) this quarter. We think that may grow as the quarter continues. Does that answer your question?

That does. Second question I have is, with your asset quality at the levels that we see in the first-quarter numbers, where charge-offs are virtually nil, how much -- what do you expect your provisioning levels to be as we move forward? Granted, you have rapid loan growth and therefore there is some need to build the reserves, but certainly, asset quality at present is not an issue.

Kevin, we feel very good about the asset quality, and the five basis points of annualized net charge-offs in Q1, obviously is a very low level and is probably not a sustainable level. What is encouraging to us is the snapshot of the portfolio that we have right now looks very good, and our trends have been good and favorable over the last several years. If you go back to 2001, I think our charge-offs in 2001 were 24 basis points. If you go then to 2002, that improved to 22 basis points. In 2003, it was 20 basis points. We are working hard and have been working hard for a number of years on asset quality. Our goal is to continue to work very hard on asset quality. We hope that that will be reflected in a continued positive trend.

Obviously, the five basis points number is exceptionally low, and is extremely unlikely to be a sustainable number. But at the same time, we do feel very good about our asset quality. We don't see anything at this point in time that would inflate our charge-off ratios beyond the levels certainly that we have seen in the past few years.

Okay. And I didn't mean to imply that you might. Let me ask it another way. You are at roughly a reserve level on loans of approximately 150. Is that something you would -- is that a level you feel comfortable with going forward, or could you possibly bring that percentage down, given the fact that your credit quality is very good at the present time?

Yes. Kevin, we use a formula method for determining the appropriate reserve, and then we try on top of that to maintain an unallocated reserve some between 15 and 25 percent of our total reserve, realizing that you cannot take every risk into account in a formula method. We are very comfortable with the 152 right now, and depending upon how all of the individual loans that comprise our portfolio grade out and what happens to various ratios within the 1-4 residential and the consumer part of the portfolio, that ratio may go up or may go down depending on that.

If the ratio allowed us to lower that one basis point or two, we are not opposed to that. If the ratio said we needed to increase it a basis point or two to stay within that percentage guideline that our formula gives us, then we would do that. It's pretty much formula-driven in how we are calculating and maintaining that. It is a coincidence and not by design that it has stayed at basically 151 or 152 for most of the last two years. That is just where the formula has suggested it should be.

Fair enough on that. I guess I will ask one question on deposits. As I look at the average balances, it appears that the jumbo CD accounts or the line item has increased year-over-year about 60 percent or thereabouts. Is that the type of deposit that you are bringing in or are you bringing in a disproportionate amount of jumbo CDs with your deposit campaign, or what has been driving that? Maybe a part 2 to the deposit question, if we do get an upgrade environment from the Fed in the second half of this year, what do you think happens to funding costs as you continue to grow your balance sheet?

Good questions. Our first quarter CDs on average were 53.7 percent of our total average deposits. That compares with 53.8 percent in the fourth quarter of last year; 51.7 percent in the fourth quarter of '02; 54.5 percent in the fourth quarter of '01. So there really have been much change in our deposit mix over the last two years, 2.5 years. We have been running somewhere between 51 percent and 55 percent CDs, and conversely, 45 percent to 49 percent non-CD deposits on a quarter-to-quarter basis over that period of time. We are -- I was not aware of the increase in the jumbo line item, and we're not doing anything intentionally to affect that percentage one way or the other. We are out raising CDs and raising deposits in our markets, and I think doing a good job doing that.

The deposit pricing that we are using in some of our markets, Kevin, does have a premium pricing built into it. And we know that in a number of our markets right now, that we are paying somewhere between 25 and 50 basis points on certain products more than we need to pay to be competitive in those markets. And we are doing that and have been doing that for a couple of quarters now to gain additional market share in those markets. And our thought behind that is A, we can afford to do it; and B, when rates go up, then I have a little cushion built into my deposit costs because I'm not going to have to be raising those deposits as much as I would if we were pricing right at market now when rates go up.

So we think that on the deposit side of our balance sheet, that we have built into a considerable cushion against interest rate increases. And we have mapped out and included in our simulation model the actual interest rate changes that we would make, and we know what those are, on the each of our products for the first eight 25 basis point Fed increases. And our simulation model is run based on those assumptions, and those assumptions are derived from the specific pricing that we have in those markets now vis-a-vis our competitors. We think we can maintain good deposit growth in those markets even as rates rise and have some cushion built into the deposit side against rising rates. Thank you for asking that question. That's a good question.

Thanks, and thank you for answering it.

Peyton Green.

Good morning. A couple of questions. One, George, you referenced in your review of the fourth quarter that your deposit account fees had been low or kept intentionally low for the last four years or so. How much of the linked-quarter increase was a result of pricing increases on your existing accounts versus volume growth?

Peyton, that is a very hard question to answer, and if I could break that down for you, I would give it to you. How much of it is price and how much of it is volume is difficult to tell you. I would point to the fact that we had a 25.7 -- I think it was --percent year-over-year increase in first quarter service charge income. And last year, if you looked at 2003 versus 2002, I believe the percentage growth in our service charges was something 11 percent plus or minus. So our thought there is that probably something along that 11 percent plus or minus trendline is the impact from just growth, and the balance of that increase is probably a result of pricing adjustments.

