Hancock Whitney Corp (HWC) 2009 Q2 法說會逐字稿

Good day, everyone.

And welcome to the Whitney Holding Corporation's second quarter 2009 earnings results conference call.

Today's call is being recorded.

Participating in today's program are: John Hope, Chairman and CEO.

John Turner, President, Tom Callicutt, CFO, Joe Exnicios, Chief Risk Officer, Lewis Rogers, EVP of Credit and Administration, and Steve Barker, Comptroller of the Bank.

At this time for opening remarks, I would like to turn things over to Trisha Carlson, Manager of Investor Relations.

Please go ahead.

Okay.

This is Steve Barker.

During today's call we may make forward-looking statements.

Forward-looking statements provide projections of results of operations or financial condition or state other forward-looking information such as expectations about future conditions and description of plans and strategies for the future.

Factors that could cause actual results to differ from those expressed in the company's forward-looking statements include but are not limited to those outlined in Whitney's SEC filings including the risk factor section of the company's form 10K and 10Q.

Whitney does not intend and undertakes no obligation to update or revise any forward-looking statements.

I will now turn the call over to John Hope, Chairman and CEO.

Thank you for being with us today.

During last quarter's conference call, we noted that unless we saw an overall improvement in the economy, stabilization and improvement in real estate prices and fewer credits moving into criticize classification, we expected our credit cost including the provision for credit losses to remain elevated, and they did.

The trends did not change in the second quarter.

While we're disappointed to report a $21 million loss for the quarter, the results were in line with our range of expectations.

Core earnings drivers remain stable for the quarter.

And net interest margin compares favorably to industry tiers, fee generating business lines grew and noncredit relating operating expenses remain very much under control.

However, lower valuations, I might say continuing lower valuations, on residential real estate credits in Florida and coastal Alabama significantly impacted our credit quality metrics and the bottom line.

In addition, ongoing pressures associated with problems in the overall economy affected various types of credits serviced out of our Texas and Louisiana markets, adding to the provision for credit losses and our level of criticized credits.

The net loss plus the $4 million dividend on the preferred stock issued to the treasury on the TARP result in the a $0.38 per share loss per diluted common share.

Included in this is the $5.5 million or $0.04 per share after tax charge related to the industrywide FDIC special assessment.

Net interest margin remains solid at 4.05% for the quarter.

We did originate substantial new loans but we -- but subject to the lack of demand with loan demand overall was light.

We are continuing to actively look for new and expanded relationships.

Noninterest income was up over $3 million from last quarter mainly related to a significant increase in mortgage originations as well as most other recurring sources of fee income.

Expenses were $15 million from the first quarter with this increase mostly related to FDIC special assessment noted above and higher costs associated with problem credits and REO.

Capital remained a healthy $1.5 billion with tangible equity -- tangible common equity at 6.42% and a leverage ratio of 9.21%.

I'm going to ask Tom Callicutt, if he will, to take it up here.

Okay.

Thank you, John.

The net interest margin of 4.05% was down eight basis points from 4.13% in the first quarter of 2009, and reflected the reduced share of loans in the mix of earnings assets, the ongoing impact of a low rate environment and the impact of lost income on nonaccrual loans.

Nonaccrual loans reduced our net interest margin by approximately 20 basis points in both the first and second quarters of the year.

Noninterest income for the second quarter of $32 million was up $3 million or 11% linked quarter.

Secondary mortgage market income was up approximately $1.3 million or 68% on continued strong refinancing activity.

Bankcard fees and trust service fees were both up for the quarter as were most other recurring sources of fee income such as investment services and insurance operations.

Other noninterest income in the second quarter included a $1.8 million distribution from a local small business investment company investment, while revenue from grandfathered assets was $1.5 million lower in the current period.

As a reminder, dividend income from one of our grandfathered assets totaled $1 million in the first quarter of 2009.

Total noninterest expense for the second quarter increased $15 million or 15% from the first quarter of 2009.

As John mentioned earlier, the majority of this increase came from the $5.5 million FDIC special assessment charge, a $4.4 million provision to increase the valuation allowance for ORE property and approximately $2 million increase in ORE in collection costs.

Total personnel expense increased $1.4 million or 3% linked quarter.

