Trustmark Corp (TRMK) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Trustmark Corporation's third-quarter earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded. It is now my pleasure to introduce Joey Rein, Director of Investor Relations for Trustmark. Please go ahead, sir.

Thank you. I would like to remind everyone that a copy of our third-quarter earnings release and supporting financial information is available on the Investor Relations section of our website at Trustmark.com by clicking on the News Release tab.

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 release and with our other filings with the Securities and Exchange Commission.

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

Good morning. Thank you for joining us this morning. I have with me Jerry Host, who is President of our General Bank; Louis Greer, our Chief Financial Officer; Buddy Wood, our Chief Risk Officer; Bob Hardison, who is Chief Commercial Credit Officer. They will be happy to answer any questions that you have after my comments.

Trustmark had another excellent quarter, particularly considering the financial and economic environment that we have been seeing over the last few weeks. Net income totaled $29.1 million or $0.51 a share. We have many positive issues in the Company, and I'm going to add some color to what you have already seen in our press release and stat sheets. We will also talk in depth about credit quality, which seems to be the topic in the industry. It is on the front-burner with everyone.

First, I would like to take you, and I will be speaking principally where I know your interest is, and that is on a linked-quarter basis, and I would take you to page five in our stat sheets. Linked-quarter net interest income increased $1.2 million or 1.6%. We're seeing the effects now of our disciplined ALCO process of deleveraging bonds and to what has been still an inopportune time to reinvest. Our net interest margin has been stable at 391, and we are particularly proud of that, that it has been stable actually up from a year ago and holding firm.

Loan yields increased by 2 basis points, even though the Fed lowered the Fed Funds rate in the middle of the quarter. Our security yields were down about 21 basis points due somewhat to some prepayments of mortgage-backed securities which we welcomed with our rate. There was some minor premium that we had to write out, and we do not expect that to be there this quarter.

Our yield on earning assets was up 4 basis points. Our interest-bearing deposit cost actually fell 2 basis points. We were able to lower rates when the Fed lowered rates. We had heavy certificate of deposit maturities during the quarter. We were able to work through those. We think we're able to take advantage of our branding and dominance in our core markets and control that cost. Cost of interest-bearing liabilities in total increased 3 basis points.

Provision for loan losses was up. We reserved approximately $5 million. Net charge-offs to average loans was 20 basis points, still well within a mark of good credit quality and 13 basis points year-to-date. You will recall that our charge-offs last year were negligible and returning more to a norm of 2001/2002/2003. Despite this increase, we compare very favorably to industry trends.

There was no particularly significant charge-offs during the quarter. It was scattered across the Corporation, the largest charge-off being $500,000 related to a textile manufacturing organization. We're doing a lot of what I would call raking of Republic Bank at this time at very granular levels. We have about $700,000 in charge-offs there. I think the largest one was a couple of hundred thousand dollars, and the vast majority of them actually under $50,000. We're not seeing credit problems with loans that went through Republic's loan committee process. These were officers who had small loans in their own portfolios, and there was just not enough documentation there to pick up a $40,000 problem in due diligence. We think we're closer to the end of this raking of Republic than the beginning.

Other losses, we had a $250,000 loss on an ex-employee down in Florida on a home. We expect to see a partial recovery there. We have seen a minor increase in our losses relative to our auto company. Nothing significant, nothing out of hand. We have been in that business for years and years, and we are not subprime there in any area. We're pleased with what we're doing there and have actually due to our staffing and market dominance seen good increases there.

Nonperforming loans increased $17.7 million. We have no direct subprime exposure of mortgage loans. The one or two mortgage companies that we had that we banked wholesale have paid off. One in particular with about $20 million exposure, which is essentially what we had, is paid off completely. We do not have exposure there.

Our one to four portfolio we can comment again more granular, but it is in great shape. About $900 million. Principally no problems. There have only been two to three loans all year. The average credit scores are up in the 737, 47, 50. We feel very, very good about that. We're not immune to the impact of residential real estate slowdown. The increase in our nonperformings was principally two companies, one in the Panhandle of Florida that also does a lot of business in Birmingham and one in the Memphis area. These were both cases where we were with a number of other financial institutions. We do not have any significant amount of additional loans to larger builders like this that are heavy borrowers. These borrowers leverage themselves significantly and are paying the price for it.

