Truist Financial Corp (TFC) 2004 Q4 法說會逐字稿

Good day.

All sites are now on line in the listen only mode.

At this point, I'd like to hand off your conference to your moderator, Mr. Sam Hay.

Good afternoon, and welcome to the fourth quarter 2004 earnings call for Main Street Banks.

We appreciate your being with us today.

Right from the start I'd like to make you aware of the absence of a familiar voice or at least familiar to those of you who may have tuned into our calls in the past.

As you may know, we completed the previously announced management transition whereby Ed Milligan has relinquished his CEO duties for the Company and I have taken on those duties.

We are fortunate to have Ed still providing leadership in the future of our Company as chairman and very grateful for his many contributions and leadership over a lot of years.

As some of you know he has served as CEO of our Company and its first predecessor banks since 1989.

But our thanks to Ed.

First I'd like to make you aware of our cautionary statement.

I will not read every word of this to you but commend it to your reading pleasure and entertainment and we will move on.

First, I would like to go over the agenda for today.

We will be looking at a company overview of Main Street as we have done in the past.

We will talk about recent developments and we do have a good many to make mention of some of which you are already aware of.

We will also then announce our fourth quarter results, discuss some of the details of those results, and then try to give you some color on what did go on in the fourth quarter and what impacted those results.

We will close out with what we believe is a valuation opportunity in Main Street stock and then leave some time for questions and answers at the end.

Today I am joined by two of my colleagues, Max Crowe, our Chief Banking Officer and John Monroe, our Chief Credit Officer.

I will be going through an overview of the Company and discussing our results for the quarter and giving you some detailed financials about that.

Max will then be going through factors that have impacted the quarter.

And then John will talk about asset quality during the quarter as well as figures for the end of the quarter 2.

First for a Company overview, no new news here.

For those of you who have been regular listeners or followers of our Company, as you may know, Main Street is the market leader and community banking in metro Atlanta.

That market is a very strong growth market.

It has led the nation in population growth and job growth.

It did throughout the '90s and continues to post country nationwide leading source of figures.

You'll see here and note that the population in Atlanta is growing at about three times the U.S. average population growth rate.

Main Street is in a unique position.

We are filling a void, both from a customer and an ownership standpoint, a void that has existed for many years particularly since BankSouth sold out to what is now B of A in the mid to late '90s.

As you see, we are operating 23 banking centers in 18 of Atlanta's most vibrant and fastest-growing communities and we finished the quarter and the year with about 2.3 billion in assets.

Further, in terms of overview, some market dynamics or market statistics.

We are trading on the NASDAQ under the symbol MSBK.

Our share price at least a couple of days ago was at 32.99. 52-week range between 24.90 and 35.48.

We do now have 21.2 million diluted shares outstanding and will tell you a little bit about the new capital offering which was completed at the end of December.

A market capitalization of, roughly, 700 million now and increasing trading volume about 49,000 shares over the last 90 days.

A trailing PE of a little over 21 and as I said total assets of around 2.3 billion.

Further, I believe that we are posting strong shareholder returns and are still somewhat of a valuation opportunity relative to years and we will close out our comments today with some of those metrics.

To update you on our covering analysts and firms that are active in our stock, FTN Midwest Research, Keefe, Raymond James, SunTrust Robinson Humphrey, (indiscernible), Stanford and Sidoti round out the covering analysts.

As you may be aware Morgan Keegan and Sandler O'Neill do not presently have analysts in those slots and, therefore, do not have estimates on us and are not officially covering the stock.

Moving on to recent developments.

As you know, we completed a capital offering of 1.5 million shares back in December, December 9th and was the underwriting agreement and December 14 was the closing date.

We also completed the overallotment option with our underwriters on December 30th for a total of 1.75 million shares at 31.25.

We also announced a management transition earlier in 2004 and, as I said a few minutes ago, completed that transition as of January 1st.

And a new piece of news which was announced late yesterday afternoon.

