Hancock Whitney Corp (HWC) 2009 Q4 法說會逐字稿

Good day, everyone. And welcome to the Whitney Holdings fourth quarter earnings conference call. As a reminder, today's call is being recorded. Participating in today's call are John Hope, Chairman and CEO; John Turner, President; Tom Callicutt, CFO; Joe Exnicios, Chief Risk Officer; and Steve Barker, Comptroller of the bank. For opening remarks I would now like to turn the call over to Mr. Steve Barker.

Good afternoon. During today's call we may make forward-looking statements. Forward-looking statements provide projections of results of operations or of financial conditions or state other forward-looking information, such as expectations about future conditions and descriptions of plans and strategies for the future. Whitney's ability to accurately project results or predict the effects of future plans or strategies is inherently limited. We believe that the expectations reflected in the forward-looking statements are based on reasonable assumptions, but actual results and performance could differ materially from those set forth in the forward-looking statements. 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 factors section of the Company's Form 10-K and 10-Q. Whitney does not intend and undertakes no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements.

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

Good afternoon, everybody. As we noted in our earnings release, we're all very encouraged by some of the positive signs we reported for the fourth quarter, but especially for those related to credit quality. The provision for credit losses was down over 50% from its peak in the third quarter of 2009. Criticized loans declined $124 million from the end of the third quarter. And our loan portfolio outside of Florida and coastal Alabama has continued to perform actually very well as we expected, given the recessionary environment. For the first time in 2009, we did not report a net loss, and for the second consecutive linked quarter, we reported pre-tax, pre-provision growth. And net interest margin expansion continued. We saw slight growth in our balance sheet as year-end deposits increased from the end of the third quarter, and the decline in loans outstanding declined.

Our fee income remains stable and our non-credit related expenses declined even as we continue to invest in our strategic plan. While 2010 will continue to be impacted by credit quality cleanup, and an improving yet still uncertain economy, I'm optimistic that the credit situation is normalizing, and I'm hopeful we will soon see a return to full-year profitability. We still expect loan demand to remain weak in the first half of the year, with slow growth expectations for the second half of 2010, as the economy begins to recover and strengthen. Our quarterly earnings could be lumpy. However, as we are focused on what the full year and longer term may bring, on keeping our strategic initiatives and related investments on track, and being poised to capitalize on the opportunities ahead.

During the fourth quarter, Whitney announced a public offering of its common stock, and after all 28.75 million shares were sold, including the under writer's 15% overallotment option, the Company raised new capital of $218 million net of expenses. As a result of the offering, the year end tangible common equity ratio was strengthened to 8.18%, while the leverage ratio improved over 200 basis points to 11.05% from September 30, 2009. The success of the capital raised places Whitney's capital ratios among the top banks in its peer group, and positions us to benefit from the opportunities we predict will be available to stronger financial institutions as we emerge from this recession and the credit cycle passes. Our offering had significant interests, and we added a group of quality long-term institutional investors to our already strong shareholder base. I believe the success of the public offering is a positive indication of the market's confidence in Whitney.

Tom, if you will take it.

Okay. Thanks, John. Total loans at the end of the third quarter were $8.4 billion, which is down $74 million, or less than 1% from September 30, 2009. Included in the quarter's decline were charge-offs of $58 million, foreclosures of approximately $15 million, and problem loan sales of approximately $7 million. The shared national credits portfolio totaled $680 million at December 31, essentially unchanged from September 30, 2009. Approximately $247 million of the total shared national credit portfolio is related to the oil and gas sector. Average deposits in the fourth quarter of 2009 were down $59 million, or less than 1%, compared to the third quarter. Deposits at December 31, 2009, increased $270 million, or 3%, compared to September 30, 2009. Year-end balances include seasonal, commercial, and public fund deposit inflows. Noninterest bearing deposits for the fourth quarter were up 4.5%, on average, and 5.5%, or $171 million, on an end of period basis from the third quarter of 2009. Noninterest bearing demand deposits comprised 36% of total average deposits for the fourth quarter.

