Truist Financial Corp (TFC) 2005 Q1 法說會逐字稿

Good day and welcome to Main Street Bank, Incorporated fourth quarter earnings conference call. (Operator Instructions)

At this time, I'll turn the program to your speakers today, Mr. Sam Hay and Mr. John Monroe. Go ahead, Mr. Hay.

Thank you and good morning. Welcome to the first quarter 2005 earnings conference call for Main Street Banks. We appreciate all of those who are with us today. Thank you for your interest in, and support of, Main Street Banks. Also I want to apologize for any difficulty any of you may have had in accessing our website this morning. And as some of you may have accessed us through the audio-only portion of the conference call, and therefore, may not be able to access out slides. We understand that our website is still down; do not know exactly when it will be back up, but assure you that the slides will be saved and will be accessible on our website as soon as we can make them available. For that reason, we will try to make sure that we point out all details within our slides during the call this morning.

First, I'd like to call your attention to the cautionary statement that is normal in our presentations. Our presentation will contain forward-looking statements about future results of Main Street Banks and we'll leave that slide to your reading pleasure.

In terms of our agenda this morning, it is our normal agenda for earnings calls. We'll be giving you just a brief overview of the Company, and keep that brief since most of you are familiar with Main Street Banks. We'll update you on recent developments at our Company, talk about first quarter results and then present first quarter financials in some level of detail, and then more important, talk about the factors that impacted the results during the quarter.

I'm joined this morning by John Monroe, our Chief Credit Officer, and John will be providing highlights and color on our asset quality at the end of the quarter, as well as credit impact during the quarter, as well.

First, for an overview of our Company, as many of you know, Main Street Banks is the market leader in community banking in metro Atlanta. We are the biggest little bank in the Atlanta market. That market is one that has shown phenomenal growth over the last couple of decades, and currently is growing at nearly 3 times the average U.S. population growth rate. We think that Main Street is in a real unique position. We have traditionally been a very high operating performer in a strong growth market, and we're filling a void both for our clients as well as investors. Not since Bank South sold out to what is now B of A in the mid '90's, has there been a bank that can legitimately claim title to -- lay claim to the title of Atlanta's home town bank and we think Main Street certainly fills that bill.

We have 23 banking centers in 18 different communities and assets of about $2.3b as of the end of the quarter.

The Company has been traded on the NASDAQ national market system for roughly a decade or so. Our share price was $24.49 a couple of days ago and our 52 week range is roughly from $24.00 to $35.00. We have nearly 22 million diluted shares outstanding at this point, a market capitalization of a little in excess of $.5b, average daily volume over the last 90 days of about 650,000 shares, a trailing 12-month price earnings ratio of just over 16, and as I've said, total assets of $2.3b during the quarter.

In terms of sponsorship and coverage, we do enjoy a coverage from 7 different analysts or research firms. Those are Fig Partners, FTN Midwest, KBW, Raymond James, Sidoti, Stanford and Suntrust Robinson Humphrey.

Moving on to recent developments during the quarter, I'd just like to remind you of a few things that you may already know that were published recently, and then update you on some new news as well.

As most of you know, Main Street did reduce its 2005 earnings per share forecast to 5 to 8% growth over 2004 GAAP earnings on March 7th. We also lowered our first quarter forecast to 36 to 38 cents per diluted share. This reduction in forecast was based mainly on margin pressure on a flat margin, on our continual investment in internal growth and the cost impact in the near term of those investments, a higher tax rate during 2005, as well as the implementation of FAS-123R. For those of you who have read our earnings release from this morning, you may have seen that we did decide to reverse our decision on FAS-123R since the SEC delayed the required implementation of that accounting measure until 2006.

First quarter results were also impacted by a 2 cents on a net tax per share charge for the demolition of a banking center in our Conyers, Georgia, market to make way for the completion of our new full service prototype facility in that market.

Of interest on other news, we are experiencing very strong interest in our CFO position. That search is being led by Korn/Ferry International and we are very pleased with the interest level that we are getting. We've been focusing on larger banking organizations, primarily in the southeast, and are very hopeful that we're going to be able to finish up that search in the next few weeks.

We've been enjoying very strong balance sheet growth on both sides of our balance sheet and we'll speak to that in a few minutes, and also continue to enjoy some local market disruption that is giving us opportunities both on the client and the recruiting side of our business.

In terms of other developments, as you probably also know, we did launch during April a high performance -- have launched, in the last few weeks, our high performance checking program. It's a new checking account acquisition program which we have spoken to previously, and are very pleased with the results of that and we'll be speaking to that in a few minutes.

We also continued construction on a couple of new banking centers, one in the Galleria area and one in Suwanee, Georgia. During the quarter, we presented at Raymond James 26th Annual Institutional Investor's Conference in Orlando, also at Suntrust Robinson Humphrey's 34th Annual Conference in Atlanta. We will be attending the Fig Partners CEO forum in Atlanta next week. We'll be presenting at the Gulf South 9th Conference in New Orleans in May and also presenting at the Suntrust Robinson Humphrey (inaudible) Conference in May as well.