Bob McDermott, our CFO, has resigned to take on similar duties with a small banking company in Orlando, a company by the name of Seaside Financial.

We are certainly sorry to see Bob go.

But we understand that he is moving on to an opportunity that is going to be very good for him and his family and it is an opportunity to move back to Florida where he had spent many years, previously, working with Southeast Bank.

We wish Bob all the best.

We would like to share with you our feelings about the transition period.

As we said in the release yesterday afternoon, we will begin immediately a search for Bob's successor, but in the interim feel very good about not only the accounting and financial staff that Bob has spearheaded and been so instrumental in building over the last few years but also feel very good about the oversight in leadership that our risk management function can provide to the financial functions in the Company, too, on an interim basis.

As you will remember, back in November we did announce that $2.5 million problem loan relationship.

Most of you are probably aware of all of those details.

Certainly it did have an impact on our earnings in fourth quarter as you have seen and we will talk about that in a few more minutes and, certainly, John can cover some of that in the asset quality section of our comments as well.

During the quarter, we were also very glad to open our latest banking center.

Our Midtown banking center.

This move gets us into the heart of Atlanta now with two facilities -- one in Buckhead and one in Midtown.

We are very pleased with that location.

It is in the heart of Midtown near 17th Street on Peachtree and is our first Peachtree Street address for those of you who are familiar with the cachet that that may bring us in the Atlanta market.

We are very pleased with the early signs from activity in that facility and very proud of our new staff and our support staff who worked so hard to get this facility opened, actually, just during the holiday season.

We are currently building two new banks banking centers as well.

One in the Galleria area, which will be our third facility inside the perimeter of Atlanta. and then another in the Suwanee area which is up in the Northeastern growth corridor outside the city.

In terms of investor relations activities, we of course have had a lot going on with the recent capital offering but wanted to make you aware that we will be presenting at the Raymond James Investor Conference in March in Orlando and also at the SunTrust Robinson Humphrey Institutional Conference in Atlanta in April.

Now moving on to our fourth quarter performance.

As you may have seen in our release this morning, we did earn $7.7 million for the quarter which was up 4 percent from the fourth quarter of 2003.

Diluted earnings per share were 38 cents versus the same number for 2003.

And as I said earlier, certainly those numbers were impacted as expected by the release and previous announcement of the problem loan relationship that has been discussed in detail.

Cash operating figures were the same since the only difference in these numbers is a small amount for fourth quarter -- a small amount of intangible amortization which would affect the cash operating EPS.

We are very pleased with the strong loan and transaction deposit growth that we were able to obtain during fourth quarter and I will be sharing some of the figures wit you and then Max will be providing a little color on that here in a few minutes, too.

We did have some increase in nonperforming assets during the quarter as well as net charge-offs which were of course expected with the problem loan relationship which was announced previously.

But we are glad to tell you and feel very good about our asset quality data as we remain very favorable to our peers.

Fee income growth during the quarter was moderate but was led by very good growth in our insurance agency as well as our SBA (ph) lending areas.

Max will give you a little bit more color on that as well as the other fee businesses in our fold.

And we're also very proud of the fact that total expenses were up only 5.3 percent over fourth quarter of '03.

We think that is significant in terms of our efficiency gains, relative to our asset growth and deposit growth of strong double-digit figures.

Turning now to consensus estimates to look forward for a few minutes.

You'll see that consensus estimates for the first quarter of 2005 are 42 cents a share and for the full year $1.80 per share; and we are comfortable with these estimates and wanted to reiterate that at this point.

Turning to details for the quarter, you'll see that as I said earlier net incomes for the quarter were 7.7 million versus 7.4 million in the fourth quarter of 2003 for a change of about 4 percent.

You'll see also that earnings per share at 38 cents were unchanged on a year-to-year basis.

Looking at loans, we experienced very strong loan growth on a year-to-year basis during the quarter.

Loans grew at upwards of 18 percent, rounded to 18 percent, to total just under 1.7 billion for the quarter.