Compensation was up $2.3 million, offset by a decline in benefits expense of $800,000.

The increasing compensation reflected higher sales based incentives in the current period and the effects of a $1.5 million reduction in share-based compensation in the first quarter of 2009 that resulted from updated performance estimates on outstanding awards.

No management cash bonus was accrued in either the first quarter or the second quarter of 2009.

The decline in benefits expense reflects lower payroll taxes and a reduction in pension plan expense.

While the linked quarter in year-over-year increase in deposit insurance and regulatory fees was largely related to the $5.5 million special assessment, the new rate structure and calculation method introduced in 2009 increased recurring FDIC insurance expense an additional $1.5 million during the quarter and approximately $2.8 million from a year earlier.

The increase of $7.6 million in other noninterest expense is primarily related to the $4.4 million provision to build evaluation allowance for ORE along the higher collection costs on problem loans and ORE.

Now, I'll turn the program over to Joe Exnicios, who will talk about credit.

Thank you, Tom.

As indicated in our earnings release, we continued to experience growth in our criticized and nonaccrual portfolios as a result of this recessionary environment, and we're disappointed that these issues are continuing to drive elevated provision levels.

As John noted in his opening comments, the story is now really two-fold.

Valuation issues related to Florida and coastal Alabama real estate continue to significantly impact our provision for credit losses, chargeoffs and nonperformers.

But now, we're seeing signs of general economic stress affect various types of credits and service from our Texas and Louisiana markets, including the oil and gas portfolio discussed last quarter.

These credits are impacting both our provision and level of criticized loans.

However, what we're seeing today from the credits outside of Florida is different from what we experienced in Florida.

Real estate valuations in Texas should not be compared to those in Florida.

Therefore, as I discuss some of the details behind the numbers, I'm going to segment the impact from the continuing real estate related problems in Florida and coastal Alabama from the newer trends related to overall economic pressures.

The total of loans criticized through the company's credit risk rating process was just over $1 billion at June 30, 2009, which represented 12% of total loans and a net increase of $168 million from March 31, 2009.

Special mention credits, the least criticized category represented the majority of the increase or $110 million, bringing that category to a total of $351 million, while substandard and doubtful credits increased $58 million.

Included in criticized loans are $413 million of nonperforming loans, up $47 million during the quarter, net of chargeoffs.

About $300 million or 72% of the nonaccruals are commercial real estate, about $181 million is construction, land and land development with almost the entire balance in Florida and coastal Alabama.

As of June 30, 2009, 65% of our nonperforming loans were in Florida, 7.5% in Alabama, 22% in Louisiana, and 5.5% in Texas.

So, where did the increase in nonaccruals come from?

Part one: Florida and coastal Alabama.

This theme has continued.

About $58 million in new nonaccrual loans and about $47 million in new criticized loans came from larger Florida and coastal Alabama real estate-related credit relationships.

Part two: the general economic pressures.

About $113 million of the total increase in criticized loans came from eight larger credits, all serviced out of Texas and Louisiana, and it represented various types of credits in industries.

We had one residential development.

We had one multifamily construction, two nonresidential income producing commercial real estate, one owner user commercial real estate, one oil and gas credit and two general C&I credits.

And just so you don't think all large credits only move into criticized, during the quarter, a $12 million C&I special mention credit in Louisiana improved and was upgraded to pass and moved out of the criticized totals.

About $16 million of the increase in nonperformance came from credit service out of Texas and Louisiana.

This included a $3 million oil and gas credit, a $2.5 million manufacturing credit and a $6.7 million residential construction relationship.

The second quarter's provision for credit losses of $74 million was driven by the following: $2 million was added to the reserve for unfunded commitments; $25 million was related to reserves on newly impaired credits and unreserved chargeoffs resulting from declining collateral values on nonaccrual loans, again, mainly from real estate-related loans in Florida and coastal Alabama; $27 million was related to the addition of newly criticized loans and ratings downgrades within the criticized categories.

Almost half came from commercial real estate credits in Florida and coastal Alabama and the other half of the increase came from various C&I and commercial real estate credits in the portfolios serviced out of Texas and Louisiana.

$2 million was associated with changes in noncriticized credits.

$7 million related to chargeoffs on consumer and other smaller credits offset by recoveries during the period.