Turning now to first quarter performance, Main Street earned during the quarter, net income of $8.2m which was up nearly 8% over first quarter of 2004. That equated to diluted earnings per share of 38 cents versus 38 cents for the first quarter of '04. On a cash operating basis, we actually were down a penny from 39 for the first quarter of '04, and that cash operating EPS only excludes the impact of intangible amortization.

We did have strong loan and deposit growth, particularly transaction deposit growth during the quarter, and we'll be speaking to those numbers in just a few minutes. Our net interest margin, which we did mention in early March, was under pressure. It did climb 5 basis points during the quarter from the 4th quarter of 2004.

As you may have noticed in our release, our loan office and our nonperforming assets were higher during the quarter and certainly higher than our previous standards and John and I will be speaking to the results on asset quality here in a few minutes. We're also pleased with our fee income growth, particularly led by insurance and SBA lending, and also proud that we appear to be doing a good job from an expense stewardship standpoint, having brought non-interest expenses down slightly -- actually down slightly from first quarter of 2004.

Consensus estimates follow on the next slide and we won't go into great detail there, but you see the first quarter numbers and then numbers for all of 2005 and 2006.

Next we'll turn to more specific detail on our financial results for first quarter of 2005. First, to discuss net income, as I said, and we did earn $8.2m during the quarter versus about $7.6m in the first quarter of 2004, which was roughly an 8% increase, though those numbers were flat on a per share basis.

We're very pleased with our loan growth and very excited about the results that our team is producing -- our sales team is producing on the loan side. This chart, for those of you who are able to see it, shows a very nice increasing trend in terms of loan growth. We were up roughly 15% year-to-year, up to nearly $1.75b in loans, showing growth of just over $230m on a year-to-year basis.

Deposits are a similar story, although the mix is changing some. Total profits were up 14% year-to-year. Time deposits were up only 7%, to some extent due to our emphasis on low cost core deposits, those being up nearly 21% on a year-to-year basis. Of course we should point out here, that our ability to attract low cost core deposits is somewhat dependent on promotional money market rates and certainly those rates, with the increasing competition for funding in the Atlanta market, those rates have had somewhat of a negative impact on our margin.

Net interest income is up about 8%, as you can see, due to margin pressure, is up only roughly half of what our loan growth is, and we have incurred about 40 basis points of margin compression on a year-to-year basis. We are very hopeful that the 418 level that our net interest margin has stabilized and we'll be talking in a few minutes about some of the things that we're doing to ensure that that happens.

Next, we'll turn to credit quality for just a minute and I'll ask John Monroe to update you on these results.

Our annualized net charge-offs for the first quarter were 56 basis points, after 48 basis points in the fourth quarter of last year. That is above our long-term goal of 25 basis points in annualized net charge-offs. Non performing assets were up to 90 basis points against assets, after being at 62 basis points in the fourth quarter. That's also above our long-term goal of being at, or below, 50 basis points in non-performing assets. And I'll provide some details and outlook for that later on.

Our reserve percentage after going up from a 1.47% to 1.48% in the fourth quarter was down to 1.43%. The primary basis for that was the elimination of some large specific reserves that we established against some criticized assets in the fourth quarter, and in the course of our larger than normal net charge-offs in the fourth quarter, several of those large reserves were eliminated. Also our criticized asset percentage is down from its levels of 2003, and based on that, we think our long-term outlook is really unchanged from the last few years, and on that basis, we were okay with that reserve percentage dropping 5 basis points.

Thanks, John. Moving onto fee income for a few moments -- and by the way, I just received word that our website, MainStreetBank.com, is back up for those of you who would like to access the slide show through out website. We're sorry about those difficulties this morning.

Speaking of fee income for just a few minutes, we did tell you that fee income was up nicely, at least excluding the non-cash charge for the write-off of the Conyers banking facility due to that demolition. Fee income was up 8% excluding that charge. Insurance agency commissions were up 14%. And I should point out here that all of that growth is internal growth due to the fact that the acquisition that we made last year was in the first quarter of last year, early in the first quarter and therefore, all of our results should be reflected year-to-year. We should point out, of course, that in the insurance business, some of that income is seasonal and often is heavier in the first quarter, in terms of looking ahead for results from our insurance agency.

Mortgage banking income actually was down roughly a quarter off of previous levels due to the refi market being much softer, and certainly due to interest rates having moved up some. We're very pleased with our results in the SBA lending group. Our revenues there were up 60% during the quarter, or about $300,000, quarter-to-quarter.

As I mentioned earlier, we're proud also of the work we're doing on the expense side of our business and appreciate all the efforts our teammates are making on being good stewards of our capital and of our overhead. We're seeing -- year-to-year, we're actually down nearly 1% in operating expenses, which we're very proud of, particularly in light of the strong growth in our Company and in light of the strong balance sheet growth that we've been able to post.

Notice that personnel expense actually is down about 1%, in line or parallel with, the total operating expenses. Our occupancy expense is actually up about 11% on a year-to-year basis, and that simply is because of the renovation and rebuilding of certain facilities, as well as new facilities that we've opened in the last year or so. All other expenses were down about 5% as we continue to try to find ways to be more efficient with our dollars.