So the pricing adjustments have been made across the footprint, or is it being lagged in?

No, they were made across the footprint effective January 20.

Okay. And then let's see -- in the margin issue that you referenced on the trust preferred, back in the fourth quarter you indicated that the carry on the September issue clipped about 8 basis points from the margin in the fourth quarter. Does the plus 9 basis points take that into account, that you see if you do prepay the trust preferred -- the legacy trust preferred that is out there?

Yes, and the way we arrived at the 9 basis points is we basically pro forma-ed the Q1 numbers. We went into Q1 and took out the $17.25 million of trust preferreds at 9 percent, the $10.9 million of securities sold at 8.23 percent. I think we assumed the balance was Fed funds' cost. And then we reduced earning assets by the $10.9 million of securities sold. And when you do the math on that pro forma, it would have added about 9 basis points on a pro forma basis to Q1 net interest margin.

In terms of the change in adversely graded credits -- I mean, not necessarily overall, but in kind of -- have you had more go from middle to adverse as customer statements have lagged the economy, or how do you feel about that component of your watchlist?

As would be indicated by the fact that we are holding that reserve pretty constant at 1.52, we have not seen much movement one way or the other in that category.

So it's stable?

Yes, I would say it is stable. And the consumer credit side obviously was a significant contributor to the very low past-due ratio in the last quarter. We did see some improvement there.

Great Thank you very much, George.

Jeff Hayden.

Quick question about your securities portfolio. Right now, what is the duration of it?

Good question. As of -- the last date that I know that data is as of March 18. And of course, a large portion of our securities portfolio is in CMOs, and using consensus prepayment speeds (ph) for the portfolio, the average life of the portfolio at that time was 2.73 years, and the modified duration at that point in time was 2.15 years. Again, that data is as of March 18, which is the last date we compiled that data. But the modified duration was 2.15 years.

Okay. Given some of the changes in interest rate expectations, given some of the economic news we have gotten recently, are you comfortable with your securities portfolio, or is there anything you are doing to restructure it here going forward?

The only thing that we are really doing to restructure it is again, in connection with this payment of the trust preferreds, we are selling off at least 10.9 million of the longer-term fixed-rate securities. We had basically bought those securities trying to offset our cost of funds on the trust preferreds, and we are unwinding those positions with the trust preferreds. It makes sense from an interest rate risk point of view to get rid of those long-term, fixed-rate assets that we bought to offset the cost of those long-term fixed-rate trust preferreds. That is the only change we are making.

And with regard to the comment you made on loan growth, I believe it was high teens to mid-20s for the year. Would you be able to break that down a little further as far as commercial versus mortgage?

Well, the portfolio that we have is predominantly a real estate secured portfolio, and we expect that to certainly continue to be. And I don't have the exact percentages at my fingertips here. Paul Moore, our CFO, may have those. But at year-end, for example, $707 million of our portfolio was real estate secured out of $909 million, so that is 78 percent of the portfolio was real estate secured. We would expect that percentage to probably be maintained or perhaps even go up a percent or so. We like collateral on our loans and real estate collateral is something we're very comfortable with. We expect to continue to do a lot of real estate lending.

Let me rephrase, I guess. Splitting the real estate between the commercial and the residential is really what I was trying to get.

Again, we expect both parts of that to grow. Obviously, if you looked at our portfolio over the years, the commercial real estate has grown at a much higher percentage than our residential 1-to-4s. And the reason for that is most of the residential 1-to-4 loans that we have in portfolio are in our smaller, more rural markets, where a lot of home loans are done on balloons and ARM loans, and the loans do not go to the secondary market. And it high-quality business that gives us very good yields in those markets, and it's just not a normal thing in those small rural markets for loans to go to the secondary market. The banks there typically portfolio those loans.

Obviously, since 1998, our franchise has become increasingly a metropolitan and more urban franchise. And as a result, in those urban markets where there is a lot of commercial lending opportunities and commercial mortgage lending opportunities, those have been the fastest-growing components of our portfolio. Even though the other pieces have grown, they have not grown as fast as the commercial portfolios in the more urban markets. Our location of branches, selection of sites, continues to be focused on areas that are more largely populated, more densely populated, and hence the portfolio gets more commercial over time.

Obviously in our urban markets, almost all of the 1-to-4 residentials that are owner-occupied go on the secondary market and are sold off on a nonrecourse basis. Did that answer your question?

That does. Thanks a lot. Nice quarter.

Chris Kelly.

I know we are running long. I will try to be brief here. I don't know if you have provided this before, but could you possibly give us -- if you have it at your fingertips -- what the margin was across the three months of first quarter, just to try to get a sense of that trend if we could?

Chris, I do. Hold on just a second. I have to -- all right. The margin for January was 452. For February was 451 -- of course, affected by the two less days in that month. And the margin for March was 444.

Okay, that is all I had. See you at GolfSouth (ph).

Mr. Gleason, there are no further questions at this time.

All right. If there are none, thank you very much for joining our call. We look forward to talking with you in about three months. Thank you very much for participating.

Ladies and gentlemen, this does conclude our conference call for today. You may now disconnect.