Net interest income for the fourth quarter of 2009 increased 1.3%, or $1.4 million, compared to the third quarter of 2009. Although average earning assets were down slightly between these periods, the net interest margin improved 9 basis points to 4.20%, from 4.11%, reflecting mainly a further reduction in the cost of funds. Funding costs benefited from the maturity or renewal in the current low interest rate environment of higher cost certificates of deposit from the 2008 campaign, as well as rate reductions on deposits from a special money market campaign earlier in the year.

Consistent with the past two quarters, interest lost on nonaccruing loans reduced the net interest margin by approximately 20 basis points. Noninterest income for 2009's fourth quarter decreased less than 1% or $200,000, from the third quarter of 2009. Deposit service charge income in the fourth quarter was down 3%, reflecting the impact of higher balances maintained in commercial accounts, subject to analysis charges. Bank card fee income increased 7%, reflecting a reclassification of fees from other noninterest income to bank cards, as a result of a change in processors, in addition to increased volume from seasonal spending. Trust service fees increased 3.5% from the third quarter, while fee income from Whitney's secondary mortgage market operations was flat between the periods. The other noninterest income category declined a total of $300,000 from the third quarter of 2009, reflecting lower investment and brokerage income, and the change in reporting bank card fee income noted earlier. These declines were offset by increased revenue from customer swap fees, a new product during the quarter.

Total noninterest expense for the fourth quarter of 2009 increased less than 1% from the third quarter. Total personnel expense for the fourth quarter decreased $1.1 million, or 2%, from the third quarter of 2009. Employee compensation decreased $2.1 million, mainly from reductions in both sales-based incentive plan compensation and share-based compensation on revised performance estimates. No management cash bonus was accrued in 2009. The cost of employee benefits increased $900,000 for the fourth quarter, related mainly to retirement plans. Occupancy expense decreased 7% during the fourth quarter from lower property tax, maintenance, and utility costs. Legal and professional fees were up $1 million, mainly as a result of increased legal activity on certain corporate matters. Loan collection costs, including legal services, foreclosed assets expenses, and provisions for evaluation losses, totaled $8.6 million in the fourth quarter, which is up $1.8 million from the third quarter. This increase was the main factor behind the overall increase in the other noninterest expense category.

Last quarter, you will remember that we discussed with you the results of our internal stress test. I would like to note that we are currently tracking at 85% of our base case for charge-offs in the first year. C&I credits are performing better than our expectations, while CRE charge-offs are meeting or slightly above our expectations for the base case. I will now turn the mike back to Joe Exnicios to discuss credit further.

Thanks, Tom. Just a reminder, we have posted supplemental credit data slides on our website. I will refer to some of these slides during my comments.

This quarter, we reclassified commercial loans secured by owner occupied real estate from the commercial real estate category to the C&I category in our loan portfolio detail. The risk characteristics of these credits are marked more similar to C&I credits because the repayment source is dependent upon the borrower's performance, not the real estate, though the collateral is real estate. We believe this reclassification provides investors with a better view of the portfolio and is consistent with how management views the portfolio. I think it is important to point out that Whitney's credit processes and disciplines that we have discussed with you throughout this cycle, have brought us to where we are today, and we feel comfortable about where we are. Early identification of problems and a disciplined approach to risk rating, allowed us to put into action our workout process and to aggressively deal with the issues.

For the fourth quarter, Whitney provided $39.5 million for credit losses. Down $41 million, or 51%, from the $80.5 million, in the third quarter. Impaired loans accounted for 75%, or $30 million of the quarter's total provision, as current appraisals in Florida and coastal Alabama continued to decline. The remainder of the quarter's provision was related to residential mortgage and consumer charge-offs. Total criticized loans declined $124 million during the fourth quarter. Upgrades in risk ratings removed approximately $100 million from criticized C&I and CRE credits. Most came from Louisiana and Texas, although all geographic areas contributed. Criticized loans in Louisiana, Florida, and Texas declined $52 million, $39 million, and $33 million, respectively. Nonperforming loans totaled $414 million at December 31, 2009, a small increase of $8 million from September 30, 2009. During the fourth quarter, we added a $30 million previously-criticized residential-related credit relationship out of Alabama to a nonaccrual status.