We're very pleased with our loan growth, very pleased with the Atlanta market and the opportunities for growth that it continues to give us as well as the opportunity for all of our sales staff.

We are very thankful for all of them and thankful for all of their efforts.

Pleased with this graph, which shows a nice steady upward trend in our loans outstanding over the previous five quarters.

Deposits are a similar story.

During the quarter, we enjoyed deposit growth of a little over 17 percent, total deposit growth.

Low-cost core deposits which, as you know, we focus on very heavily, we are actually up 22 percent on a year-to-year basis and we are very pleased with those results.

Time deposits increased 12 percent.

That is simply because we continue to focus on what cost core deposits which of course are cheaper and we think longer-lived in terms of relationship value for our organization.

And of course, it improves the mix in terms of our cost of funds over time as well.

Turning to net interest for a few minutes.

You'll see that we had some margin compression during the quarter.

We were down, as I remembered, about 8 basis points from the third quarter of 2003 and we believe that most of that, particularly due to our asset sensitivity, we believe that most of that compression was due to the fact that we have not been able to move up loan yields quite as fast as we would like because of the loan floors that we have imposed on our lending -- our borrowing customers over the last couple of years during the low interest rate cycle.

We believe that during the fourth quarter, we worked out of that hindrance and believe that we will now enjoy all of the benefit of future Fed increases and therefore believe that our margin is definitely stable in that 4 1/4 quarter range.

Share with you a few credit quality statistics and then we will leave more data as well as highlights for John Monroe to cover with you but you will see the charge-offs were up during the quarter to just under 50 basis points on an annualized basis for the quarter.

And nonperforming assets, of course, increased as well.

John will share with you a good many details about this, as well as the contribution to these figures that the problem loan relationship -- which was announced in November -- added to these figures.

You'll see also that our reserve has been very stable in the 145 to 148 range for the last few quarters.

As I said previously, our fee income results for the quarter were good but more moderate in terms of recent quarters.

Our non-interest income were up 9 percent on a year-to-year basis from fourth quarter to fourth quarter.

Leading the charge on the income was insurance agency commissions, which were up 85 percent.

Of course a good bit of that is due to the acquisition back last January of Banks Moneyhan Hayes Insurance, which is a deal that we continue to be very pleased with.

Excluding the impact of that acquisition, however, our internal growth was just under 14 percent on a year-to-year basis -- a number that we feel very good about.

As you'll see, our mortgage banking income was flat which we also feel somewhat positive about, relative to the more challenging rate market that we are now in as well as relative to the shrinkage in mortgage revenues that many of our peers had experienced in the last year or so.

And our SBA lending group continues to shine.

We had significant growth in this area on a year-to-year basis and are very positive and very hopeful about the future of our SBA lending business.

Of course, it is a very strong fit with this small-business niche that we seem to flourish so well in.

I mentioned previously our results in terms of expenses and efficiency.

We are very pleased with our operating expenses having grown only 5 percent on a year-to-year basis, particularly in light of asset growth

(technical difficulties)

and then all other expenses which, of course, is a host of many different types of expenses were down 13 percent on a year-to-year basis.

Now we would like to turn to reminding you a little bit about the objectives and guiding principles that we have set and that we go by in our business.

We'll talk a little bit about color or highlights of the quarter.

And for that, I will turn it over to our Chief Banking Officer, Max Crowe.

For those of you looking at the performance objective, we won't go through line by line but we will remind you that these are pretty solid numbers from our history.

Looking at continuing and EPS growth of 12 to 15 percent, dividend payouts staying consistently 30, 35 percent, but primarily and most focus being to maintain superior asset quality and to perform in the top quartile of performers.

The guiding principles for us haven't changed and should never change as we move forward.

To solidify our position as Atlanta's market leader as Sam has talked about, continue our strong internal growth of loans and deposits, and the discipline and limited rational acquisition strategies within the market where they make sense to fill in the market share.

Sales and marketing.

We really are doing very well here.

We had strong double-digit loan low-cost core deposit growth.