Management added another $10 million to the allowance and provision based on its regular assessment of current economic conditions and other quantitative and qualitative factors.

The provision of $74 million exceeded net chargeoffs by $47 million and further strengthened our allowance for credit losses to 2.5% up from 2.17% last quarter.

Of the $49 million of gross chargeoffs during the quarter, approximately $29 million was from residential-related credits, mainly impaired commercial real estate loans in Tampa and coastal Alabama; $8 million of C&I credits; $9 million of nonresidential commercial real estate credits, mainly impaired loans in Tampa; and $1.5 million of consumer credits.

Loans outstanding to the oil and gas industry customers represent approximately 12% of the total loans at June 30, 2009.

About 32% of the loans are related to exploration and production lending with the balance supporting the industry through transportation, supplies and other services.

At the end of the second quarter, approximately 7% of the total energy portfolio was criticized compared to 6% in the first quarter.

We added only one new large oil and gas service company loan to criticize assets during the quarter.

Many of you have asked how higher commodity prices may have impacted our energy portfolio.

Simple answer is it helps.

Obviously higher prices are a good thing for the industry, but they need to be sustained over a period of time.

Secondly, while prices are higher, this doesn't necessarily mean that activity has picked up.

Today, we're not seeing new investment or additional activity from the drilling and exploration companies and this lack of activity continues to impact the service companies.

Until the outlook on commodity prices translates to increased activity, we expect to see continued stress on this portion of our loan portfolio.

Everyone wants to know what inning we're in, and when is this credit cycle going to end?

I don't know.

The only way I can answer the question today is to repeat what I said last quarter, and that is, until we see stabilization in real estate prices and a positive turn in the general economy, we expect our criticized loans and credit costs to remain elevated.

I'll now turn to John Turner for his comments on loans and deposits.

Thanks, Joe.

While we originated new loans or funded commitments of $700 million during the second quarter, payoffs and continued weak demand across our footprint impacted our overall results.

Loans at period end were down 2% or $161 million link quarter, and gross chargeoffs of $49 million impacted total loans outstanding.

Based on what we're seeing today, we do not expect -- we do expect loan demand to remain weak in the near term.

Deposits were up 1% on average link quarter.

During the first quarter of 2009, we launched a money market campaign designed to generate new or expanded customer relationships.

We're very pleased with the outcome.

We actually generated over 1,200 new retail and small business customer relationships and money market deposit account balances increased by $266 million.

The decrease we experienced in DDAs reflects a seasonal trend.

However, even with the decline during the quarter, DDAs is a percentage of total deposits remained a healthy 33%.

We believe that challenging times like these present a great opportunity to get better, and to that end, I want to take a minute to give you an idea of some things we're working on to position the company for the future.

It has been almost nine months since we merged with Parish National.

It was our largest to date.

And the combination thanks to the work of a lot of hard work of a lot of bankers on both sides has been -- has produced results that are everything that we have expected or better.

Toward the end of May, we announced a new technology initiative we call Project Genesis.

Over the past year, management worked intensely on the project designed to align our technology strategies with our updated strategic plan and to provide the bank with contemporary customer service technology.

The new core systems were chosen -- that we have chosen are expected to give our bankers better tools designed to meet their customer's needs, solve problems quickly and take advantage of high sales and service opportunities.

The completion of Project Genesis will take us -- which will take us over two years, should dramatically reduce our ongoing cost of operations.

Over the past several months, we implemented branch rationalization project designed to more actively manage our branch portfolio -- our portfolio of branch offices and align our network to optimize the use of capital.

Based on this work, we announced the closing of 17 locations including overlapping Parish National branches.

We've also opened a few new branches during that same period of time to give us the best strategic opportunities.

We currently have three locations under construction.

Again, we believe this project will not only preserve capital but will also have a positive impact on future earnings.

Over the last several months, we've hired several key new senior managers that we believe will help us achieve the goals in our strategic plan.

These managers have backgrounds in retail, small business, commercial and wealth banking with specialized expertise in treasury management and trust and wealth management.

Experienced sales people have joined us in key markets to support our banking and commercial banking lines of business.

And finally and most importantly, we think we continue to have an excellent group of bankers that are very loyal to the bank and its customers during these challenging times.