Trustmark is a 100-year-old national bank regulated by the Office of the Comptroller of Currency and the Federal Reserve. We have very strong credit culture. We have credit deputies and credit committees.

I will tell you that a Company regulated by what I consider the best regulators and with a credit culture of ours are going to be among the first to identify a problem. I do not see significant losses from any of these credits. They are secured luckily for our case by homes that are finished or developed lots. We do not have a lot of houses that are halfway, a third or two-thirds through construction with these people. We anticipate bringing them into foreclosure and liquidating the property. We feel we are well reserved for those two credits.

We have been through our own reviews in commercial real estate, and we have also been through recent regulatory reviews, both horizontal and targeted. We feel that our regulators know well what is going on within our Company. We have had the same regulators for years, and they understand our credit quality.

We feel Trustmark is adequately reserved for what we understand about our loan portfolio. You have to segment our loan portfolio, and there are about $4 billion of commercial loans and commercial real estate related loans. Our reserve against those loans is about 1.36%. Our reserve against our consumer and mortgage loans is 0.58%, bringing our total reserve to 1.05%.

We grade each loan individually either with a credit deputy or a loan committee. We have specific criteria for each loan and each type. We have 10 commercial grades. We have set aside specific dollar amounts of reserves based on grade 1 through 10. Certain grades for past loans, four or five different grades, four or five different grades for what we reserve and recognize immediately with our methodology. We feel we are complying both with the SEC and with the inter-agency agreement that was posted last December by the regulatory agencies. We will be happy to answer particular questions that we feel that we would be happy to do so after I go into other issues.

Noninterest income was very good for the quarter, up $1.1 million. We had a good mortgage banking quarter. They are not down. They were at $1 billion this time last year, and they are at $1 billion now. They increased $700,000. The hedge worked. We would have been significantly impaired had we not hedged. We lost no money in the hedge during the quarter that was essentially neutral. This is now a year and a half we have been hedging our MSRs, and needless to say, we are elated that we began doing so. We believe we have moved significant risk out of the Company.

Every third quarter we sell our student loans, approximately $30 million. It is a very good business for us. We have been doing that for the last six or seven years. The dollars were no different from quarter a year ago. We saw a decrease in insurance commissions of approximately $900,000 from linked-quarter. I think that was due to a particularly strong second quarter to some seasonal things. We have a number of companies that there have been some premium changes as to when they would pay them. And also we have seen some settling back in premiums and insurance rates which we think long-term is very good for the markets that we're in on the Panhandle, Gulf Coast of Mississippi and others.

Noninterest expenses during the third quarter actually decreased by $1 million relative to the first quarter. Linked-quarter noninterest expenses were down $350,000. I cannot tell you how pleased we are with that, how proud I am of the management team and our associates for taking what is already a lean, well-run company and looking for productivity. Salaries and benefits, this declined $600,000 linked-quarter. We saw a big positive in imaging technology. Our ability to capture, send and receive images in check clearing process depletes our clearing career costs and expedited our funds availability.

We have taken our couriers out from Florida, Texas and Tennessee. We have taken the airplanes out of the air and really improved our situation there. In addition, we have reduced cash and equivalents by an average of $65 million year-over-year, and that is essentially money that we are not supporting with deposits or borrowers. It had a positive impact on our net interest margin and reduced staffing in operational areas.

We are growing out the image capture technology in our core banking centers in Mississippi. That will have further process in the first and second quarter of next year of reducing headcount. Also, we're now sending and receiving daily our transit letter with the Federal Reserve of Atlanta. That has been going very, very well. We were sending -- a few months ago we started receiving in early August, and we had no issues there. We put a couple of our largest commercial customers on capture technology in their offices. They are getting the hang of that. That is going well, and we will be moving further in that process.

Our efficiency ratio improved to 58, down from where it was in the '60s. We would hope that would continue. We are in a strong expense control mode and are working on a number of projects which we think we will see come through in '08 that will further help us control noninterest expense growth. On the income tax, we trued up our taxes, principally GO Zone credits from employers that we have hired in the GO Zone and branches that we have built in the GO Zone. Recognize our main core market, the Jackson MSA, is in the GO Zone.

Also, I am very pleased to announce that we were able to defend our market share in Jackson, and we are still between 37 and 38% market share on the June '07 numbers and feel good about where we are in particular since with our leverage position and get rid of low yielding assets, we have been able to during the quarter very much pick and choose the deposits that we want and moving away from higher cost deposits.