That is really a complement to our sales and service staff where we have 22 percent low-cost core growth this year.

The replacement of banking centers in Conyers which we talked about happened in November of '04 and that really completes our current cycle of facility replacement.

Midtown, again, we have talked about already to a degree, but that is that 1355 Peachtree, which really gives us a great location in the Midtown business district and continues our expansion into the markets where we feel like we can make a big difference.

The Galleria location, which Sam has discussed, is set for third quarter and we'll continue to expand our locations there.

Many other locations going forward.

We've talked about Marietta in the past and that is still in a hold stage as far as construction goes rating on the completion of a master plan in the Marietta business district.

The probably most exciting part of what we've announced in sales and marketing in the fourth quarter is a new checking account acquisition program, which we will roll out first quarter of '05.

This is intended to help us accelerate our checking account acquisition program, focusing primarily on the fact that as in Economics 101 we all learned that we have a plant and facility.

And we are looking to find a way to leverage that up in the market and make sure we are maximizing the use of that and take into account our ability to serve that market.

Fee income for the quarter.

Non-interest income up 9 percent overall.

Very pleased with that.

Good strong continuing growth across the board.

Sam talked to the SBA revenues historical strong growth.

That reflects a real strong effort in Danny Pressman's group who heads up our SBA opportunities.

Continued strong growth, linear looking forward to a good 2005 growth, and really also reflects the fact that we have really stepped up and become a leader within the Southeast and in Georgia particular, in that particular market segment.

Insurance.

Again Sam discussed that but we feel very good about the sales group there and feel like we have a great opportunity to move forward.

The mortgage revenue flat.

Most of us within the market that really is an advantage I think and a good positive point for us in that if you look at some of our competitors, some of our peers, most of them would be very happy to have a flat fourth quarter, from fourth quarter '03, and so the renewed generator I felt very positive about.

Still seeing good movement in our newest ventures such as Payroll Solutions where in December we signed our largest client to date with 350 checks and any of you familiar with the payroll industry, number of checks generated and number of W-2s generated is the key to how we make our living there.

M&A activity.

Not much merger activity going on, needless to say, but really still interested in banking deals with a very strong strategic fit.

Not looking to make a merger for the sake of a merger but looking to find a partner that fits well into our concepts and our philosophies and into the family that we want to create.

Continue to build on internal growth success.

We have been very pleased with our recruiting efforts, with our continued expansion in the new markets.

Again we've talked about the Peachtree location, the Suwanee and Galleria will continue that effort.

Continuing to seek insurance agencies within the footprint.

And in some cases finding that we are able to buy books of business and by that, finding individuals that like our story, believe in what we are trying to do and willing to sign on with us and come to join the Company.

Profit improvement segment of this is really to continue to leverage the new systems and reporting efficiencies.

We are pleased to announce that we are ahead of our goal of FTs (ph) for 2004.

Reduced other operating expenses 13 percent overall fourth quarter of '03 and total operating expenses as Sam noted were 5 percent from fourth quarter of '03, despite an 18 percent asset growth.

That probably is the greatest complement we can make to any of our staff in that with that great growth quarter we have been able to maintain expenses at that level.

Staffing and support.

Semiannual mystery shoppings.

Our quality of service is really the only thing in the future that will really differentiate us from everyone else.

And we are dedicated to making sure that our client service quality and standards have no one in the industry that are better.

We are pleased to say that we have had our second shopping in December and we saw improvement.

Our goal is to see that improvement quarter by quarter, day by day, and that is central focus for us.

Management comfortable with 404 implementation progress there.

We added one professional to IT in the fourth quarter to sustain our growth and to make sure that the systems are up.

Market disruption has really provided an increased recruiting opportunity for us.

A good bit of my time is spent in looking and talking to individuals that are interested in joining our Company and finding the people that really like the way we do business.

The disruption within the Atlanta corridor, specifically, has been to our advantage, quite honestly.

We have been able to talk to a lot of very good individuals.

