Trustmark Corp (TRMK) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's second-quarter earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation this morning will be a question-and-answer session. As a reminder, this call is being recorded.

It is now my pleasure to introduce Mr. Joey Rein, Director of Investor Relations at Trustmark. Please go ahead, sir.

Thank you. I would like to remind everyone that a copy of our second quarter earnings release and supporting financial information is available on the Investor Relations sections of our website at trustmark.com by clicking on the News Release tabs.

During the course of our call this morning, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We would like to caution you that these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties which are outlined in our earnings release and our other filings with the Securities and Exchange Commission.

At this time I would like to introduce Richard Hickson, Chairman and CEO of Trustmark Corporation.

Good morning and welcome. We look forward to visiting with you this morning. Let me get rid of a cough, I'm sorry. I got it yesterday from too many Board presentations. Good morning. We feel we had a very solid quarter with negligible noise. I would characterize the Company as high morale focused on long growth, very pleased with what we have accomplished in one quarter on our pathway into efficiency. We will have some comments and then we would enjoy very much your questions; discuss a number of areas.

I have with me this morning to help me add color to what's happening on the loan side. Gerry Host, who runs our General Bank; Louis Greer, our CFO, is here. We have a person some of you have met but may not have been on a conference call before; that is Bob Hardison, our Chief Commercial Credit Officer, who succeeded James Lenoir, who retired last quarter. Bob has been with the Company many, many years; traveled all of our markets; is in with customers and all of his credit deputies and has a very good handle. You may enjoy a couple of questions for him. Also Buddy Wood is with us today, our Chief Risk Officer. He will be able to answer any questions you may have about interest rate risk.

For the quarter, we reported $0.52, a little over 21% return on tangible equity and a 136 ROA. Very little noise in there. There are a couple of items that I will mention that more or less net each other out. I am going to -- because I think it's more representative -- take you to page five of our stat sheet and let's take a look at linked quarter. Because a year ago we had not acquired Republic Bank and I think it distorts the numbers somewhat. And you will get a clearer picture if you take a look at the second quarter versus the first quarter or even the fourth quarter of last year.

Taking a look at page 5, we saw some solid improvement in linked quarter performance. Net interest income was up $4 million, about 15%. Linked quarter earnings per share were up at 8% over a seasonal down first quarter. On the income statement, net interest income increased about $1.6 million. The net interest margin increased a couple of basis points to 391; I'll have some comments about that. Our loan yield increased about four basis points during the quarter. Yield on earning assets went up about seven basis points. Total deposit costs -- and this is probably the most significant thing in my mind today -- flattened out after many quarters of increase. And that was both in the 2.5 billion CD portfolio and in the 3 billion transaction account portfolio. And that's something that we had been predicting would happen. We weren't sure exactly when, but it wasn't just a June, it was an all-quarter situation that we feel good about.

A major for us in the quarter was that we saw, serendipity or whatever, a really good increase in credit quality. We had one large and a couple of small loans that were $1 million or so, loans that were on nonaccrual payoff and a large one go back on accrual. We also saw subduction in our substandard loans and this produced an excess under the methodology that we used to measure loan loss reserves. We had a reasonable month on net charge-offs and we saw loan growth and we had a net back which was released from the loan loss reserve, about $1 million. Under normal conditions, we would expect to be reserving $1.5 million to $2 million pretax with loan growth and normal net charge-offs. So, that was a positive. It was not a change in methodology. It was using the methodology which we adopted from the interagency regulations in December. And we will talk about that more if you have questions about it. We still feel we are particularly well-reserved and we will talk about that with you also. And we're going to tell you about that relative to the mix of our loan portfolio.

Non-interest income had a very good linked quarter; up $2.3 million. Our insurance agencies and our wealth management group have some momentum. They're focused, they're calling, they're getting new business, they're competing well and both growing at good percents.

Mortgage banking showed a decline for the quarter. And it's principally hedging ineffectiveness of about $1 million. And if you have further questions, Buddy will address that later. But it's essentially the ten-year moved up so fast that there's just no way to protect that ineffectiveness. But remember that move was almost 40 or 50 basis points and that we've been hedging for well over a year and been extremely successful. And although had we not been hedging, we would have had a non-cash gain. We think that adds charge and we are committed to hedging and we feel very comfortable that there's no flaw in the hedging. We've worked over it very carefully during the quarter.