Turning now to look at our previously set objectives, I won't go into great detail here, but would remind you of the objectives that we have used for many years as benchmarks for our own performance. We continue to strive for returns on assets, particularly using tangible assets and tangible equity these days, as a result of purchase accounting, and our activity and acquisitions in previous years, for ROA of 160 and ROE of 18%, EPS growth of 12 to 15% on an annual basis, dividends of roughly a third of earnings, fee income of about 30%. We want to regain and maintain our superior asset quality and certainly still shoot for top peer performance, which we think really differentiates us as an organization.

In terms of general themes, our guiding strategies for the future, just to remind you of how we look at the future, we want to continue to build on our position as being the leader in community banking in the Atlanta market, and we think we solidly lay claim to that position and have a tremendous future in being able to leverage that position. We want to do that primarily through growth internally and have a fairly limited acquisition strategy, and the way we want to accomplish that, or believe that we can accomplish that, is by preserving our entrepreneurial culture, one that is informal and very collegial.

Also want to ensure that we maintain some degree of decentralization at the point of sale. We think it makes a tremendous difference in how we do business and how we respond to our client base. Of course, we want to always maintain strong centralized controls, particularly in the credit and risk and audit areas and, as you have heard from us this morning and in the past, we continue to work on transforming our great success on the lending side, particularly the checking account growth, as well as all deposits. And as somewhat of a new initiative for us in the last year or so, we want to measure and manage service quality because we think that it absolutely matters in our business as a point of differentiation.

In terms of specific initiatives for this year, we'd like to share with you a little bit of our outlook for the remainder of this year, and why we feel good about returning to our double-digit earnings growth targets for next year. We want to continue to achieve double-digit loan growth and believe that we can do that with the great team that we have. With our renewed focus on checking deposits, as well as the dollars and efforts we are putting forward on new account acquisition programs, we intend to grow checking deposits at not just double-digit rates, but rapid double-digit rates.

We also will continue to improve our efforts to price business versus our own benchmarks and our own needs and certainly, not using the across the street index. And we believe that we can do that and that that will stabilize our net interest margin. We have raised sales incentives on checking deposits in the last year or so and have also raised those again in the last couple of weeks, and will continue to emphasize internally the need for growing the course of core deposit or checking accounts.

The consumer portion of the high-performance checking program is very early. Certainly, one month or so does not a trend make, but we're very excited to tell you about the results there and we'll be giving you a little bit more detail in just a minute. We also, during 2005, intend to launch the business portion of our high-performance checking program, too.

Other objectives for the year are to maintain FTEs flat, as well as maintain expenses flat for the year. Despite our emphasis on internal growth, we believe that we can have our cake and eat it, too, and we must have our cake and eat it too, to spend our dollars wisely. And as John has mentioned this morning, and as you have heard us say before, we certainly intend to reduce our NPAs during the year down to our normal standard of ½ of 1percent of assets, as well as to get our losses back to our normal standards, a standard that we budget on an annual basis of 25 basis points.

Looking at some specific impacts of the quarter, I'd like to take you through various functional areas of our Company and give you a little bit more detail about what is going on at Main Street. First, from the sales and marketing perspective, as I have said, we've had strong double-digit growth on an annualized basis in the balance sheet. Loans were up a little over 15 percent and low cost, core deposits nearly 21 percent. We continue our construction on 2 new banking facilities. As I've said, we did launch the high-performance checking program and are very pleased to tell you that initial results show account openings being up 2.8 times our normal openings since the inception of the program.

The program has many features to it, but it is an aggressive mail marketing program. We project to send around 150,000 pieces of direct mail to existing and prospective clients every 6 weeks. Those mailings are very targeted in terms of existing and prospective clients and targeted geographically, too. We also, in the launching of this program, have streamlined all of our deposit products, making them much more client friendly, having introduced an absolutely free checking account, which is our new marker there, as well as 6 additional interest-bearing accounts for differing lifestyles and client choices.

In terms of fee income, some of this slide is now redundant from previous slides, but excluding the branch write-off, fee income was up 8 percent. We're pleased to tell you that our SBA dollar volume of SBA loans generated actually was first in the Georgia market between October and February. I believe the SBA has a fiscal year which begins October 1st so we're leading the Georgia market in dollar volume since the beginning, October through February, since the beginning of their fiscal year on October 1st.

Our payroll solutions group is on plan in terms of number of clients and we continue to hope for growth in that business. Our brokerage revenue was up 27 percent on a year-to-year basis. And as I mentioned earlier, our mortgage revenue, certainly a number that we would rather see either flat or positive, but due to rising rates and the declining refinance market, it is actually down 22 percent.

Nothing new to tell you on the M&A front, but just as an update and reminder, we are not actively pursuing banking deals at this point. We do want to continue to build on our internal growth success. We are seeking insurance agencies within our banking footprint on a fairly active basis and have actually purchased a couple of very small books of insurance business in the last year or so and will continue to pursue those sorts of deals.