As I've said, we believe that challenging times are a great time to improve.

We're working every day to take advantage of this opportunity and the continued execution of our strategic plan we think will lead us to a great future.

And I'll turn the program back over to John Hope.

Thank you, John Turner.

Before I open the call up for questions, I would like to emphasize a little bit and follow up on Joe's comments about credit.

Credit for us now is very much a two-part story, and we really want to make sure that we get this concept across to you.

First, we're continuing to weather the storm created by the residential real estate valuation issues in Florida and coastal Alabama.

But until real estate prices stabilize, we're going to continue to see adverse impact from these loans on our credit metrics.

Also, at this time, we do not see a benefit to our shareholders to package and sell these loans at what we currently see as discounted prices offered today, so we're going to continue to work these properties one at a time and on a case-by-case basis.

Secondly, pressures in the overall economy -- until pressures in the overall economy subside, we're going to see credits in open markets [moved and criticize and] impact the provision.

But this is not like what we saw happen in Florida and coastal Alabama.

What we saw happen in those markets was dramatic and seemed to happen almost over night.

As we continue to work through the current and potential issues resulting from the recessionary environment, we have been working closely with our customers to try to mitigate the impact on them and us.

However, until we can look back and confirm that this current credit cycle is over, we will remain very cautious.

As you all know, the banking environment has been difficult so far this year.

But we will persevere as we always have, and we are committed and focused on creating long-term value for our shareholders.

There are going to be some terrific opportunities available once the market turns.

While we still have some more work to do to get through the current economic cycle, as John turner pointed out to you, we're committed to investing in our future, so that we'll be ready to capitalize on the opportunities that are available once the current cycle winds down.

We'll now open it up for your questions.

Thank you.

The question and answer session will be conducted electronically.

(Operator Instructions) And we'll go first to Kevin Fitzsimmons with Sandler O'Neill.

Good afternoon, everyone.

Hello.

John, was just wondering if you can give us a sense for how you're looking at your capital right now.

The tangible common equity ratio pulled in this quarter.

Capital has always been a real strength in the hallmark at Whitney, but it seems like what we're look at for at least the next few quarters here are elevated credit losses as the criticized loans continue to remain high, and it looks like probably increasing margins coming in.

Balance sheet is staying flat to shrinking and expenses are staying high.

So, with all of that said, just wondering, are there levers out there you can pull to help minimize the erosion to tangible common equity ratio?

Can you shrink the balance sheet more aggressively in certain areas, not necessarily through the bulk sales you talked about, but maybe are there businesses, are there parts of the portfolio that can be sold off that could be capital accretive?

Thanks.

Kevin, I'm going to let Tom try to answer part of that question, too.

Let me start off by saying this, our own assessment of the situation is such that we don't feel like the kind of actions you're talking about are necessary.

We believe our capital is going to be more than sufficient to carry us through the balance of what we expect to see and still allow us to remain in what's called the well capitalized category.

Now, no one knows how long this is going to last.

Certainly, I wouldn't profess to be that insightful.

But we have not -- our analysis and our assessment has not taken us to the point yet where we're going to take any dramatic actions like you're talking about.

Right, and just to add to what John said, I just -- I think it is not the time to do that.

There are many banks that would love to have our level of tangible common equity.

We wouldn't mind having more.

We know it eroded slightly during this quarter.

We don't see that as a major problem.

We have plenty of defensive capital, if you look at our capital position.

We're in good shape to weather the storm.

What we're going to focus on at some point is talking about capital so we can take advantage of some opportunities.

We're just not ready to do that yet.

Okay.

I mean I guess the -- so, the bottom line is based on what you see, you're comfortable with the capital.

Obviously, that has a large part to do with the duration of this thing and how -- and it seems like right now, unfortunately, we're at a point in time where the real estate issues in Florida and coastal Alabama are still there and formidable where you have these other economic weaknesses coming in.

They are.

Every time we get an appraisal, it seems to be lower than the last one we got.

Everybody in the industry knows that.

But I can tell you, Kevin, we've been pretty aggressive in updating our appraisals and our methodology also calls for impairment charges for real estate dependent credits between appraisal events.

So, we're pretty aggressive at staying current on those valuations.

And there's only so much further they can go down.

I mean at some point, there won't be anymore to appraise.