Our mortgage group actually originated during the quarter about 400 million in loans versus 300 million in the first quarter and this was seasonal. And we feel because we're solid tremendously well-respected in our markets, we do not handle subprime, that people were turning to us. We think our branding in the marketplaces that we're in helped us there also.

Our pathway into efficiency really made an impact, more than we thought it would, in its first quarter. And we have some good news for you for the remaining of the year on that. Non-interest expense actually declined $600,000. Salary and benefits declined about $300,000 and we actually reduced FTE headcount quarter end to quarter end 35 FTE.

Services and fees declined about $500,000 and other expense was down about $100,000. Relative to our pathway in efficiency, which our CFO, Chief Technology Officer and Chief Risk Officer are working on, we identify approximately 70 items running from $5,000 up to $300,000 that were either vendor-related, that are reduced fees immediately, discontinued products and services that take place immediately, and some in particular related to check imaging and Check 21 that I will talk about that are very significant.

That number that we feel on an annual basis not annualized for the remainder of this year is 2.5 to $2.8 million. Right now it's annualized at about $3 million. These are not compensation expenses; this is other expense. So that is a significant lick to what I believe is about 100, $105 million number on an annual basis.

And that's the beginning. We are now beginning reengineering in various areas where we will use software that we think will add to efficiency, remove paper. The big plus in the quarter related to movement to imaging. We started early in the quarter sending our transit cash letter electronically to the Fed. We picked up our two day items. We also picked up what they call bumps and lates and whatever. And that had a very significant impact on us. We actually lowered our average cash due from, which is a hard cost, by about $50 million. You see it dropped down under $300 million and we feel that's permanent and could go lower.

We also did a couple of other things that will be important going forward that took place mid-quarter. We're using the card identification system in a number of our branches which allows the branch to run much later before closing out the customer and sending that electronically directly to our operations center. We did that eight months ago in Houston; four or five months at Florida, but we did it in northeast Mississippi in the beginning of the quarter and in Memphis toward the end of the quarter. That allowed us to remove an airplane courier every night that was running in excess of $500,000 a year.

It also allowed us to reduce proof department a dozen or so people. So that makes a big impact when we move that direction. We are looking and we'll be bringing in southern Mississippi -- which is a high transaction area like Memphis -- the Delta and are assessing the gains and losses relative to the Jackson area. And we'll do whatever is most economic relative to couriers versus what we pick up and ease of operation. Also there's some savings there when we move from our major correspondent bank with a cash letter with cash items, which was charging us more per item than the Fed was charging us on electronics. We are anticipating being on the Fed's list to receive electronically next quarter. They've asked for a short break, but we're at the top of the list. That should also equate to some savings.

We're particularly fortunate with vendors during the quarter. We have negotiated with probably 20 plus major vendors, both related to the Internet, related to our loan underwriting, a number of other areas and they have come forth to help us get our efficiency ratio clearly back into the '50s.

We continue to work on compensation. I am pleased with what we're seeing there. We're re-looking at a lot of our retail models. We are questioning every model. We're looking at the computer screen and we're going to the branch to take a look. We're not just depending on our models. We are doing everything we can to reallocate lending positions from slow growth to higher growth areas. And I expect to see savings in the third quarter compared to the second quarter on salary compensation. We are seeing some move-up with insurance, wealth management, commissions, as those revenues go up and that's offsetting some of our core FTE drop, but that's coming to the bottom line as earnings.

On the loan side, if I could take you to page four -- if I could find mine. Anyone have a page four? Thanks. End of period loans increased $150 million. Commercial loans were up about $72 million. It was geographically dispersed. It was not related to any particular industry. We did see, for the first time, meaningful loans to us on the Mississippi Gulf Coast, particularly residential real estate construction and land development.

Overall we saw growth in our Jackson Metro area. Houston had a good month -- health-care, some real estate, some oilfield support. Memphis had a great quarter, principally health-care related. Southern Mississippi had a very good quarter. Drawdowns under lines of credit by larger customers, principally construction related; home piping company, electrical contractors, construction companies.