Our profit improvement personnel, led by many people on staff, but also particularly by our former consultant, who has internal consulting duties, is continuing to identify revenue opportunities and efficiency opportunities, too. We are holding our FTE levels constant with the latter part of 2004 and as we said earlier, reduced total non-interest expenses nearly 1 percent from first quarter of 2004.

We also in the process lowered our efficiency ratio from roughly 56 down to 52.5 on a year-to-year basis, and believe that some of that efficiency is coming from our attempts and leveraging our past investment in people and in our processes and in all of our systems, too. We also are working on improving our measurement for unit and organizational profitability to give our people the best possible information with which to do their jobs.

Formal information on staffing and support functions throughout our Company, we are beginning our client surveys and mystery shopping program in second quarter of this year in conjunction with the new checking account acquisition program. Most of you may have seen that we cite a material weakness in internal controls due to staffing in our 10K which was published several weeks ago. Despite that citing and despite that material weakness, we feel like we made significant progress in building our foundation for Section 404 and are very hopeful about our prospects for that process for this year.

During the quarter, we did add 4 new sales professionals to our organization and 1 professional in the risk management loan review area, having added 1 other professional to the loan review area late in the fourth quarter. John will be speaking to that effort here in a few minutes.

As I've said, we continue to enjoy some disruption in the local market, particularly due to recent acquisitions of larger organizations and by larger organizations. And we also continue to work on replacing our treasury and cash management systems and products, and hopeful that we'll get that done in 2005.

Now turning to asset quality for a few minutes, I'd like to ask John to give you some highlights on that.

Talking again about our net charge-offs and non-performing asset levels, the majority of our increase in charge-offs during the fourth quarter and the first quarter of this year, are the result of the problem loans we identified and announced in the fourth quarter of last year. We're continuing to work through those loans and anticipate we'll be largely done with that in the second quarter. But we may have the possibility of somewhat elevated charge-offs in the second quarter as a result of that.

Of our non-performing assets, 9 percent are SBA guaranteed. Our largest non-performing assets are either well secured or previously reserved for, and most of those larger accounts are near resolution. We'd anticipated some would clear in the first quarter but they -- it looks good that they will clear in the second quarter, and 11 percent of our NPAs are in a current status and we're monitoring those for a possible return to an accruing status.

As I mentioned earlier, our criticized asset levels are down some from 2003. We did have some elevated non-performing assets in the fourth quarter of 2003, but returned to within our goals during the early part of the first 3 quarters of 2004. And based on that, we believe as the year goes on, that our non-performing assets and charge-offs will return to their historical levels.

In the interest of improving our early identification of policy exceptions, as Sam mentioned, we have added some staff in our loan review area. We're near completion of the implementation of some construction lending software that will also improve our monitoring of that type of lending. As always, 98 percent of our portfolio is collateralized and guaranteed by the principals. We do not have any share of national credits and our largest credit is less than 1 percent of the portfolio.

Thanks, John. Looking ahead to our pipeline, or outlook for the foreseeable future, we continue to see good, double-digit growth on both sides of our balance sheet. We are focused very heavily on lending to stable commercial and residential real estate sectors, and particularly focusing on the owner-occupied credits on both sides of our business, commercial and residential.

We are very hopeful and excited about transforming our lending success, the great success of our sales team into deposit gathering. We appreciate our team embracing the changes that we're making in our organization to do that. We have very high expectations for our new checking account acquisition program and are looking forward to providing good results of that to you in future communications.

We are doing many things to enhance our deposit growth, particularly our core deposit growth such as mandating compensating balances on loan relationships. It's a process that all of us are involved in and that John, particularly in approving credits, is involved in as well, and focusing on improving our fee income growth, both in revenue, of course, and in bottom line, or net contribution for those businesses.

So to summarize in terms of an investment rationale, we believe that Main Street continues to combine nice attributes for banking investment in terms of traditional high performance and good growth. We believe that we're in one of the best markets in the country and that Atlanta will continue to provide good growth opportunities for us, both due to its organic growth as well as the unit disruption in the market and consolidation in the banking industry.

We still believe that a lot of our consolidation and infrastructure investment is complete, and we'll be able to continue to leverage those investments in the future. We see that we are still filling a competitive void in our market and believe that it will continue to be good, and that our success for internal growth will be good due mainly to our culture, our culture being entrepreneurial, and one that's really focused on our recruiting and retention success, as well as continued sort of maturing of our sales force with our organization. We also believe that we've got the right team, the team to continue to execute on these plans and of course, as usual, intend to be limited in our acquisition strategy as well.

That concludes our prepared remarks for today. And now we'll be glad to try to answer some of your questions.

[OPERATOR INSTRUCTIONS]

We'll go to first, Jeff Davis, FTN Financial. Go ahead, please.

Good morning. Sam, a question for you on the asset quality side and more one of perspective is with the losses and the pickup in NPAs last year and this quarter, is it a function of the gentleman who the problems are attributed to? Was it a bad hire, a bad apple, or maybe a little bit more broadly, has the company just tried to do a little too much, too fast over the last few years?