We continue to believe that the level of stress we are seeing in portfolios outside of Florida and coastal Alabama is different from what we experienced in those two markets. The ratio of nonperforming loans to total loans by geography and the breakout of nonperforming loans by geography is detailed on slide eight. At year-end 2009, loans past due 90 days or more and still accruing totaled $23 million. Up from $15 million at September 30, 2009, and not material. Loans past due 30 to 89 days totaled approximately $67 million, reflecting a $20 million decrease from September 30, 2009. Gross charge-offs are detailed on slide nine.

During the fourth quarter, net charge-offs totaled $54.5 million, or 2.59% of average loans on an annualized basis, compared to $61.9 million, or 2.86% of average loans in the third quarter of 2009. The majority of the gross charge-offs again came from the Florida market, mainly Tampa Bay. Residential related credits, mainly in Florida, accounted for 41% of the gross charge-offs and CRE credits again, mainly in Tampa Bay, accounted for 39% of gross charge-offs. The Florida loan portfolio in total accounted for 70% of the gross charge-offs. To date, we have charged-off approximately 30% on average of the original book value of our current impaired loan portfolio. The current book value, net of charge-offs, of the impaired loans at December 31, has been reserved approximately 15% on average. The allowance for loan losses was 2.66% of total loans at year-end 2009. Down slightly from 2.81% at September 30, 2009. And significantly up from 1.77% at December 31, 2008.

In the middle of the third quarter, the level of activity in ORE sales for certain types of properties, mainly condos, lots, and single family residences, increased and that trend continued in the fourth quarter. We believe our ability to sell these types of ORE properties at prices close to the recent appraisals, indicates to us that we may possibly be beginning to find some floors for real estate values. During the fourth quarter, we added $14.5 million to ORE, and sold almost $8 million. At this point in the cycle, we believe we have worked our way through the major issues in Florida and coastal Alabama. And we expect the portfolios outside of those markets to continue to perform in line with historical recessionary credit trends. We will continue the cleanup process throughout 2010 and expect most credit metrics should return to a more normalized level sometime in 2011.

I will now turn the presentation back over to John Hope.

Thanks, Joe. Let me -- I will wrap it up fairly quickly. Let me re-emphasize a point I tried to make in my introductory comments. 2009 was not a fun year. The pain wasn't a lot of fun. But I will tell you that we feel -- really do feel good about where we are today. Credit cost is not over. You all know that. And we think 2010 will continue to be a challenging year. But when you compare it with 2009, it is going to be considerably better. We believe our credit situation is normalizing. And we do not expect to have to report any more hefty provision expense. I think you should expect the quarters to be lumpy. I would encourage you to focus more on the annual results for 2010. We may have a lumpy quarter. Either way, good or bad, but we think for the year we are positioning ourselves, and before too much longer will be able to return to what I consider full-year profitability.

We will now open up for questions, and it looks like Kevin may be first in line.

(Operator Instructions). We will go first to Kevin Fitzsimmons with Sandler O'Neill.

Good morning, guys. Or good afternoon, actually. I hear what you're saying, John, about all of the encouraging signs on credit. Can you just help me reconcile a little, because I'm sure you all wrestled with this, the decision to take the reserve down. You mentioned a few times that 2010 is going to continue to be a challenging year, that it is going to be very lumpy, that in terms of provisioning, we still could be potentially kind of early in the income commercial real estate cycle, and the effect to some of the C&I. What gets you confident enough at this point to get over that hurdle to start taking the reserve down?

Let me -- Joe Exnicios may have some additional insight into this but let me -- I want to start, Kevin. First of all, let me say, we did not make a decision to take our reserve down. Let me walk you through the process. We have a methodology, we have talked about a discipline that we've talked about before, that we follow religiously, that we have every quarter since this started, and for us in the second quarter of 2008, we have followed that methodology, and not veered from it through the bad times, and now I think somewhat better times. There is a specific methodology, there are different parts of the bank involved and coming up with the various numbers, and when we complete our work on the reserve for the quarter, we come up with a provision number. That provision number is balanced off against the other factors, like charge-offs. We don't make a decision that we're going to come up with a certain provision or a certain amount of charge-offs and then manage to a result. Those are independent actions, and whatever they happen to be, is what you see. And I didn't know until the numbers were added up actually, that we were going to end up reporting a small profit. We followed that discipline, we followed that methodology, and we will continue to do that. We followed the exact same methodology in the fourth quarter, the same discipline that we followed every other quarter. The fact that it brought the provision -- the reserve down a little bit was an after-effect. It was not a plan or a purpose of the process.