One of the things that I want to comment about is our loan portfolio we segregate broadly into three areas -- what we call commercial, which would be obviously simplistically a loan to a company, whether it's a C&I loan or a real estate loan or real estate construction. For us that's about $4 billion. And then in our consumer finance business, which is our auto company, our credit card company and our consumer lending out of our branches is about $1.6 billion. And then our home mortgage portfolio is about $1.1 billion. About $150 million of that right now is our pipeline moving through.

So we get back to that $900 million or so that is home mortgages that we've elected to hold on our balance sheet. We elected at the beginning of the year to let those fixed rate home mortgages that we were holding run off. They've run off about 45 million year-to-date. I think they're down 20, 25 million for the quarter. And they are yielding a low yield above what our incremental cost of funding is and are not adding any profitability, so we're letting them run off at what we anticipate will be about $10 million a month. So our loan growth at 150 million is a little better than it looks because we are now letting that run off because we can afford to do so. And we are refraining still from putting on our balance sheet incremental low spread business, whether it be bonds or home mortgages.

We, like everyone else, are unclear in which direction the Federal Reserve is going. Our commercial and consumer loans are growing at a rate with our expense control that are allowing us, we feel at this time, showing good solid earnings per share growth. We'll continue to do that, maintain our optionality and the flexibility. And we have the capacity, both from an equity generation and the ability of funding -- since we're using essentially no wholesale funding today -- to take advantage of perception that the yield curve might revert. But we are not planning that it will. In our planning we are holding rates flat for an indefinite period of time. We think that is the most conservative way to do it. And if we see a change we can react to it very quickly.

We did let investments come off, approximately another $100 million and those were low yielding. I mentioned that our cash and due from was down about 40 to $50 million. We feel that's permanent. Deposits were down. We are now picking and choosing our funding. We're not bidding aggressively on public funds and seasonal public funds ran off about $170 million; principally, the state and the Jackson School District, City of Jackson. That's normal, we still have the relationships. We have not lost no public deposit relationships. We have the option to compare that pricing to our Cayman branch or to the Federal Home Loan Bank, all of which we have collateral to use if we wish to do so.

The good news is that personal CDs, we had a very heavy renewal quarter. We were able to hold it flat and hold the rates flat. Relative to the forward yield curve, we actually improved our funding cost. We did take the opportunity both with downstream and correspondent Fed funds, which was our least expensive source of alternative funding during the quarter, to cover any needs that we had.

Finally, during the second quarter, we opened two branches -- a great location in Memphis, out east of Germantown on a street called Houston Levy, not to be confused with Houston, Texas. Also another branch in southwest Houston in Missouri City right in front of a new busy H.E. Butt grocery store. Recall that we opened another branch in Sugarland last quarter, about three miles north of there at the intersection of Southwest Freeway in 1960, in front of what will be a large new prototype Whole Foods store. We're the only branch in that center and we feel both of those will be great branches.

We have four more branches that will open this year; a new one in Western Hattiesburg, where we have great branding and a lot of growth; a wonderful center for commercial lending branch banking and wealth management in Madison, Mississippi where we have dominant market share. It's in the neighborhoods where the best building is going on. We expect it to be very positive. We expect to open one new branch very close to the Compact Center in Houston and open one other branch in Panama City, Florida in a dense subdivision area.

We still continue our branch process. You know we've opened about a dozen branches in the last year. We've closed a number of branches. These new branches are staffed. The Houston branches are staffed with excellent people who have experience in the neighborhoods. We have found that we have been able to hire these retail people. They're eager to come to work for us. We have a good retail reputation in Houston and feel very comfortable with that. As an aside, I find it interesting -- I looked back ten years, because you would get some question about our branch expansion program. There are probably six or eight other branches on tap in Houston, Florida, principally.

In 1997 we had about 120 branches. Today we've got about 160. We have opened about 25 in that period of time. We've closed 32 during that period of time and acquired 45. So out of our branch system of an exact number here, 157; 69 of them we did not have 10 years ago. So 44% of our retail franchise is practically new. And we plan for that to continue. And we plan to control our costs in doing so, work through our models but we think that is key to continuing to grow core deposits of which our non-interest-bearing deposits are approximately 20, 21% of total deposits. And we want to maintain that ratio.

Thank you for listening to me. I think it was a very good quarter. We would be very happy to discuss any items for you.

(OPERATOR INSTRUCTIONS) Charlie Ernst, Sandler O'Neill Asset.