It sounds like what you're saying is while you're going to see this inflow to criticize assets from the driver number two, the economic weakness, don't jump the gun and think you're going to see the same kind of severity in net chargeoffs.

That's exactly the point we're trying to make.

We would expect our experience in Louisiana and Alabama to be similar to how Whitney would normally weather a recession of this magnitude.

Thank you.

We'll go next to Steven Alexopoulos with JPMorgan.

Hi, everyone.

What was it about the second quarter that you saw such a large increase in the criticized loans in Texas, particularly given it was fairly broad-based?

Was there any type of specific review done there?

No.

We are always diligently reviewing and our account officers are held to a pretty high standard with respect to understanding their credits.

So, we are -- we would like to feel that we're always in a good position to react to interim financial statements, discussions that we have with our customers, or any other indications we might have weaknesses that might be creeping in.

As you will note, the large majority of the increase was in the least criticized category of OAEM.

As I mentioned, it was based pretty -- it was a pretty diverse representation of credits.

So, when we characterize that as really being a result of the recessionary environment, eventually you get an impact, not just in real estate but in other operating companies, companies that might have issues that might have nothing to do with the economy.

And a lot of times these can be mitigated rather quickly.

All I can tell you is that our job is to identify them and work to mitigate them as quickly as we can.

Okay.

Just one other question.

You guys provided roughly $30 million above the level of net chargeoffs in the first and second quarter.

Is that a reasonable run rate of provision for us to assume at least until we get some stability in home prices?

We're not going to give you any guidance, but I just have to tell you that I think you would be making a mistake to jump at that conclusion.

Okay.

That helps.

Thanks.

Okay.

Thank you.

We'll go next to Jennifer Demba with SunTrust-Robinson Humphrey.

Thank you.

My questions have been answered.

Thank you.

Next, we'll go to Jeff Davis with FTN Equity Capital.

Good morning.

John and Joe, you more or less touched on it but let me follow up on Kevin's question.

Is to the extent real estate values haven't stabilized and appraised values continue to drop and you have pressures on criticized assets, are we not getting to a point where the criticized assets, the in-flows in Florida, should begin to taper off?

Jeff, I think you probably would see that, yes.

I think that's a fair assessment.

Along the lines of what John has said, so much of that portfolio has been criticized, not all of it is impaired.

We have a portion of the portfolio in central Florida that's criticized, but it is still continuing to perform.

But given the environment in which they're operating, there is obviously cause for concern.

But I think your assessment is a fair one.

Within the Florida piece, it was criticized, was there much migration downward in the ratings, if average rating was a 6.5, did it go to 7.5 in Florida this quarter or was it relatively stable?

Jeff, this is Lewis.

I don't know the portfolio average off the top of my head for Florida.

My sense would be that yes, we have continued to see some downward migration of the Florida credits, either the risk rating itself or taking the additional chargeoffs that we've already alluded to on impaired credits as we get appraisals in.

So, I think there has been some deterioration within the criticized group of Florida credits over the last quarter reflected by chargeoffs or downgrades.

Yes.

Okay.

Thank you.

Thank you.

We'll go next to Bain Slack with KBW.

Hey, good afternoon, guys.

Do you have any color on the 30 to 89 past due loan data currently?

Everyone's looking at me in the room.

The color -- when you say color, what's your, Bain -- what is the --

I guess, just seeing what the link quarter trends are there.

The delinquencies are very similar to what they have been as it relates to 30 to 89 days quarter to quarter.

Trying to get some data to refer to --

Okay.

No problem.

Well actually, let me ask another question I guess, because in the press release, I think you referred to it earlier that although we've got elevated loan loss provisions and we had a big loss, given the conditions, it was in line with management's expectations.

It sounds like we do have expectations barring any stability in real estate prices in turn in the general economy that we're going to see similar type costs.

to see similar type costs.

Am I hearing that correct in terms of your guys' expectations?

I think you're going to have to draw that conclusion, Bain.

Okay.

I mean, I just want to be careful not to give you too much guidance.

Bain, so much of that depends on the dynamics.

A lot of it has to do with the timing of which we get updated valuations.

Okay.

So, it is really -- not trying to avoid the question, but it is difficult because there is a certain timing aspect to some of it.