We have seen with the Washington Mutual change, with the SunTrust, the Wachovia, the Southtrust mergers that a lot of key individuals are looking for a new home that fits more to their style and way of doing business.

Last but not least, we are beginning as we've told in the fourth quarter to begin the staffing planning for the rollout of treasury management.

That is probably the last key critical piece for us in deposit management within the bank and we would hope to have that in place during '05.

I am going to turn it now over to John Monroe to discuss the asset quality.

Despite the large chargeoff that we previously announced in the fourth quarter, we were able to finish up the year 2004 with 21 basis points in net charge off and we are pleased with that and we will hope to continue that in future years.

We did have a substantial increase in nonperforming assets during the quarter.

Main contributor to that was a $3.5 million relationship that is all secured by real estate.

A large portion of that relationship stayed current after year end and we feel optimistic about our ability to work our nonperforming assets back down during first quarter.

Of our nonperforming assets, 8 percent are guaranteed by the Small Business Administration.

In general, our nonperforming assets are either all well secured by real estate.

Or, if not, we believe we have adequately reserved for those in our loan loss reserve analysis.

As I mentioned, 15 percent of our nonperforming assets have been paid current since since quarter end.

We don't expect any earnings impact from the large nonperforming assets that we announced in fourth quarter and are hopeful to work that thing out successfully during the year.

As in the past 98 percent of our portfolio is collateralized by hard assets and guaranteed by a principle of the borrower.

We do not have any share in national credits and our largest credits are substantially below 1 percent of our total portfolio now.

With that I'll turn it back over to Sam.

To finish out our comments for the day, I would like to give you a little feel for our business pipeline or forecast for 2005.

We continue to see, as we have in the past, and as Atlanta has continued to give us the opportunity to do, a strong double-digit loan and deposit growth.

The Atlanta market, we believe, is very healthy.

It is a market that has been good to us for many years.

We do follow real estate statistics and other statistics about Atlanta very closely and find that, particularly in the sectors which we believe we have a lot of skills and strengths, that those sectors are very healthy.

We are focusing on blending to (ph) stable real estate sectors in the market.

We also are maintaining our mix of owner occupied credits which we believe is very unique and something that all owners should keep in mind in terms of evaluating our loan portfolio.

We believe that owner occupied credits are different and different risks from pure real estate credits and we hang our hat very much on owner occupied kinds of risks.

In terms of continuing to transform our deposit gathering culture in hopes of keeping our deposit growth in pace or at least close to our loan growth opportunities, we are doing many things.

One of which is mandating, compensating balances on loan relationships.

There are many others.

Max mentioned a few in terms of new checking account acquisition programs and other things for this year.

And we are also focusing very heavily on our fee income businesses this year.

We are furthering incentives, we are developing or have developed and now have our sales team with the opportunity to earn specific and immediate incentives for their referral efforts and their referral success in the fee income arena.

And we are focusing on not only growing the top line of those businesses, but also growing in net contribution of those businesses as well.

And last, to summarize, a rationale that many of you may be familiar with.

First, a summary of what we believe makes Main Street unique as an investment.

We are a top quartile performer.

We have enjoyed strong double-digit earnings growth for many years now.

I believe that our opportunity to continue to post that kind of record is very good.

We are in one of the best markets in the country we think and also some of the most vibrant and fastest-growing segments of that market.

We are filling a void both for our clientele, as well as for ownership, we believe, and have focused heavily on internal growth in the last few years, due to continued disruption in the market and concentration in the market but also to leverage and utilize the culture that we think is unique.

One that is entrepreneurial, is service-oriented as Max talked about and one where recruiting success and retention success are very critical to our business.

We think we have an experienced and deep team, primarily from larger banking organizations, to continue to execute on our plans.

And as we have said we will continue to be limited and disciplined in our acquisition strategy, although we are interested in good deals that may come along.

And then, last.

We think that there is a valuation opportunity in our stock.

Despite the fact that we have performed fairly well in the market over the last few years, you'll see that when you compare us to a group of peers that are similarly situated around the country, based in primarily metro markets.