Good morning.

Hi, Charlie. How are you? Thanks for your call.

Good. The question on the hedging costs versus the write-up. And I don't think it was this way last quarter but historically I think I remember that your write-ups and write-downs tended to be bigger than your hedging effect. I was just wondering if this quarter the hedging effect was bigger than --

Are you talking about decay and adjusting to fair value on the (multiple speakers) --?

Yes, I'm just talking about the fair value.

Let me [let] one of our fellows cover it for you top to bottom and (multiple speakers) [get that answer] for you.

That's not the question, Richard. The question is are you guys hedging more now for higher rates than you have in the past?

Are we hedging more now for higher rates than we have in the past?

This is Buddy Wood.

Just give an answer, yes.

The hedge is not geared like a day-to-day traded position with an outlook for interest rates which, as I follow your question, would say that perhaps we established a hedge with a specific direction. What we found, though, is that in the amount of the hedge that it required for us to avoid a larger move of interest rates like 50 basis points, it is important that we have an adequate hedge. And when short-term moves the 10 year, which is primarily the market instrument that our futures and options are baked against, move as rapidly as they have in May and in June. And in fact, it was only on four days during that period of time that we saw that one day rapid move, which the customer behavior on the underlying asset just doesn't respond in that rapid a period of time. So, it's not an outlook of interest rates as much as it was a very unusual high spike series of events in the 10 year that occurred in the second quarter, especially on those four days. Is that helpful or is that still unclear?

That is helpful. And Richard, can you also just talk about your current capital level? Something you've said for awhile now is when you feel like rates are better, you can add borrowings and sort of relever the balance sheet a little bit. But when you look back over your history, you're at sort of lower levels of tangible capital. And so I was just wondering how much can you really relever given where you currently are?

Well, if you take a look in our bond portfolio, Charlie, if we don't do anything it will be, by the end '08, $500 million, round numbers. So that's coming off significantly; $30 million a month. We are removing these 15 year mortgages which have been on our books for three, four, five years at $10 million or so a month. They require half as much risk-based capital as a regular loan. Our earnings, when you take our quarterly earnings and you take our dividend, that throws you still in the range of 15, $16 million a month of tangible -- a quarter, excuse me -- tangible equity for loan growth. And you know, we repurchased in capital management about 950,000 shares of stock in the second quarter and I think it costs about $25 million. We feel there's plenty of capacity in equity generation and continuing deleveraging of unprofitable asset, bonds and 1-to-4 home mortgages that we don't see any problem at all.

Okay, because I guess if your capital was building, then it would seem to be a more -- accurate is not the right word -- but understandable statement. But since your capital hasn't really been building and you're at the lower levels of your tangible capital historically, it just surprised me that you think you can lever up a lot more.

Well, our maintaining capital flat has been at our option. We have -- if you forward move us and you take our total equity generation at our high rate of earnings, 140 basis points on ROA, then we can generate tangible equity and therefore total risk-based equity very quickly. And we are way above anything that's well capitalized. So yes, we are managing our equity, not wanting to have what we would call at this time excess. Our tangible equity is about [6.6, 6.7], our tier 1 risk base is a couple of basis points, [11.1, 11.2]. And our numbers say with our projected loan growth -- you know, our loans are going to grow 5 or 6%. They may pop up one quarter but that's our solid quarter in and quarter out goal, our commercial and consumer loans. We don't see that as a problem, Charlie, in our model.

Now, I don't know how many hundreds of millions of dollars worth of bonds we can buy but it would be more than we'd probably want to put on our balance sheet. And Buddy or Louis, you want to comment on that? Am I clear and making sense?

Richard, I think you're very clear and one of the things we've really modeled is to model our capital generation on an ongoing quarterly basis (multiple speakers) --

We're out about three years.

We're out three years and that's with what we feel like is good earning asset growth which is made up of loans. As Richard has mentioned, running off of securities through '08 and feel like that we're [only] well capitalized and would be able to generate excess equity if we choose to do so, not buying back stock. And we model that out for three years and feel very comfortable in our capital ratios.

If for some reason we were ever short of equity, I don't see that as a problem with our credit rating. Our excess to subordinated debt, which we just did trust preferreds, whatever. But we don't see the need of any borrowing right now.