Jeff, we would say that it's not the latter. Certainly, I think, if you look at our non-performers and loss levels, I think it would be easy maybe for anyone to conclude that because certainly, all of the increase in those measures is not due solely to the problem, that one situation that we announced last fall. But, as John mentioned a few minutes ago, certainly, a large portion is due to that and therefore, we would argue that we have -- that it's not the latter in terms of your alternatives.

Certainly, we have grown, and grown very rapidly. We believe strongly in the controls that we have in place in our business. We also believe strongly that this somewhat decentralized model is very critical to maintain in terms of maintaining relevance to our markets to our people and to our client base. But let me ask John if he wants to maybe provide some of his perspective on your question.

And Sam, can I just jump in here?

Sure.

And John if you could -- I'm sorry, you may have said it and I missed it. Tell us how much of the 19 or the 21 mode of NPAs are related to that lender, and then maybe if you could walk us through the top 3 or 4 NPAs by dollar volume?

John Monroe Around a third of the increase in NPAs was in that portfolio that we announced in the fourth quarter and I'm going off the top of my head, but I would say around a quarter of our overall NPAs are in that portfolio. We did have some increase in first quarter outside of that portfolio. I think as we mentioned, those were largely secured credits and are not going to require large new specific reserves.

Looking more in the longer term, the fact that our criticized asset percentage has been stable to slightly down, were it not for that, I would be concerned this might be the start of a sustained increase in our non-performing assets. But based on that, I believe its more a scenario similar to the fourth quarter of 2003 where we are at a peak here and have some large accounts queued up to go out in the bank in the second quarter. Our largest account is 2 fairly large home construction loans. Construction is progressing on those and we had 1 on -- and some lots that are under contract. I think we -- and another part of that relationship is the primary residence of the builder that is under contract. So I think we have a slightly better than even chance of that one going out in the fourth quarter.

I think the next largest NPA are 2 subdivision loans that are in that problem loan portfolio that we announced in the fourth quarter. We're near working that out, and I anticipate we'll have that one cleared in the second quarter. Past that, I think we're into generally secured loans that are either in foreclosure or the collaterals is up for sale in the borrower's possession. And I think the market continues to be good here so I think our pace of clearing NPAs ought to continue at the good pace we had last year.

So, I'm sorry, John. So your largest NPL by dollar volume is how much?

Total relationship's about $3.5m.

Okay. And that's secured?

Yes.

Okay. And then number two is roughly, relationship? I can follow up with that one.

2.5, 2 to 2.5.

Okay great. Thanks.

We'll go next to the site of Jennifer Demba of Suntrust Robinson. Go ahead please.

Good morning. I was just wondering if you can elaborate on what gives you confidence that your net interest margin has stabilized here.

Yeah, Jennifer. I'll be glad to speak to that. We feel like the impact of the loan floors, which we had been very active in putting -- in really imposing on our loan clients over the last couple of years has played out. Of course, that worked real well as rates were declining, but as rates began to move back up, certainly, we did not get the complete impact, the full impact or benefit of rates having moved up. So we believe that that is totally behind us as well.

We also feel very good about growth in checking accounts. As you know, as you can look back over the last 4 or 5 quarters, we've been pretty much flat on checking account growth. Our focus is very heavy there. As I said, we're very bullish on our new account acquisition program and already seeing times not only of account openings being up significantly, but also a positive impact on balances. Certainly, we're a little bit early in that process, having just launched this in the last 30 days or so, but still very excited about those prospects, and not just excited about the pure financial results, but really the energy and the passion impact on our sales team.

The program has been very exciting internally. Our teammates have really embraced it in a big way with some real creative and energetic ideas on marketing and client service, and we're very excited about the prospects for that, as well as launching the small business portion, the business portion of the account acquisition program later this year. So we continue to work very hard on the core deposit area. We also are finding opportunities to improve our yield on the loan side. Certainly, the Atlanta market is competitive, being one of the best markets in the country from a growth standpoint. Certainly, so comes the challenge of competition, but we are continuing to measure and manage margin on a unit basis, on an individual account option basis, and on a weekly basis as well, in asking our folks, and with good success, receiving the sorts of yields that we need to meet our internal benchmarks. So obviously there are a lot of things going on with margin, but those are the primary pieces that make us feel good about having stabilized the margin.

What percentage of your loan portfolio re-prices immediately with changes in prime?

Our loan portfolio is about 50 percent floating and the remainder of the fixed rate portfolio turns pretty quickly. Just based on our gross production, we think we're at about a 14 month turnover rate.

Okay. Can I ask a separate question?

Sure.

The insurance line, you noted had huge sequential growth and I'm assuming most of that was contingency fees. What do you feel like is a good run rate going forward, a good base run rate in the first quarter for the insurance commission line?

Just a second, Jennifer. Let me pull those numbers up. I would say a good rough number in terms of revenue for a run rate would be somewhere in the 2.5m, 2.5 to 2.75m range.

Okay. Thank you.

Our next question comes from the site of John Pandtle, Raymond Janes. Go ahead please.