Let me talk about the balance sheet for a moment. We continue repositioning with our deleveraging strategy. Linked-quarter loan growth was solid, very good at 2.2% or $148 million. Commercial loans grew $182 million. Let me give you a sense of comfort about these commercial loans, and Bob Hardison can do the same thing.

Our growth in commercial loans was fundings principally in the Jackson market, the Southern Mississippi market and the Houston market, most of which was in the Jackson market with things like nursing homes, hospitals, owner occupied real estate construction, buildings built for major private or public companies headquartered here. No real expansion seen in residential real estate during the quarter.

Consumer loans increased $37 million. This is principally our auto company, and our disciplined decline in our home mortgage portfolio was about $72 million for the quarter. Geographically our loans grew $45 million in Houston, about half of that solid commercial real estate like long-term care facilities. About half of it was in commercial and midmarket commercial.

The Jackson corporate area increased $63 million. That is principally privately owned Mississippi-based core companies. South Mississippi increased $38 million, and Florida declined $4 million. We are seeing funding under lines of credit for structural steel companies, electrical contractors, plumbing contractors, many other companies that had been enriched from their initial Katrina that are drawing under their lines of credit. We are also picking up some business that we have been after for years and years in our marketplace because of our stability, our branding and having the same people in place for years. They are looking for folks they know to bank with.

So we are seeing this loan growth for a second quarter, and it's facilities that have been committed in the last couple of years that are now coming into place. We are also seeing some of our well capitalized solid apartment builders from the Jackson area moving down on the Gulf Coast and building lower income housing under government programs or apartments, and this is just a natural move for us down there.

We're also seeing some funding up under residential loans in the Biloxi, Gulfport area to what we consider the stronger borrowers there and principally borrowers from Jackson that have gone down there that are building houses. So there is nothing -- I am elated about this loan growth you are seeing the last couple of quarters, and I am feeling pretty good about the quarter that we're in. It is what we have been looking for and hoping for for well over a year, year and a half.

The diversified geographic portfolio, our Houston portfolio is now $785 million or 11%. Our Florida portfolio in total is $690 million, 10%, and our Memphis portfolio is right at $500 million or 7%.

We purchased our Florida franchise about four years ago. We did not arrive and start hiring people to make commercial real estate loans in Florida. [John Summerall] whom all of you security analysts know has been in that market for years. You will know from your visits with him through the years that he is a conservative thoughtful lender. The commercial real estate department that we have we feel is the strongest in the Panhandle and most stable. They have been there since the beginning. They know the market extremely well, and when we went into Florida, we were fortunate enough to retain the Board of Directors that had started the Emerald Coast Bank many years ago, and they are some of the premier top tier real estate developers in the Panhandle Florida. And I have attended our board meetings and they have too, and real estate has been a topic of conversation for three years down there, not just this year.

So I'm trying to let you know that we just did not hire a bunch of people down there to build a bank. We hired people that were there, that were in the bank, and we feel have taken advantage of a situation that was there. And we agree with you that sales are very slow down there.

But we have looked at our position continuously. We have had our own people in there. We have had targeted exams in there, and we feel we are well reserved today as we see the market. None of you know nor do I know how long the slow down will last, and we will continue to monitor that portfolio continuously.

Investment securities declined $92 million or 10%. We expect to see this to continue, and we will not reinvest until we feel spreads are adequate for the risk and the tenor.

Linked-quarter deposits were down $167 million or 2.5%. This is because we have the ability to optimize and control our funding costs. We intentionally reduced some higher costing deposits. Our last $50 million of brokered CDs matured during the quarter, and we saw no reason to increase those. We decreased again commercial money market of $50 million decline there that we elected to exit. Non-interest-bearing deposits, the majority of the decline was in commercial accounts. We haven't lost the accounts. This is a low point of the year with public. It will start building now this quarter, and we're happy to see some of our major corporate customers use their excess cash and move back into borrowing.

Short-term borrowings in Fed Funds we increased by about $225 million. We took advantage of the situation during the quarter, particularly when the ECB and others were putting tremendous liquidity in the market. We saw a lot of opportunities at the federal home loan bank below what we had-- we were seeing in the Fed Funds rate, and we moved into some of those deposits, which helped our margins and helped us overall in our funding.