Companies that have strong performance and good growth prospects as well as a good growth record too.

But when you compare us to the top performers in this group, and we believe that that is a reasonable comparison since we are second in the group in terms of performance, that there are still several dollars potentially left in our stock as well.

That concludes our prepared comments for today.

We thank you all for being with us and now we will be glad to open up the floor for some questions.

(OPERATOR INSTRUCTIONS) Chris Merrimack (ph), SIG Partners.

Wanted to ask you for some more color on the credit quality change in the quarter.

It looks as if it is just beyond -- not only is there the change you announced back in November.

Can you just talk about how much those are sort of one time of of nature or is there anything sort of helping us?

Is there a trend happening in some of your clients or even in some of the various areas that you focus on lending?

John Monroe will try to address it.

I wouldn't identify any of the increase in nonperformers as being systemic in nature.

It is really concentrated in two or three relationships and I think we feel good about our ability to work those out successfully.

So I think my outlook is favorable towards an improvement during first quarter.

What is your average loan size now on the commercial side and is that changing either getting larger or smaller?

Our average loan size is increasing and has increased some over the past two years.

I think we are still being very judicious about taking large individual exposures and our largest relationships are substantially below 1 percent of the portfolio.

I think our average loan (indiscernible) is probably and I'm going off the top of my head in the $3 to $400,000 range now.

So is it routine that you are getting above $8 to $10 million on loan size is or is that more of a -- ?

That is a rarity.

We just have a handful above that size.

Chris, I would add that our comfort level, which you could construe to be sort of a house limit is the 1/2 of 1 percent of the portfolio and we have very few relationships which exceed that.

In fact, it is less than a handful of relationships which exceed that.

So the $8 to $10 million level is very much a rarity for us.

I think you could count those relationships on one hand.

But we are very focused on not only maintaining general granularity but we also have specific numbers in our policy which limit the distribution of the size of credits as well.

We don't just look at the largest credits in terms of portfolio allocation or size concentration.

We don't just look at averages.

We also look at that distribution too.

Separate questions about deposit, pricing, and funding cost.

Do you feel any pressure to have to match other competitors or other -- or do you see other irrational behavior on deposit and pricing?

As you well know, better than we, the Atlanta market is somewhat unique in that it is so heavily concentrated.

Of course, now the Big Three have right at 65 percent deposit share in the market.

And that gives us, we think, a lot of opportunity because all three of those folks as you know are very rational pricers.

To date, we have not seen pressure from the market leaders to move up deposit pricing or, particularly, core deposits.

Mainly checking accounts.

You still see some very low interest rates being paid and we have been fortunate to be able to follow our larger brothers and sisters in the business in doing that.

Of course, there is significant pricing pressure from the smaller banks.

They are generally younger, may not be as profitable, may only possess overhead from the standpoint of ownership and, therefore, any margin to them is better than no margin.

In some cases, to compete, we have had to offer attractive market not leading but market sorts of money market rates to attract some of that money.

But we still believe we get some pricing opportunity with money market accounts because we do have the ability to move those rates around some.

Let me ask Max if he has any further comments on this.

I think the key that Sam made is right on target.

You can always find irrational pricing, but we work hard on every day to make sure that we don't participate in that and that we match the client issue and we have an existing client that we need to make sure we retain but that we don't go out on tangents that are to the detriment of the whole portfolio.

John Patel.

Couple of questions.

Just to review the problem loan relationship previously identified the 2.5 million.

You charged off 1.8 of that this quarter?

No.

That's not right.

It was -- I think in the release we said 6 cents.

So you can probably do the math on that.

How much of that is still on nonaccrual at this point?

We took a charge off of $1.4 million and established a specific reserve of $200,000.

And that leaves about $900,000 still on the books and we -- based on what has continued to happen with it over the next last 30, 45 days, we still feel good that we can collect on that.

And the 900,000 contributed to the incremental increase of 7.5 million in nonaccrual?