Great. And I'm (multiple speakers) --

Things could change, Charlie, and we'd say, wow, that's a -- what a wonderful thing. We need a little more equity.

Right. I'm not trying to suggest you guys are short on equity. It's just you're operating in a lower part of your historical range. But anyway, thanks a lot. Thanks for your interest.

I would just add that the amount of leverage that we're talking about is really the 20% risk based capital area which allows us easily a $1 billion of additional asset growth and still have peer level tangible equity. So before we even move into what you're recognizing is that on a peer comparison basis, all of the alternatives of tier 1, tier 2 that we are significantly below our peers are available to us at very attractive interest rates.

If you look at some of our peer group, Buddy, they're pushing it on up around 8% in tangible. That's not our goal. We think return on tangible equity is an important ratio along with free cash flow and earnings per share and you're seeing us at a projected bottom but we don't anticipate letting it accelerate up above the meeting of our peer group.

John Pancari, JPMorgan.

I wanted to see if you could give us a little more color on the increase in the loans 90 days past due. I know we saw a pretty sharp increase there. Some of it from the [JMA] stuff but I wanted to see if you can just give us a little more detail there and then how that may correlate into your outlook for the performers going forward?

Let me take a look at that and we'll let either Gerry Host or Bob Hardison. It says loans past due 90 days. June 30, 6.5 million, '07; June 20, 6.5 million, '06. What was it quarterly, Bob?

I don't really --

Richard, I can comment on that.

Do you have -- what is the quarterly number?

For the loans that we hold on our balance sheet, which is a 6.4 compared to 3.6, increased about $2.8 million. There's two primary loans that make up that increase so it's not a condition of all loans; it's primarily two credits that make up that increase. And then for the service Ginnie Mae loans, the accounting world came around and made us take loans past due that we service and put them back on the balance sheet. They increased about 4 or $5 million for the quarter. Remember those are off balance sheet loans.

John, I'm looking at this number that was included in the portfolio 90 days past due, 6.5 million a year ago dropped to 3.6 and then back to 6.4. I'm going to ask our Chief Credit Officer Bob Hardison if there was anything that he can recall or is that just normal fluctuation? It's not a big number. Was there anything out there, Gerry or Bob, that you recall?

No, it's normal. It will move around from quarter to quarter. The primary difference is that we have to struggle with all the time on the various reporting is the fact that, as Louis said, we're required to include these Ginnie Mae's that we have that there is an option to repurchase. It's an option, not an obligation. And accounting rules, as Louis said, make us include those. And that number went from 8 million in December to [11.2] million in June which it always sorts our 90 day past dues and we just have to back them out. Our corp -- just past dues from corporate owned loans increased some but it's really just a timing thing. From month to month it will flow up and down.

John, let us comment on subprime all day our home mortgage portfolios. We have virtually none of those two types of loans. Any exposure indirectly that we had to those loans we've addressed and we have essentially no level of past due in that 900 million that we have on our books. It's seasoned, it's been there for years. It's reserved against at about 20 basis points and we've had no losses in it. So I don't see -- if anything right now, credit quality looks extremely good because a number of things happened that we were working on last quarter.

Okay, that's helpful. And then on the loan side, just one question there. I wanted to get your comfort with your loan growth outlook. We saw some really good growth this quarter, particularly in the land to construction portfolio, which is about 6% growth there annualized. In light of the slowing production to homebuilders and land and construction loans in general across the market and for the bank space, I wanted to just get a feel of your expectations on loan growth in that area and how that can impact total loan growth going forward, if we should expect a more modest level?

We're seeing in July on the commercial side and the consumer side what we saw in the first quarter month today. We were up about $20 million in our centrally underwrited home equity program. Lines were actually up a little over $100 million; usage under them about 20. Our auto business is going very well, principally because of issues that a large competitor is having to the west of us. We've been able to pick up very high-quality paper at [8] paper or [8] better paper; [8] better than [8] paper, if there's such a thing at good rates. In this auto portfolio, let's say it's up, Gerry, how much year to date?

We're up -- well, just for the quarter we're up 50 million.