Okay. That's -- I understand that. But just to go down that road, I would think the methodology has a certain expectation for the economy, and what the effect is going to be on certain sectors, and I would assume that it is fairly benign, with the outlook.

It actually does. There are qualitative factors that take that into account and we left those qualitative factors generally speaking in the same conservative position that they were in, at the end of the third quarter.

Okay. All right. Great. And you guys seem to go, make a deliberate effort to size up the oil and gas exposure, and the shared national credit exposure, and I know you've talked about that in the past quarters, but is that really just to size it up for us, or is there any specific concern or encouragement in those areas?

Kevin, what we try to do is when we get questions that are repetitive, we try to put the information out there, because it is an indication that there is an interest, so it is nothing more than just trying to make the information that the investor community seems to be interested in. And we're putting it out there. And our level of concern on any one of those portfolios is not more or less. So you shouldn't infer that.

Okay. Great. Thanks, guys.

We will go next to Adam Barkstrom with Sterne Agee.

Hey, gentlemen, good afternoon.

Good afternoon.

Joe, I wonder if you could go back through, I just -- you were talking a little bit fast and I didn't catch it, but I wanted to you make the point at least clear again to me. When you talk about the impaired loans, and you said that they were charged down by a certain amount, and I guess on an aggregate basis, and then additional reserves were on top of that, would you mind going through that, those numbers again?

Sure. Our impaired loan portfolio, the net book value is the result after charge-off on average of about 30% of the original contractual value. So we have charged-off approximately 30% of the original contractual value. Then you get your net book value. We have approximately a 15% reserve against that net book value. So we try to give that information out so that you get some indication. These are our most severely criticized loans, many are collateral dependent, so it is an indication of the impact of the decline in value that is collateral securing this loan. So we try to provide it in that basis to help give you an understanding of how far these loans have been already written down, and reserved for.

Okay. Maybe if I could shift gears -- actually one more question on credit, and then I have one other follow-up question, if that is all right. Now, you guys are not -- remind me, you're not really active users of TDRs or you are? Could you tell us what the balance of TDR is for the quarter?

Well, we don't have any. In anything Adam, that is in -- that would technically be a TDR, is in nonaccruals. So it is captured in nonaccruals and nonperformers.

Okay. Fair enough. And then last question, maybe for John. You guys did a capital raise last quarter. You've got tangible common equity levels of 8.2% now, pretty solid levels. I guess you're making the case in your comments here that if we're not there, we're pretty close to perhaps a credit inflection point for you guys. What is your current thinking on TARP repayment now?

Really, it hasn't changed, Adam. We need a couple of quarters of I think pretty solid credit improvement, and then we can go to the regulators and talk to them about repaying TARP. So if you just take that, maybe second, third quarter, would be the earliest that we would probably be looking at it -- and it is again, it is going to be up to what the regulators allow us to do.

Fair enough. Thank you.

We will go next to Jennifer Demba with SunTrust.

Thank you. Good afternoon. A couple of questions. First of all, what is your interest level at this point with credit trends moderating for you and FDIC transactions, and then I have a follow-up.

Jennifer, this is Tom. We are quite aware of the financial implications of those kinds of transactions, but frankly, we look at things, and for us, it has got to be strategic. We've got to have long-term shareholder value to come out of it. So while we would look at them, we haven't seen anything to date that we would be interested in.

Okay. So you're looking for something obviously in the core deposit franchise. Is your priority something in Louisiana? Would that be a higher priority than another market?

I think our highest priority would be in market. Not necessarily in any particular part of our market.

Okay. And then secondly, you had a nice margin expansion during the quarter. What are you expecting, Tom, over the near term, assuming no change in rates?

I think with no change in rates, and the fact that we benefited from bringing some of those CDs and money market deposits down, while we can improve somewhat, I think it is going to be basically flat until there is some interest rate action.

Okay. And then finally, can you guys spell out -- you gave us your loan collection costs for the quarter, versus the third quarter. Do you have that for ORE expenses specifically?

We could probably get that for you and get back with you, Jennifer. I'm not sure that I have that readily available.

Was it up sequentially, would you say, Joe?