Good morning. Just to start with, the sequential order -- quarter increase, excuse me, and NPAs, up about 6.8 m, you noted 1.4m of that was related to this problem loan officer. That looks like 20 percent to me. Can you just go through how many credits and the relative size comprise the remainder of the increase?

Are you looking at the, at the 1.4m? Are you looking at the impairment in today's press release?

Yes.

Yeah. That was losses we took in that portfolio this quarter.

That was losses. Okay.

Yeah. And your question was characterize the other new entries into the non-performing assets during the quarter?

Yeah. So you had a little over 2m of the increase sequentially was related to this problem loan officer and can you give us the size of the other credits? How many are we talking about?

I know there was one in the $1m range, another one in the $700,000 range, both secured credits, that required specific reserves under $100,000. Beyond that, it was a good number of smaller credits past that.

Okay. And, what gives you the confidence that you've identified all of the problems related to this lending officer because you obviously took a swipe at it in the fourth quarter as well and I'm just kind of worried about the recurring nature of this.

I think we're -- as we continue to work through that portfolio, we're at the risk of some surprises there in the second quarter. I think we'll -- we're going through liquidation of these assets and taking the wiggle avenues of collection. Until you finish that process, you never really knew exactly what you will correct. So, I anticipate we'll have most of that process behind us in the second quarter, but we will have a risk of discovering some new exposures as we do that.

Okay. And the loans that you put on non-accrual from that portfolio this quarter, are they secured? What's left? You charged off 1.4 and then added the remainder to non-accruals. Are those secured?

We have established specific reserves on from -- the issues we discovered in the first quarter with these loans and they were approved as secured loans and had defects in their lien positions, and that was the reason our actual losses on those loans exceeded some of our fourth quarter specific reserves. So the remaining loans are secured, but I think we have a risk of discovering deficiencies in our documentation. That's what causes me concern, that we may have another higher than normal charge-off quarter in the second quarter.

Okay. And can you just please give us the specific dollar amount that went on non-accrual from that portfolio in the quarter?

It was right at that 1/3 of the increase. I don't have those handy.

It was roughly a couple million dollars, John.

Okay. And how big is the total portfolio from that lender?

I think the remaining portfolio's in the $20 to $25m range.

Okay. Thank you.

We'll go next to the site of Christopher Marinac, Fig Partners. Go ahead please.

Hi. Good morning. I wanted to follow up on Jeff's question a few minutes ago about the concentration of NPLs and look at it broader. What is the total concentration within the commercial and commercial real estate portfolio of loans, say, above $4 or $5m? John, can you elaborate on that?

Yeah. Our largest relationship on our top 10 list is in the $10 to $12m range. As you get to the bottom of that list, I believe, our number 10 largest relationship is in the $6 to $7m range, so, if that gives you an idea. Our number 10 relationship has a total exposure of $7m, so it drops off pretty quickly past that.

So if you were to put commercial and real estate loans in the bucket, and arbitrarily take $5m and make them as one cut-off point, how much of the portfolio would be above that, in that larger size category?

About $5m in exposures?

Yes, per relationship.

I would have to make a guess at that. I just don't think I could give you a very good guess on that.

Okay.

We set some tiers, some goals that I would say under 10 percent, but that's a guess.

Okay. And then if you looked at maybe the $2 to $5m range, would you have any better feel for that?

John Monroe Again, it's a guess, but I would say 15 percent.

Okay. So maybe 25 comprehensive?

Um-hum (affirmative).

Okay, that's helpful. And then I guess separately, Sam, can you talked about sort of what you are seeing competitively, not only on the deposits, but also loan pricing and can you just maybe just delineate between the community banks and the large regional banks?

Sure. The large banks, of course, continue to be very rational on the deposit side and we have seen some promotional efforts on the part of the large banks, but generally speaking, have not seen them do much at all to their chart rates, as we call it, to their base rates on core deposits. We have seen some promotional efforts, particularly in CDs and money markets, but really the promotional efforts have been more -- and frankly the crazy rates have been more out of our larger -- excuse me, our smaller competitors.

On the loan side, just to break down the balance sheet on the loan side, the impact we're really seeing is more on the fixed-rate loans. And as you know, we do very little fixed-rate lending of any length. Of course, we call a 3-year balloon a fixed-rate loan because it is fixed rate for our purposes, contractually and for rate risk purposes. But what we are finding is, is that of course, the yield curves has impacted the rate opportunity on some of those mini-perms, I guess I should say, or short balloons. But then we're also finding that competitively, particularly smaller banks are willing to do something even lower than where the yield curve might place that sort of business in terms of the spread over a treasury constant. So, I think that is -- that probably is the biggest impact for us competitively on the loan side.

Now keep in mind that in a rising rate environment, we certainly would not want to do much of this fixed-rate lending, albeit very short, but generally speaking, we have enjoyed short, average lives on short balloon sorts of loans, and that yield premium, over variable rate loans, has always been good to us, certainly, better to us in a declining rate environment, but even good to us in a rising rate environment too. So we're not able to avail ourselves of much of that sort of thing right now. Our clients are really demanding variable rate loans and certainly, I would assume that's because they are seeing their borrowing costs go up.