What we're trying to do is give you some directional trend information and that's really where our thoughts are.

Okay.

Bain, in the nonFlorida real estate credits that we've been working for a while, we are beginning to see some progress on a couple of those.

So, the variable that I'm not comfortable with giving you any guidance on.

It is a factor is we're going to clean up some of the C&I credits and we're going to be able to upgrade them.

I just can't tell you exactly when.

Okay.

And I guess kind of thinking about capital, there needs to be actions sort of taken to reserve.

I know that occasionally, we always touch on the pre1933 assets.

And that's not anything that you all have looked practically to maybe sell or recognized value in that portfolio which is marked down to nothing on your balance sheet.

Is that something that could help to buffer the balance sheet a little bit going through the cycle?

This is Tom, Bain.

I think that as we've talked many times before, it takes a market sometimes for some of those.

And we're not any less actively trying to move some of that than we might have been before.

It is just not something that can be done in one fail swoop or at any given time.

I'll go back to one of the earlier questions about what are the special measures we've taken to possibly improve our capital ratios.

We don't yet see the urgency to take any, I would say, extreme measures whether it be selling the assets or doing other things.

We're relatively comfortable with our level of capital.

Okay.

Bain, to get back to your question about the past dues, they were relatively stable from first quarter to second quarter.

A little bit of movement among the categories, you actually had in the over 89 days, you had a reduction of 11 basis points.

So that might have as much to do with chargeoff activity as anything else.

So, there's no significant changes really in the past dues.

Great.

Thank you all.

Thank you.

We'll go next to Kevin Reynolds with Wunderlich Securities.

Hi.

Good morning, everyone.

Good morning.

I guess we probably are beating the credit horse to a pulp here, but I want to come back to and I know you don't offer guidance or you're not going to give us guidance, but the last line of question there, you said directional and trend information to help us out.

You made a quote -- you quoted earlier saying or paraphrasing, we expect credit costs and problem loans to remain elevated which is essentially unchanged from last quarter.

However, remain elevated really doesn't do justice to sort of the increase that happened this quarter.

Are you saying -- it is remaining elevated sounds like we might be flattening out.

But you stop short of saying, or should we continue ourselves to see similar increases for I guess the next couple of quarters in terms of NPLs and NCOs?

You're going to have to ask yourself that question.

I'm just not able to make that kind of a prediction.

I don't think any of us are comfortable.

But I would say, Kevin, that the increase this quarter was not necessarily dramatic.

Fair enough.

I guess another question along those lines is, when you speak about the two parts of the story and you talk about Florida and the coastal markets, it sounded as if you were speaking in the past tense about the nature of problems.

And so would you feel comfortable you think the worst is behind you there?

Is that a fair way of characterizing it?

I think that the historical nature of that statement is the fact that that started for us in the second quarter of last year, whereas these other items related to the general economy really have just started in the last several months.

Okay.

Thanks so much.

Thank you.

We'll go next to Adam Barkstrom with Sterne Agee.

Hi, guys.

Good afternoon.

I wonder if you could give us the -- you kind of sort of did but not really.

Can we get the gross chargeoffs by geography or by state?

Do you have that?

Adam, yes.

I can give you that.

I would say Florida and Alabama represented 75% of the second quarter gross chargeoffs and that was predominantly Florida.

Okay.

Florida.

Joe, if you could because I can't write as fast as you talk, could you go through, as did you before, the gross chargeoffs?

You did them by type as well.

Could you do that again?

Sure.

Let me go back and make sure I give this to you.

I don't know if I gave you the gross.

Yes, you started out and you said NPOs $29 million.

Absolutely.

The $49 million of the gross chargeoffs during the quarter, approximately $29 million was from residential related credits, those were primarily impaired commercial real estate loans in Tampa and coastal Alabama; $8 million of C&I credits; $9 million of nonresidential commercial real estate credits, and of that $9 million, those were mainly from impaired loans in Tampa; and $1.5 million of consumer credits.

Now, of the total -- another way of looking at it, you asked me by geography, roughly $32.5 million of the $49 million came from Florida and approximately $4 million came from Alabama.

Is that $4 million of the $32.5 million or $4 million of the $49 million?

$4 million of the $49 million.