Actually, it was flat, from the third quarter to the fourth quarter, Jennifer. I remember seeing that number. I don't remember what it is. But it was basically fairly consistent from the third quarter to the fourth quarter.

Okay. Thank you very much.

We will go next to Steven Alexopoulos with JPMorgan.

John, to follow-up on your comments and expect the quarters to be lumpy. With the criticized loans down 10% this quarter, do you think you reached an inflection point there or will the quarterly change in criticized assets be lumpy at this stage of the credit cycle?

Good question. I hadn't focused on it exactly in that angle. I would say that we would expect to continue to see some decline in criticized. I can't predict at what rate. But I think we've turned the corner on the level of criticized in classified credits. That's I guess the definition of the lumpy. If you got a $25 or $30 million credit that goes out of criticized or classified, and have you three or four of those all happen at once, that can create a different number.

Okay.

But I think you have seen the turn on that particular metric.

Got it. Do you plan to start accruing management incentive comp starting in the first quarter again? And if so, how much could that add to 2010 expenses?

Gosh, we've never gotten that specific. I'm not sure we want to disclose exactly how much, but I will tell you that at this point we are going to budget an incentive payment for this year.

Right. There is a formula that drives it, and that will determine how we accrue it. It is not evenly accrued.

But you will accrue it. Okay. And just a final question, regarding the comment to hold NIM flat, when I look at the cost of interest-bearing deposits, 86 bips, it looks like a bottom and it looks like the loan yields keep going down. Wouldn't you expect the NIM to be down? Seasonally it is usually down in the first quarter, but it looks like loan yields could take it a little further. I I don't understand the comment, I guess, on stable NIM here near term.

We just think the dynamics will work so that it will be stable. And we put so many floors under loans that they're pretty much working okay. So I guess I'm not sure why you would think differently.

Well, seasonally, you're usually down in the first quarter, where some of the noninterest bearing deposits move out. And on top of that, I don't see any room really to take deposit rates down. Okay. So you're saying stable.

I believe it will be relatively stable. Yes.

Okay, thanks.

Back to the question on ORE expense, let's see if -- we discovered a little detail we will share with you. Between the third and fourth quarter, ORE expense itself was flat. $800,000 each quarter. Collection costs was $1.4 million in the third quarter, $1.7 million in the fourth quarter. So an increase of $300,000. The legal expense related to credit was down $100,000 in the fourth quarter, from the third quarter, at $2.3 million. We did have an increase in ORE valuation expense, from $2.1 million to $3.8 million. Most of that though was related to the fact that we had an increased level of foreclosures in the fourth quarter.

We will go next to Jeff Davis with FTN Equity Capital Markets.

Thank you, but my questions have been addressed.

Thanks, Jeff.

We will go next to Kevin Reynolds with Wunderlich Securities.

Good afternoon, everybody. A quick question. Most of my questions have been answered as well, and I apologize if you briefly touched on this, but it is -- if you could, could you talk a little about how the competitive environment across your footprint may have changed, I guess, in the last quarter, last six months? Are you seeing previously wounded banks feel better and step back out to compete? Or is life getting easier for you or more difficult for you? If you could just sort of comment on that.

This is John Turner. The markets are very competitive because there is not a lot of activity in the markets. But we are continuing to make progress I think, particularly in our primary market, New Orleans, we highlighted in our conference calls, around our stock offering, that we had actually grown market share, and had taken the number two position in the New Orleans market, so we believe that our strategic plan that we've talked about often is a good plan, it is a plan that we've stayed very focused on throughout the credit crisis, and we think that it is paying us significant dividends as we continue to execute it. Having said that, again, we find the market for loans really in every geography that we're in to be very competitive, because it is just not a lot of activity that exists.

Okay. Thank you very much.

We will go next to Bain Slack with KBW.

Good afternoon. Just wanted to -- I might just have some clarification questions. One, I guess, John, just a couple of questions ago, I just want to make sure I heard this correctly, that you were saying the -- where we have probably seen the turn, you said on that metric, you were referring to the level of criticized loans?

Yes, that's right.

So then I guess another way to ask about the lumpiness is that -- is the lumpiness a factor of maybe what the law content of the sort of existing criticized MPAs might change over the next two to three quarters? Is that --

Yes, Joe can probably speak a little better to that.