Yes, it contributed in part to the increase.

And then there was a $3.5 million credit.

And with that, so, we're up to 4.5.

The other 3 million is spread across how many credits?

There is one other moderately sized 1 in there and probably another 8 to 10 past that.

Sam, you expressed comfort with $1.80 consensus estimate for the year.

That would seem to imply that you expect very little loss content from these credits that went nonaccrual in the quarter.

Kind of what is your timeline for working out these credits?

John, as John Monroe just said, we feel very positive about our ability to reduce nonperformers during the first quarter.

We are not prepared to give you any hard numbers there, obviously.

It's always a matter of a lot of things happening at one time.

But one of the reasons that we are so bullish about our future lost prospects again, as you know, and as we have reiterated many times is that we are such hard collateral lenders.

And we find ourselves very well secured on most of these relationships.

When we are not, we have already specifically reserved for these relationships and that essentially means that or definitely means that the earnings impact of potential losses has been recognized.

Have been recognized.

Therefore, we feel good about our loss prospects for the year as well as the opportunity to work through credits, the cost of the strength of our team, our credit professionals as well as our lending staff.

And our bullishness is, of course, due to the help of the Atlanta market.

It continues to be very good to us.

A follow-up question same topic.

Is there any commonality in terms of businesses that these loans fall into?

No.

One is in the home construction business and then two or three unrelated operating companies.

Jefferson Harralson, KBW.

If I could just follow-up on -- John Monroe, on a couple of questions.

I didn't quite hear what you said.

What percent or are you saying that 80 percent of the $12 or so million in NPAs (ph) was guaranteed by the FDA? (MULTIPLE SPEAKERS)

8.

8.

All right.

What percentage -- you also said the number of the amount of loans that were made current since quarter end but I didn't quite catch that.

About 15 percent of those NPAs were paid current after December 31st.

If I could follow up on the fee income line items.

You talked about year over year, but give me a little color give us a little color on the SBA lending line.

It was down a little bit quarter to quarter and the insurance revenue that was down quarter to quarter; and maybe if I could get a little color on the other income line items.

That was up a couple hundred thousand dollars quarter to quarter.

Sure be glad to.

Let me turn to those figures quickly.

We will give you some information there.

As you may know, in terms of starting with SBA we did sell a few more loans than usual out of the SBA portfolio in the third quarter of '04.

We did that for a couple of reasons.

One, we felt like it was a good opportunity from an income standpoint.

Two, we found ourselves with some increasing concentration of some of those particular credits and certain industries.

And then, three, we also liked from time to time to assure ourselves that contingency liquidity sources are real.

That we do have the ability to sell all sorts of loans.

But that is primarily the reason for being down.

If you look at the previous three quarters from an SBA revenue standpoint, on an average basis, I think you would have seen a decent previous run rate for that business.

But during the fourth quarter, most of our revenue from the SBA unit was good core income and the increase was primarily due to an increase in origination.

So we have a very successful SBA effort.

It is one that we think leads Georgia in competitiveness and as you will see stacks up at the top of the list in both number of the loans and dollar origination volume as well and we couldn't be more pleased with that business.

In terms of the insurance agency, nothing really to say about the flatness between the two quarters.

As many folks have asked us in the past, I believe we are moving into somewhat more of a soft market in terms of pricing nationwide and certainly that may have a little bit of impact.

But we still feel very good about that business.

But nothing material or nothing really to report there as to why revenues were down.

We expect very good things out of the agency for the coming year and have high hopes for the agency under Billy Musselwhite's direction.

In terms of other income, I don't off the top of my head can't speak to that increase.

Be glad to try to get some information to you on that.

Of course, as you know, the last couple of years industrywide and certainly we have not been immune to it, too, service charges have been somewhat flat from a deposit account standpoint.

And that is certainly one reason for the new account acquisition program that Max talked about.

It is a program that doesn't just focus on balances.

It is really focused on the rationale that -- any time marginal revenues exceeds marginal costs that generally is something that makes sense to do.