So, if you add the $32.5 million and the $4 million, you get $36.5 million over $49 million.

I think that's roughly 75%.

Okay.

Okay.

Great.

Thank you.

Okay.

Thank you.

Next, we'll go to Dave Bishop with Stifel Nicolas.

Hey.

Good afternoon, gentlemen.

Hello, Dave.

A lot has been made about -- in terms of the oil field services sector.

You talked to you guys and even some of our internal energy analysts here about a lot of the operators getting religion so to speak.

They touch a stove, they got burned in the last cycle and they didn't lever up through here.

What are you seeing in terms of the general capacity to weather the downturn in commodity pricing especially on the gas side?

You get the sense that they have got religion, they're in a better shape going into this and they can weather a couple more quarters of this or are they gasping for air at this standpoint?

I think it varies, depending on the age of the enterprise, the management and that would really be the answer, but I agree with you.

I do think that we have a lot of people running these companies that do understand that leverage on fixed assets is dangerous in times like these.

So -- and we're cognizant of that as well.

Another issue was that this industry had accumulated a lot of liquidity due to the good years that they had a couple of years ago.

They had a succession of two or three years where they all made a lot of money.

We did go into this downturn seeing more liquidity on their balance sheets than you would normally expect to see.

Got it.

And then in terms of -- I mean, the hotel tourism sector in terms of criticized assets, what sort of trends are you seeing there?

It really hasn't changed significantly since the first quarter.

I think in the first quarter, we broke out and gave you some statistics.

We really haven't seen a lot of movement.

It is not real good.

But let's talk about here in the New Orleans area.

Whereas some of the businesses are struggling and the activity number of conferences and conventions might not be as much.

We are in the summer.

But everybody is hanging in there.

And the rental markets on the emerald coast have been fairly consistent.

So, I would say the answer would be that I would call it stable at this point in time.

Great.

Thank you.

Thank you.

Next, we'll go to Walter Flower of Walter Flower and Company Inc.

Investment Council.

Thank you very much.

Most of the questions have been answered.

I have one minor one which relates to the understanding of the real estate in Florida near Tampa.

And how much of it is sort of "raw land" and how much has infrastructure upon it?

Some understanding of that.

Is this Chip?

Chip.

This is Joe Exnicious.

Hi, Joe.

How are you?

Good.

Listen, I don't know that I can give you an exact percentage but part of the problem and the dynamic of the real estate that we had, large amounts of in that Tampa, central Florida region was that it was land for future development, we have a lot of undeveloped land that had been developed but once the lots were subdivided and ready for sale, the market sort of collapsed.

So, our problem is that we have more of a concentration of nonincome producing type properties and therein lies the valuation issue and one of the significant differences of the types of changes we're seeing in other markets.

Where we're primarily dealing with income producing properties where you don't lose everything if you don't have everything depending on one single sale.

So, I would say I can't give you the precise percentages but part of our problem is that it was a high percentage, a much higher percentage than we would like in what is just now income producing property that's subject to changes in the overall market environment there to start stimulating sales again.

Chip, this is John Hope.

Yes, hi, John.

The only thing I would try to add to that is back to some of my earlier comments about how I would say disciplined we've been in taking the impairment.

Even if some of this undeveloped property tends to have more downside than we have taken that.

As the appraisals have come in, we aren't holding back on any of that.

So, there is more risk there.

There's more downside there.

But we've been more aggressive in getting it to a liquidation value.

Great.

That's helpful.

Thank you so much.

Thank you.

Next we'll go to Jon Arfstrom with RBC Capital Markets.

Thanks.

Good morning, guys.

Hi, Jon.

A few questions, most have been asked and answered.

But to follow-up on Adam's question on chargeoffs, was there anything sizable in the chargeoff category?

Anything sizable?

Large credit?

Well, we probably did have a large impairment, a chargeoff and an impaired loan but I'm not sure that we had any chargeoff that was greater than $3 million.

Are you looking for a dollar amount?

No.

But if that's it, that's exactly what I was looking for for.

Okay.

And what is the approach to lending in the Florida and Alabama market?

It looks like the balances have been relatively flat.

Can you talk a little bit about what is happening there in terms of your appetite?

Yes.

This is John Turner.