On the deposit side though, the main competition we're seeing is in promotional efforts particularly on money market dollars. We are seeing some 3-1/2 and 4, and even the other day, saw a 4-1/4 promotional offering. I believe that was for money market accounts. Certainly, those are still discretionarily priced. You still have some discretion over pricing those dollars once you get them onto your balance sheet. But the promotional efforts have heated up a whole lot in the last few months.

Good, Sam. That's helpful. Thank you very much.

Before we move to our next question, you may press star and one on your touchtone phones if you do wish to ask a question today.

We'll take a question from the site of Jerry Cronin (ph), Sandler O'Neill. Go ahead please.

Yes, my question's been asked and answered. Thank you.

We'll go next to the site of Jefferson Harralson, Keefe, Bruyette, and Wood. Go ahead, please.

Thank you, Sam. I want to ask you about any promotional activities you guys may be doing on the deposit side.

Sure. We are focusing most of our dollars and efforts on checking accounts. Certainly, we have to try to meet the competition to some extent because of our growth and our desire, of course, to retain what we have on the balance sheet. So, we are picking and choosing our positions along those lines. We're not necessarily doing the exact same thing in every one of our sub-markets because some of those markets can be a little bit different in terms of price and competition or our margin opportunity.

So, I would say, unless you would like to have some more specifics, I would say that we're trying to very selectively meet some of these promotional sorts of rates and offers, but not be leading the market on those sorts of things. Our dollars and our efforts are focused on checking accounts.

Do you have 3 percent or more promotions out for money markets to combat the 3 ½, 4 -- ?

Yes, yes, and we try not to necessarily meet every offer that comes along, but we certainly try to get close when and if we need to.

Okay and a quick credit question, the $20 to $25m in the loan portfolio from the fraudulent named lender, how much of that -- I guess I'm a little surprised that we had a kind of lock down the defect in the lien positions in some of these loans. Of the $20 to $25m left, I guess how much of that do we feel confident in the lien positions in the collateral there?

And these were different. They were loans that were made outside of policy; either did not ask, were not secured according to our policy or the documentation was not completed according to our policy. Based on the -- we've now have had several months pass since these loans were identified. And I think the ones that are going to -- most of the loans that are going to not perform have stopped performing and we did have a substantial portion of those go into a non-performing status in the first quarter. So that gives me some confidence that by the end of the second quarter, we will have identified and tested our ability to collect those problems of, and I think the impact past that, just based on the passage of time, should be much less than it was in the first quarter and the fourth quarter of last year.

Okay. Sam, on the 5 to 8 percent EPS guidance you're giving, it sounds like you may have elevated net charge-offs in the second quarter, possibly. You've got the seasonal insurance money revenue that's going away. The margin -- you're getting flat, but it seems like there's a lot of pressure there, so it's hard to maybe forecast that. And to get to even the 5 percent range, there's a pretty decent ramp-up you have to do in your model to get there. Are there some other things that are there that can offset some of these negatives and do you still feel confident in the 5 to 8 percent growth for '05?

Well, I think that's a good question, Jefferson, and it's one that we'll be addressing and are addressing currently. There are a lot of things good going on within the P&L and within the business. We have shown a terrific ability to grow our business at our current expense base and still believe that the opportunity to grow with our existing team and existing expense base is very good. We are also very hopeful about the prospects of the checking account acquisition program and what that will do, not only for margin but for cross sale opportunity and for fee income. Of course, the premise there is that the marginal cost of servicing a new checking account is no more than maybe a couple of handfuls of dollars, but the marginal revenue from a new checking account can be in the hundreds of dollars on an annual basis. So we have good hopes for that. We would, I guess, guide you to the -- probably the lower end of that range. But certainly understand your thoughts and your concerns there.

We'll go next to the line of Wada Quota (ph), Sidoti & Company.

Hi, good morning. Just a quick follow-up on that last question. The original 5 to 8 percent guidance that you gave, did that include the impact of the stock option expensing?

It did, Wada, and we, of course, are not doing that now, not expensing that now.

Okay. But you're still guiding towards the lower end of that?

Yes, I would stick with that range of guidance.

Okay great. Thank you.

We have a follow-up question from John Pandtle, Raymond Janes.

Okay. Thanks. Going back to this problem loan portfolio, the $20 to $25m, it sounded like 25 percent of current NPAs are related to that portfolio, so that to me implies 25 to 30 percent of that problem loan portfolio is sideways. Is that accurate?

Yeah. That's right. What percentage did you say? I think we've got about $3 to $3.5m of that portfolio's in a non-performing status. That 20 to 25, and that's a good number. The 20 to 25 is off the top of my head. So I guess we're really more in the 15 to 20 percent of that portfolio's in a non-performing status.

And, when you take -- get past that issue, and just look at the kind of the core performance of the portfolio, it sounded like, relative to your original expectations of lower NPAs this quarter, that the issue is the timing of resolution. Some of that's going to fall into the second quarter, or did you see a bigger inflow of new problems than you expected, and again, excluding this problem lending issue?