But for the year? Bump it under 100 million --

Under 100 and that's net of the normal (multiple speakers) --

See, that portfolio is today about $780 million. It's already paid off 200 million this year. It just pays off at a 25% rate or so or even greater. And so it allows us to put good earning assets on the books that are [century] written to work in cross selling. It gives us some fixed rate at good fixed rates and if rates turn, it will go away in a hurry because people are trading cars and whatever they do with cars very rapidly.

Gerry, you want to comment on the loan growth that you're having? Our pipelines, we have been seeing a lot of approvals that are just beginning to fund up. I'm going to turn to our President of our general bank, Gerry Host, a minute, John, and let him go down particular things that he's doing or seeing in any category.

First of all, let me preface the growth comment to something that we tell our presidents and our lenders consistently and that message is we will not sacrifice asset quality just for loan growth. And we've been very consistent with that message. I think we have done, though, as Richard mentioned earlier, we've realigned some of our stronger lending resources into markets where we think there is opportunity. We began this process last year, continue it through this year and I think we're finally starting to see benefits from that process.

The growth we've seen in this last quarter has been primarily out of our corporate group headquartered here in Jackson. However, the loans that they're making are in other broader markets with customers that they've done business with for many years that have moved outside of this market. And those are relationships here -- that are centered here in Jackson, people that are doing business in places like Memphis, Baton Rouge, even some Dallas operations that we are seeing.

We've also seen, very pleasantly, from our North region -- and that's the Memphis group -- some increase in growth there. And I think that's a function of having strengthened our lending staff, purged some of the weaker lenders that we've had so we become more efficient and actually moving one of our most successful presidents from one market -- a market that does not have the same growth potential -- up into the Memphis market which has increased our calling efforts there.

I think bottom line, what's happened is that we have put a tremendous focus throughout this Company on growing quality loans from existing relationships and by taking advantage of some opportunities with some disruption that we're seeing because of some consolidation. And it's keeping your nose to the grindstone, being consistent and persistent, and it's beginning to pay off.

Talk about the Gulf Coast and Southern Mississippi and what you're seeing.

I was headed there. We are pleasantly -- and for the -- it's been two years since Hurricane Katrina hit the Coast. First economic impact of course was an inflow of money into those markets that created tremendous deposit growth. We did establish a branch location down there and that branch has grown at a rate greater than any other branch we've opened in the rest of the system.

What we are pleasantly surprised with is the fact that in this last quarter we are finally starting to see businesses that have been utilizing the cash available from the storm, have used up that cash and are beginning to draw against lines that they have established. So we're starting to see a fund up in lines. We're starting to see some commercial development. We're starting to see some residential development north of interstate 10, which is in a much safer zone. We've started to see the casinos have reopened their doors which has brought new workers to the area which has increased the need for homes and for ancillary services.

And it's not happening just in those bottom six counties. We're seeing new activity in markets like Meridian, Mississippi, Hattiesburg, Mississippi, McComb, Brookhaven, and all of it has to do with the economic activity that is taking place as a whole in Southern Mississippi.

Okay great. All right, thank you. I'll stop there.

Thank you, John.

(OPERATOR INSTRUCTIONS) Brian Klock, KBW.

I think some of my questions have been answered already but maybe a follow-up on the Gulf Coast color you guys gave. The deposit runoff that you had, about $230 million in time deposits that ran off, I know you mentioned some of that was some of the seasonal fluctuations.

Not some; about 80% of it.

Okay. That would be -- would the rest of that be the Gulf Coast customers that have been utilizing those deposits [then will] start building?

No, you see we only have one branch there actually within a couple of miles of the water. We did not see any shrinkage other than public in Southern Mississippi. We've got about 1.6 billion of deposits. It held very stable.

As far as those public funds --

Let me make one other comment. [Arch Stevens], who is our President down there and has about ten markets, he feels that the rebuilding has taken place in the Laurel's and Hattiesburg's and Brookhaven's and McComb's. These are the towns with 30 to 60 people, 120 or 150 miles off the Gulf Coast. It's really not much in the way of towns between there and the Gulf Coast. He feels his deposits are more permanent deposits and they migrated very quickly from DDA into transaction and CDs. I don't think in the markets we're in, other than one branch in Biloxi, that we're going to see much more disintermediation or those go away. We don't really know what's (technical difficulty) [going to happen with] deposits closer to the ocean. We don't know whether they will go into home rebuilding or how long it will take. But that's not something that we were the beneficiary of to a significant degree and that's not something you'd expect affecting us negatively in any way.