In the Tampa Bay market, we're seeking good C&I opportunities, and have actually been able to with a group of bankers that we've recruited there, we've had a few opportunities to develop some nice commercial relationships with long-time Tampa businesses.

And we're still looking for those opportunities in that market.

And the same would be true in Alabama.

Commercial banking is our core competency, and we're still actively looking, seeking commercial banking opportunities, both loan and deposit relationships, as they present themselves.

Okay.

And then Tom, maybe a question for you.

A little bit of help on the margin.

Some of your peers have actually reported an up margin.

And you give us some color and prepared comments.

But I'm wondering if you could talk a little bit about what kind of rolling you might have of CD balances or other help in terms of funding costs coming down.

Sure.

We can talk about that for a minute.

First, the biggest determinant of our margin going forward will be the mix of loans in our overall earning asset mix.

So, if loans come down a little that could cause a little pressure on the margin, but I don't particularly expect that.

LIBOR has done everything it is going to do to the margin.

And we do have some CDs that will be coming off in the fall that are higher priced that we can pick up some from there, also some money markets that will come down later in the year, too.

So, those are kind of the things that will affect the margin.

Okay.

One more question, and believe it or not, noncredit-related.

This service charge line looked like it was down just modestly.

And I'm curious if there's anything unique that happened there.

The only thing I would say is we've been working with our customers to increase their demand deposit balances to cover service charges that might be created because of historically low earnings credit rates.

Makes sense.

Thank you.

Thank you.

We'll go next to Albert Savastano with Fox Pitt.

Good morning, guys.

How are you?

Two questions for you.

When you look at your special mention classification historically, can you give us an idea of how much is migrated in and how much is migrated out?

I'm looking just for qualitatively.

Well, of the $168 million from the second quarter, I think we said $109 million went into OAEM.

I don't -- are you looking for --

I don't think we have the percentage of what dollar volume of those are drifting downward.

I will tell you through the cycle, and it would be normal with any cycle where you're in a downturn, you're going to see a good bit of OAEM develop, defined weaknesses that force you to rate them substandard.

So, there has been more of a migration down.

That, I view as more of the -- it is the economy as we -- the one issue that has been interesting with this downturn, the initial portion of it in terms of real estate is the speed with which loans have tended to deteriorate.

This -- you don't get interims often.

You get an appraisal or get a borrower who, all of a sudden, has liquidity problems because a few events didn't occur, a sale didn't occur, and so you do get a rapid decline that is being experienced by all banks and that leads to very fast migration downward.

When it turns, hopefully that won't be the case.

We'll see migrating out of OAM back into pass category, more than we see downward, but I think through today, it would be the impression should be that we're continuing to see downward migration.

Okay.

So, just to clarify then your comments, if you're putting a loan on special mention, you kind of do expect it to migrate down.

I didn't say that.

I didn't say I expect one that's special mention to migrate down.

I just think if you looked at the history based on where the economy is, many of them have migrated down based on what we've experienced.

Al, and the reason it varies is because sometimes you can have guarantors who have capacity that can provide support, a lot of times we get principal curtailments, we get back in line with our loan value requirements, oftentimes we can get additional collateral.

Those OAEM credits oftentimes have a defined deficiency, but oftentimes, if you get with them quick enough you can get it resolved.

And then you get back on track.

It is only those that I think Lewis was referring to where, that's the first step and they're not able to mitigate their weaknesses and they become a little bit more pronounced.

And that's when they slip it to the more severe criticized category.

Okay.

Got it.

And then just a question for Tom and I apologize if you talked about this before.

Can you give us a little color on just the drivers of the overall balance sheet side?

And I guess where I'm going with this, if you do have continued weak loan demand, do you put on some securities to keep the balance sheet somewhat flat, or do you let it kind of run down a little bit and save that [powder for later?

So far, what we've done is we've kind of kept the portfolio on the target that we've had for the entire year rather than increasing it when loan demand has fallen.

We can pull those levers if we need to.

But right now, we have not seen any reason to do that.

Okay, thank you.

Thank you.

And with that, we have no further questions.

I would like to turn the program back over to Mr.

John Hope for any additional or closing comments.

Thank you.

And thank you all for your questions and participation in today's call.

We appreciate your interest in Whitney.

That does conclude today's conference.

Thank you for your participation.