And what we find is is that the marginal cost, of course, of adding a new checking account is virtually nothing.

But the marginal revenue is potentially a couple hundred dollars on an annual basis, mainly from fees and of course particularly NSF fees which are so strong in our industry.

But the flatness of service charge income, certainly, is one big reason for all of the initiatives that we are taking on in the deposit arena.

(indiscernible) Cortes from Sidoti & Co.

Question for you.

First I was wondering, professional fees were down quite a bit sequentially.

If you could talk about what triggered the decline and also with your new checking account acquisition program, if you could provide some detail on it and what your goals are there?

I will address the checking program.

The program itself is a very direct-mail, direct marketing program that we will be looking at each location that we have in market within a five-mile radius and trying to pinpoint that kind of activity, specifically, to the market as opposed to try to market all of Atlanta.

We don't have the distribution network to try to do a mass Atlanta market.

Therefore we will actually do 23 minimarket concentrations within it.

It is a back to basics deposit acquisition.

It is pre (ph) checking.

It is basic core account presentation in a package that our clients can understand.

That they don't have to have an advanced degree to figure out whether they're getting a service charge or not.

That they're able to understand what kind of balances they have to keep for what kind of services they want.

It will be a lot of activity within the branching network.

A lot of marketing and merchandising at our production site i.e., the branches.

It is geared to bring more volume as Sam alluded to and the production mindset into our production facilities, our branches, and to allow us to better utilize our costs.

(OPERATOR INSTRUCTIONS) John Pandtle from Raymond James & Associates.

Sam, have you been able to isolate the specific margin impact in the quarter related to the loan force?

Maybe if you just review the dollar amount of the floors at what interest rates?

John, I don't think we are prepared to give you specific numbers on that.

We have certainly done a lot of analysis of that.

We don't have those numbers in front of us and I think we'd probably, even if we did, might ought to shy away from just the exact detail.

But we have done a lot of analysis of that and in fact, John Monroe has done a good bit of it because John is not only Chief Credit Officer for the Company.

To a great extent he is Chief Pricing Officer, at least on the left side of the ledger.

As you imagine he has a large influence over loan pricing.

But let me ask John to comment, at least anecdotally, on the analysis he has done and our comfort with how those floors have both helped us in the past and maybe hurt us a little bit more recently.

The floors did have a very substantial benefit for the bank going back six months or more before Prime started to move.

But they have dragged the increase in our yield as prime has gone up over the last several months and we have analyzed what portion of those floors were in the money.

With the last prime change, we've moved past substantially all of those floors and while only part of our portfolio was floating and prime based, we think we will enjoy, at least on that portion of portfolio, just about all the benefits of future prime changes.

A quick follow-up question.

Sam, in the quarter of the limited year-over-year expense growth, you had some pretty nice improvement in operating leverage relative to historical trends.

Is that something you think is sustainable going forward?

John, as you know we invest heavily in the future.

It is expensive to open facilities in a market like Atlanta.

It is expensive to grow fee businesses and make further investments in some of those businesses.

So I think what we are most comfortable with and what we would want to leave with you on that issue is maybe not a hard and fast run rate in terms of total expenses because we obviously have got to spend money to make money.

I think we are very comfortable saying that we believe and you've all heard me say this before, but we believe that we must maintain low 50s sorts of efficiency to achieve our overall objectives.

I think we are real pleased to see that we have made progress to that level after moving up closer to, in fact, a little bit over the mid-50s level.

You have also heard me say that we will never be a 40s or even a high 40s sort of efficiency bank, given the growth prospects and the growth opportunity we have.

I think we are comfortable hanging our hats on low 50s and believe that we have got to be there.

We may fluctuate between 52 and 55, but we are comfortable operating within that range and believe that that is an objective we need to stick to.

(OPERATOR INSTRUCTIONS) We have no further questions.

It is all yours, Sir.

Thank you for joining us today.

Thank you for your interest in Main Street Banks and have a good rest of the day.