Gerry also commented to me that normal slowdown in deposits is against the seasonal high and income taxes were paid and they'll build back up. So, no, we've not seen any growth in core deposits but we have not seen any significant shrinkage either.

Okay, so between the next two quarters we will see those deposit balances go back up again?

You should. Yes, yes.

And I guess (multiple speakers) quarter of expense control, you mentioned there was a 35 count reduction in FTEs but there were two branches open. So were those employees for the two new branches open already in a previous quarter?

Well, you know, that's a net number and we might hire 400 people a year, so at the end of the day for years, for years, Mr. Host and I together have approved any individual hired into this Company who earns $40,000 or more, whether it is a new position or a replacement. And we talk about each of those and we're both cognizant of it and we debated with area heads on 40,000 and under. He does that himself with a staff that looks at retail. We are very conscious in our risk management areas and where we can consolidate and still give service we do so. We are hiring a number of people each quarter but we also had two or three senior people retire, of which we have not seen the benefit at this point because they retired June 30 and they had vacation pay during July, but we'll see some help there also. And one Chief Credit Officer and the other Chief Credit Officer who was already aboard and asked in and we replaced our CFO internally and our Chief Credit Officer internally. So those things, if we're constant on that, we work diligently to replace every job from within. And that will generally save a lot of money down the line and will generally create opportunity for three or four people down the line. Gerry, you want to comment on what you're doing under $40,000 or anything like that?

Yes, I think what we're looking at it is we have been -- we have had for a number of years a branch staffing model. As you can imagine, that's where an awful lot of our human resources are allocated. So a couple of things. Number one, we constantly look at the configuration of our branches -- where they're located, where they are in their lifecycle and where we need to be with new branches and then how we staff them. We are using a new branch design that allows us to have people multifunction, both opening accounts and handling teller transactions and makes us more flexible and more efficient, we feel.

Secondly, we have been using an FTP based staffing model. We have resigned that model and made it more specific so that we can look at staffing levels on a 15 minute incremental basis in an effort to staff our branches in accordance to when our customers are there, peak time staffing versus slow times and middle of the week. And as we refine that process I think we can get, if not necessarily the number of people we have hired down, the number of hours they're actually working. So we think there is some room there and we will continue to work on that.

I guess with the four branches you plan to open here for the rest of the year, I guess, I'm not sure if I missed it earlier but what sort of is the timing when those will be opened up and I guess with that --

Let me (inaudible) your question.

Okay and just -- I mean have those FTE's been added yet and they are in training now? Or those are going to be added with the branch opening?

I think when you're looking out 2,700 associates -- and take me in the right way -- we probably have two or three branches in process of closing, consolidations. I don't think you're going to notice any impact within our Company of additions from us opening the four branches in the remainder of the year. It will be negligible. We likely overall in a retail bank would not add any people. We are always in a re-shuffling, efficiency, closing, remodeling, two-for-one consolidations, whatever, that I really think the cost of those branches, we've owned the land. They're being built. We're already carrying all of the land for the openings for '08 and that is the principal cost.

Gerry closed three in-stores, absorbed the business in Jackson without adding any people. We're finishing up the amortization of those three in-stores and I think it's actually going to be a 40 or 50,000 positive before the end of the year. So we're doing the same thing in Vicksburg, a number of cities. So we are always working with what we have. We just don't know if they're going to be 16 people in four branches that open; there might be two or three additions and they might be an FSR or a teller.

Okay, thanks. Just one last question. I'm not sure if I missed this but earlier on, Richard, in your comments you talked about that there could have been some noise, some non-operating items, that kind of offset themselves. Did you cover those already?

No, that was the recovery of -- in the loan loss reserve which was one and that was specific. We picked up 2.5 to 2.7 million out of our reserve and we used a [1.3 million or 1.4 million] of it for loan growth. And the net was there about 1 million.

Got you.

The other was the $1 million pretax hedge and they sort of offset each other. So we feel our reported numbers are essentially core. There was no other significance in there. We are very pleased. It was a very clean quarter, not a lot of onetime items of any kind that we're worried about replicating for the remainder of the year. One thing I want to comment on that no one's asked about yet and discussed, and that is this methodology which we were more or less on top of in an agreement with the regulatory folks that came out in December.