Yes. I think that is exactly what we're talking about. The timing of the charge-offs is -- a lot of times it is tied to the receipt of an appraisal or some kind of an adverse event that you just really can't time. So when we refer to the lumpiness, that is really what we're talking about, the timing of the charge-offs. We feel like our impaired loan portfolio, we're constantly getting updated appraisals, we're following the valuation trends as carefully as we can, and we're carefully evaluating the appraisals that we are receiving, reviewing them very carefully, so we feel very confident with respect to where those most severely criticized and troubled credits are with respect to the collateral that we have, the extent to which they have been charged down appropriately, and also the reserves that we have established specifically against each one of those credits. The other thing is, is that, we mentioned in our press release that we had one credit in the Alabama market that became impaired during the fourth quarter. And even situations like that can have an impact on the figures. And the amount of reserve. And that sort of thing. It is a fluid situation.

Let me emphasize too, lumpy goes up and down. Good and bad.

Right.

And as we resolve some of these issues, if we've been overly conservative, it is going to free up some reserves. And I think there is just as much likelihood, maybe even slightly more likelihood of that being the case, as opposed to the other way around.

Okay. I just wanted to make sure I understood the lumpy versus the criticized, kind of that seemed more directional and I think Jeff's explanation just helped clarify that.

Just pull a number out of the air, you might see a $5 provision one quarter and a $10 provision the next quarter. We are going to have be lumpy until these numbers go down some.

And I guess a final clarification, I think earlier in the call, in the prepared comments, Tom, I think you were going over the tracking of the stress case, and I think what I heard here was that right now tracking about 85% of the net charge-offs for year one. Is that right? I guess could you clarify what year one is?

When we did the stress test, we looked at a two-year period, beginning January 1, 2009, through the end of 2010, and the losses, the way you compute it, the losses are not necessarily exactly the same between the two periods.

Right.

So we went back and looked at what the 12 months losses would have been, against what we actually charged off, and we're at the 85% of that, in the base case.

The base case, okay. And the additional comment you made is within that C&I is looking better than expected?

Much better than expected. And the various categories of CRE are either about on the base case, or a little bit worse.

And I guess, how does that match up with the reclassification you all have done with the owner occupied CRE and the C&I?

That is just a disclosure issue because that's the way we look at it. It doesn't have anything to do with the way we did the stress test because each of those categories were done independently.

Okay. But I guess when you're saying C&I tracking better than you expected, that includes the owner occupied CRE?

Because that would be part of C&I, yes.

Okay. I just want to make sure I understood it. Great. Thank you, guys.

We will go next to Michael Rose with Raymond James.

Hi, my questions have been answered. Thank you.

Thank you.

We will go next to Leo Harmon with Fiduciary Management .

Hi, good afternoon.

Good afternoon.

You all talked about your provisions being driven more by formula. And I just wanted to get a little bit of a sense of what was the biggest swing factor driving it this quarter. Was it really more visibility on the price of underlying collateral that lowered the severity of that, that gives you more confidence and that formula to lower provisions, or is it more volume of loans coming into the pipeline that was the bigger driving force in the quarter?

Well, specifically for the fourth quarter, it was valuation issues related to impaired loans. I think that probably accounted for about 70%, 75% of the provision expense. Roughly $30 million, I guess. The rest of it would have been, we've had some consumer loans that are charged-off during the course of the quarter, and as well as some mortgage loans that would have made up the balance for the most part.

If I understood your question though, it was what is the difference between the third and the fourth quarter?

Yes, particularly if you're looking at the same sort of macro factors, in that formula, what drives that number down so severely in that process, and I'm guessing that it is just more confidence in the pricing picture for underlying collateral that is doing that.

Actually, the pipe line of problems is shrinking. We have fewer new criticized and classified and fewer impairments to take on those that are migrating through the pipeline. So it is just -- the inflow has dramatically declined.

Okay.

We actually -- let me go back. What we told you at the end the third quarter, was that we were about to work our way through Florida. What you saw in the fourth quarter is that impact.

Okay. And then you all talked about the capital raised in the fourth quarter, giving you at least more of an ability to be offensive on the acquisition front. Can you talk a little bit about sort of size and scope, either from a geographical standpoint, or from the types of transactions you want to look at, whether they're whole bank transactions with guarantees or they're just deposit-based?