I would say the primary cause was just some delayed resolution. We had $3 to $5m that was set for resolution in March and got delayed, but still seems to be on track for resolution. We did, but there was outside of the problem we've been discussing, we had somewhat higher than normal new NPAs in March that contributed to it as well.

Okay, thanks again.

We do have a follow-up question from Jeff Davis, FTN Financial.

On the cost of funds, Sam, just a couple of details. CD costs were flat at 272?

Yes.

Was there some high cost money that rolled off, and kind of following up on Jefferson's that -- and thinking about the year that you were -- and I guess Jennifer on the margin question -- on able to keep this margin stable in the 415 to 420 range?

Jeff, I'm not aware of any high cost money that rolled off during the quarter, but certainly, that's a reasonable question to ask in terms of being flat quarter-to-quarter. As you know, we have worked very hard over the years to enhance our growth on a low cost core and away from time deposits, and have tried to be fairly conservative on the time deposit issue. This likely is more of a function of having to meet some -- and choosing to meet some promotional money market kinds of rates to really fund our balance sheet there in the last few months.

Okay, okay, fair enough. And then related to the broader commentary you've provided for the year, I'm sorry, loss rates for the second quarter are expected to be somewhat elevated, but for the year, you're still targeting to get net charge-offs back down to 25 nets to the business model level or is that a longer term view?

I'd expect that we'll be back down at that level before the end of the year. As far as finishing the year at a net of 25, I'm not sure we can do that, but our run rate and later in the year ought to be back to normal.

Okay, okay. And then the last one, more of a perspective question again, is, Sam, if your expenses have been flat for the last 5 quarters, and if I hear you right, they're going to be flat for the next 3, or thereabouts. You're a growing company in a growing market and is there some risk that you won't be providing the resources to feed the machine? And let's leave the VPS stuff aside, whether it's a $1.60 or $1.65 this year. But doesn't the machine have to be fed to set it up for growth in the out years?

Yeah. That's a great question, Jeff, and certainly, something we talk about regularly. You've got to remember, though, that we've spent a lot of money over the last couple of years doing a lot of different things, a lot of different things in attempts to grow and attempts to build our business, not just the traditional banking business, but our fee businesses as well. And we are measuring and managing all of those new investments, we think, very closely and we see the potential for improvement really in all facets of our business.

We are working on tighter deadlines for our newer businesses and pleased with some of the growth that we're seeing with those tight deadlines. But certainly, you always run the risk in juggling the balls of growth and investment, of doing too much of one thing or too little of another. But we have a very resourceful team, and a team that is very focused on productivity and efficiency and there is more than the opportunity just to hold expenses flat. That doesn't speak to the opportunities to reallocate certain investments and certain expenses that we're already incurring as well. And we won't go into great detail there, but there is opportunity, we believe, to tweak what we're doing to be able to make good on that expectation.

If we think about the business model -- if we work with the 420 margin going forward, plus or minus whatever, is a low 50s efficiency ratio about right from a business model perspective, regardless of what happens over the next 3 or 4 quarters or do -- are you trying to manage the thing down below sub-50?

No. You've probably heard me say before that that would be very difficult to do.

I have.

In our business and in our industry, in such a growth mode in a growing market, I think that would be very difficult to do. Certainly, your model may tell you that 50 or even high 40s might be necessary given current revenue levels, but I would not want to contemplate, and certainly would not want anyone to expect to see us in the high 40s. We are much more focused on producing revenue and using the great resources we have in our team and in our prophecies to enhance the revenue side of our business.

Which goes back to my earlier question, if you keep expenses flat though, you're still investing sufficiently to produce the growth in the out years which is what really matters and not the EPS this quarter or next quarter or whatever.

Sure, I certainly think so, Jeff. We have had periods in our history, and some of our predecessors in the last 10 or 15 years, where even for a few years, we were not necessarily adding significantly in the way of banking centers, in the way of new business lines or even in terms of numbers of sales staff. But we continue to grow and you can't do, of course, everything at once and we are in a mode obviously now of focusing on productivity and focusing on efficiency, and driving revenue with some of the assets we now have in the stable. And that doesn't give me concern about the far outlook that the 2 to, say, 5 year outlook in terms of the growth opportunity. We certainly will not shut down those investments, but we'll be looking at them far more closely than we have in the last couple of years.

Okay. Thank you, Sam.

We have a question form the site of Craig Cepakanus (ph), Partisan Partners (ph).

Hi, Sam. Given you expect continued improvement in all facets of your business this year, can you comment on the logic of not buying your stock back at these prices?

Craig, I think that's a good question and it's one that we are considering. Certainly, we have large plans for the capital that we have on our balance sheet and we want to think very carefully and make a good, deliberate decision about how we use that capital. I think it's a very good question though considering where we are from a share price standpoint and it's something that we are discussing.

Okay.

Our last question today is a follow-up question from the site of Jennifer Demba, Suntrust Robinson. Go ahead please.

They got my follow-up question. Thank you.

Mr. Hay, that's the last question in our queue today.

Great. Thanks for joining us for our first quarter earnings conference call and have a good day.

This concludes the conference call. We appreciate your participation you may now disconnect your lines. Have a great day.