If you break our portfolio down, there is about 4 billion in commercial related loans. It's about 1.6 billion or 1.7 billion in consumer related loans and then there are these home mortgages. We reserve for our consumer portfolio on a 20 quarter average and it moves up or down based on current charge-offs. Principally that's our auto company. Our losses in there have been running in the low 40s and that's an escalation from the high 30s and we don't see that increasing. We run under the industry because of our branding and what we're able to do with the [200] to 300 auto dealers in our markets that we work with.

Our home mortgage portfolio is reserved very well. When you take our industry concentrations and add it to our reserves that we do for our 10 category loan grading system, our commercial loans are reserved for, what, in the 130 to 140 basis point range, Bob?

140.

And then we carry a qualitative -- we carry no unallocated -- we carry qualitative, by market, by product with how we rate risk with certain basis points of additional reserves, whether it's increasing, decreasing, neutral or unusual things that we might anticipate in the future. So we feel very good about our loan loss reserves. We have meetings that last hours that debate the qualitative. It's reviewed by KPMG and the comptroller of the currency and we are comfortable. You will see fluctuations under the new methodology outlined by the agencies from quarter to quarter and they should reflect the credit health and size of the loan portfolios.

Okay great and thanks for taking my questions. Thanks.

Gary Tenner, SunTrust.

Just wanted to make sure I got the right information on what you were talking about, Richard, on the cost savings. You were saying between 2.5 and $3 million of cost saves over the second half of the year versus second quarter?

I'm going to let our CFO address that since he's spending more than a little bit of time on it.

Yes, Gary, we started our (inaudible) initiative in the second quarter and we picked up some cost savings. But we do see a significant savings coming in this second half of the year. And I think what Richard had mentioned, the calendar year 2007 non-annualized, we're looking around about a 2 or $2.8 million. When you take those savings as he mentioned in the categories where there'd be contractual services or other, annualized moving forward we're looking at about a $3 million target at this point in time for what we have identified. We're continuing to look at re-engineering as we go in and look at areas and looking for deficiencies in process improvements, getting rid of paper, streamlining, et cetera, so that number could grow but right now that's our identification in our model that we've done so far through June.

You know, if we quantify this thing, we were about $69 million in total non-interest expenses in the first quarter; 68, a little bit under 69. That's an important number to us. And you know, we maintain flexibility in spending money that produces efficiency, software, whatever; technology, making changes in staffing, location of staffing. But I'd sort of tie it into that number, that nominal number there, that makes more sense to me. And we may find another million here in this quarter or whatever, but to tell you that a certain number that you should track in your model, if we start saving more money than we're thinking about, we may buy some technology that will do something in '08.

So I think what you need to be focused on is we plan to control at total non-interest expense number and we expect that we're going to push ourselves to continue improving operating leverage. And we sit down and we just get very simple. We look at total revenue growth by dollar and expense growth by dollar and the first one needs to grow more than the second one going forward.

We didn't enjoy being in the ditch in the first quarter. We had 30 presidents waiting in the Boardroom up there for Mr. Host to talk about loan growth and other factors for the day and we feel better than we felt in a long time. We feel like we've taken some bitter medicine. We have not put lower yielding carry trade assets on these books for nearly two years and we're now seeing some benefit from it.

Okay, guys. Thank you.

There appear to be no further questions. I'd like to turn the call back to Mr. Hickson for any additional or closing comments.

Well, I appreciate everyone listening in. I particularly appreciate those securities analysts that cover us, of calling and giving us some attention.

There is one thing that I would like to let you know that we filed an 8-K yesterday -- or today. Today, we'll be filing an 8-K. Our corporate Board made a decision to move our quarterly Board meeting from the third Tuesday to the fourth Tuesday of the month. It just gives us more time to put it together. Our Audit Finance Committee of our corporate Board meets the day before the Board meeting. It gives our directors more time to read and study information. They're a very engaged audit committee. And we will make that change that puts us back with a number of our peers. We thought would also be nice for the security analysts in that you have a rush right now and you have a number of companies you're looking at and it could be easier for you all also. So that in the future will be the fourth Tuesday.

We have nothing else and we're looking forward to another good quarter and see you then. Thanks.

That does conclude today's conference call. Thank you for your participation. You may disconnect at this time.