Well, to kind of back up a little, I think we are using the proceeds of the common stock offering first, to execute our strategic plan and for internal growth. And then we will look at acquisitions. And we have said that we prefer acquisitions of any type, within our market areas, or adjacent, so that we can manage them better.

Okay. And I would be remiss if I didn't wish your city the best of luck in the big game.

We were wondering if anybody was going to bring that up.

Go Saints. Thank you.

We will go next to Dave Bishop with Stifel Nicolaus.

Good afternoon, gentlemen. I think in your prepared remarks you mentioned the decrease in the criticized assets related to the improvement in some of the risk ratings an loan rates there. Can you maybe give us some more color there in term what was is driving that? Are you seeing more borrowability in improving loan to value, bringing more collateral to the table? I'm trying to figure out if that dove tails with the lower provision this quarter in terms of what is driving the improvement in the risk rating.

Well, it is a combination of things. When we talk about early identification of some of these weaknesses, these weaknesses vary, some are severe, some are less severe, and some can be cured by principal curtailment, loans being put on an amortization schedule where at a right-sized amount, you've got an appropriate debt service coverage. In some cases we are seeing situations where additional collateral to shore up opposition is helping. We've got, in the C&I credits, in some cases, it is companies just addressing issues that might be impacting their companies appropriately and returning to profitability and getting to the point where we're confident that it can be sustained. So it is a combination of things that -- what we have done, we have a discipline of identifying the issues as early as we can, trying to come up with plans of action. We try to look at events that are going to trigger positive things. Events that will trigger negative impacts, and we review these credits on a monthly basis, so that we can sort of stay realtime with respect to the progress that is being made. And as progress is being made, and some of these milestones get hit or achieved, we've got an obligation to upgrade the credits as quickly as we downgrade them, based on the risk involved in the credit, and the overall quality. So performance drives a lot of it. But in some case, we do have principals, or guarantors that have the ability to shore the credit up by either credit enhancements or principal curtailments.

Let me go back for just a second, in my comments, I tried to give you a sense of my comfort that things were really are getting better. The fact that we can't be specific in terms of the cause for the improvement in criticized and classified comes from the diversity of reason that is creating that. We are just seeing an improving environment on our credit metrics. And it is coming from different variables. It is coming from different geographies. It is coming from different industries. Our bankers and our customers are responding. And they are getting (inaudible) it is across the board.

Great. Thank you.

We will go next to Albert Savastano with Macquarie.

Good afternoon, guys. How are you?

Hi.

Just three quick questions. First on TARP, we understand the loan is to repay, but do you guys think you will have to raise more capital repay given you have already done a capital raise?

It is not our intent at this time to consider any additional equity, capital. If we were required to raise some additional capital, it would probably come in the form of some kind of debt.

But there is not any equity capital raise in our capital plan.

Oh, good. Very helpful. Thank you. And on the floor loans, is that floor amount around 5%?

Boy, it varies dependent upon the credit in the market. I think on average, it would probably be a little lower than that.

Okay. And then lastly, just Joe's comments about credit metrics returning to normal. Without giving some number, can you give us an idea of kind of what is a normal loan loss reserve level? Are we talking about down to the 1% range where you guys reached in 2000, or are we talking somewhere significantly higher than that?

That is a really hard question. This is not Joe, but again, that is a number we compute at the end, so my guess is that maybe not as low as it got before, but it really depends on how the loans are rated, and how the credit quality turns out.

I don't believe you are going to see 1% for a long time.

I would hope not. Very good. Thank you, guys.

We, too.

And that does conclude our question and answer session. I would now like to turn the back over to John Hope for any additional or closing remarks.

We appreciate your interest in our Company. I know our new shareholders have to feel pretty good at this point. I think we've closed today somewhere around $12.20. And with a slightly over 4 million shares traded. So the market I think responded well to the numbers. We really do feel good about where we are. We are coming out of the credit issues. We have maintained momentum on our strategic plan. And while there is going to be a little bit of cleaning up still to do this year, I think you can expect to see significantly improved performance for us going forward. With that, we will call the session to an end.

And again, that does conclude today's call. We do appreciate everyone's participation.