Strategic direction. Our board yesterday gave their final approval of our 2008 to 2010 strategic plan. Our strategic plan is to continue both de novo and acquisition, expanding into higher growth and better demographic markets including Texas and Florida where appropriate. We will continue to vigorously defend our Mississippi markets, and we will continue to focus on revenue growth, efficiency and strong expense management.

We will continue our balance sheet deleveraging until acceptable spreads exist. We're seeing strong solid loan growth to offset it. We have a good loan pipeline at the present time that spread across the Company in all of our areas, except the Panhandle of Florida. We think that pipeline will be sufficient to supply us good loan growth in the fourth quarter. We have solid credit underwriting process. We continue to monitor our portfolio. We're still positioning for the future and seeing total expenses go down. We have opened 12 branches since 2006. We opened two in the third quarter. We've closed nine since 2006. We anticipate approximately four to five branch openings in 2008 in our highest growth markets, and we're reallocating human capital to those areas. We continue to work on efficiency and re-engineering, technology enhancements, vendor and contract management programs, human capital management. We reduced headcount 59 in the linked quarter.

We're challenging everything the status quo regarding expenses. We have a strong, flexible, liquid balance sheet. Tangible equity grew during the quarter. Trustmark is well positioned for this challenging environment.

That concludes my remarks. I would be happy to answer your questions or have my associates do so. Thank you.

(OPERATOR INSTRUCTIONS). Brian Klock, KBW.

A nice quarter. Again, on the expense side, it looks like the lower 59 FTEs was the main driver of the lower personnel expense linked-quarter. Was there anything else in there, or was it all basically headcount reduction?

It was basically headcount reduction. Louis Greer has got a comment on that.

Primarily headcount reduction.

We have been working with vendors, but there was no one thing in particular that did that with a vendor. We are just seeing the beginning right now of the efficiency on headcount imaging. I think that was eight or so, and we expect our branch capture to improve on that significantly next year. And all of this is coming through natural turnover. We have had no layoffs. We've hired a number of lending personnel, particularly in Houston. So we don't have any hiring freeze going on. It has just been a reallocation of people.

Okay. You did not talk about the plan for new branch openings. Should we expect there to be flat headcount for the next quarter to two, or should we see additional reductions going forward to next year's (multiple speakers)?

You know, we have been shifting people. I don't see any increase in headcount next quarter, this quarter from branch openings. We are working diligently and have most of the people on board in Houston that will go to the new branches we are opening there. We did acquire the downtown location in Panama City from Regions where it is a super good market for us and could be a couple of retail people there. We did buy a branch from Regions, which is an excellent location on Poplar in Memphis directly across the street from their the union planners headquarters there. We have sufficient people there.

So you're going to see us with a slow decline in headcount. But these are not expensive headcount that we are eliminating.

Right, okay.

Where we are having and can do so managers we're filling in the gaps, but I don't see us right now as a rubber band stretched out that has to be released in the fourth quarter first or second quarter.

Okay. Thank you. I guess with the interest income with all the turmoil going on and you are able to keep that flat linked quarter that you're a little bit liability sensitive from your sensitivity analysis in the queue. You talked a little bit about being able to move your deposit pricing down with the Fed Funds move. Maybe you can give us some guidance on where you think the margin would go here into the fourth quarter and start of '08?

Let it tell you what we're doing and how we reacted to the drop in Fed Funds. We have said we're neutral. You are saying we're liability sensitive. I am going to let Buddy Wood answer that question. Buddy, why don't you come down here so we can give you.

I think the differences in the determination of asset and liability sensitivity has to do with how short a period of time we're talking about since the Fed make their move. As we settle in with these changes, we will gradually see our liabilities being able to catch up.

What we will end up doing is we may stumble same-day changes in anticipation of the Fed move with as many liability categories as we could. But we're only talking about relatively small amount of changes because we keep those rates at very attractive levels, balancing the customer needs and the appropriateness for competitive positioning.

As we see resets of LIBOR priced and prime priced adjustments, which are not going to all occur in the same month, they are going to reprice at the end of a month, and they are going to reprice at the end of a quarter. We are going to start seeing those adjustments that you see when we talk about asset sensitivity, which is what we really have, and we talk about it on a shock basis. We're able to look at a slightly longer period of time than what we're measuring here. So if we're really talking about just an August event and we are just talking about six weeks later, we will settle in during the quarter.

The majority of our loans are asset-sensitive loans and will reset, but they just have a little bit of timing that goes on in here. So you're right. In a very short period of time, there is some liability sensitivity because you cannot move 50 basis points on a customer base in fairness to them or from a competitive point of view.

Okay. That sounds like -- (multiple speakers)

Margin. Buddy, do you want to comment on the margin, you know the continued deleveraging, the loan growth? What you're expecting relative to the net interest margin into next year.

You know, the good news is we continue to have a sub 4% investment portfolio runoff at 25, $30 million a month, and that is transferring into above LIBOR pricing in all of our lending categories. The funding opportunities that we take consistently are in our deposit base, and we are very fortunate to through this whole period of time been able to maintain a for majority of our customer base with the types of pricing that are felt here on, as they call it, Main Street, as opposed to the Wall Street pressure of commercial paper and LIBOR. We have not had to experience that.

In fact, as Richard mentioned, the Federal Home Loan Bank in trying to assist the market with the shock that occurred with high interest costs gave us an opportunity as well to take advantage of some sub Fed Funds pricing which we have been able to do and shift away from some higher cost funding that we had on our balance sheet that was at our option to reduce.

Okay. I mean I don't know if you have it handy, but do you have the dollar amount of loans that reprice either at prime or LIBOR? How much of that is floating?

The amount that reprices immediately is about $2 billion. The amount that will reprice during the next quarter probably has another 1 billion to $2 billion in there as well.

Okay. It seems like the fourth quarter, the asset repricing may actually put a little pressure on the margin before the funding side catches up.

I don't think it is significant enough to do that.

But, on the other side, the cash flow coming out of the securities portfolio could go into higher yielding loan growth has sort of offset some of that pressure if there is some.

When we look at it even under shock, it is just when you're talking about a $300 million margin, it is so small, Buddy says, Richard, I don't know what kind of system can get more granular than that. And our group is just very experienced people that have been running our ALCO model. They have been doing it for years. They are very accurate, and they can tell us where to cut deposit rates.

Okay.

So I just would not at this stage of the game let that interfere. I would just be looking at loan growth, security runoff and that would be the issue with it. And we don't see reinvesting at the present time unless there is some significant change that Buddy picks up on. But we surely have the ability, the capital, the liquidity and whatever to do that instantly if an opportunity presents itself.

Okay. I will just ask two more questions, and then I will let someone else jump on. Thanks for the details on the credit, both on charge-offs and the granularity there. When it comes to these, the two big NPLs that you have talked about already, the $17.6 million, can you give a little bit of detail on what kind of -- you said that these were construction projects in the Panhandle and in Tennessee. Now are these complete? Are these condos, or are they housing developments?

I'm going to toss that to Bob Hardison, but you know the interesting thing is we don't have any condo exposure. I mean I only know of one that we are in, and I think it is under $10 million, and they are two $7 million. I'm getting seven figures. And I think it is the two strongest balance sheets down there.

So we were just not in that business. We did a couple for directors, and they are all paid off and gone. But we did not do them ourselves. We got one of our large friendly competitors who understood the business and they handled that. But we don't have that exposure there. But I'm going to ask Bob Hardison to be as absolute granular as he can be -- we think we can be on these two loans.

Okay. The credit in Florida is to a homebuilder who is actually headquartered in Birmingham. He has or had quite a substantial operation in Birmingham in the single-family construction and development business. He went to Florida several years ago, and we banked him in a number of different facilities on a relatively small scale.

About 18 months or so ago, he came to us with a project that was a large development in construction line to build some, at that time for Florida, some reasonably priced single-family residences in Panama City, Panama City Beach. And the total project was about $10 million. We got a participant bank to take 30% of that, so our part was about $7 million.

These homes were presold with 20% earnest money deposits. The project proceeded about the time of completion, the slowdown in the Florida market hit. You had a lot of dropouts. Five of the homes did close. There were 10, 22 homes constructed, five closed, and so there are 17 homes left. They are completed in a nice subdivision.

What price range?

The price range that we have in the houses were about $400,000, and we are selling them initially in the 550, $600,000 range. These are 2000, 2200, 2400 square foot homes. But he had fallout. He had some backup contracts and for a number of reasons were not able to close on that. He had difficulties in his Birmingham operation that in turn spilled over into Florida, and as a result, he is unable to perform. We're in the process now of foreclosing on this project.

Talk about the other smaller exposures. It is not all in that.

Yes, and we have some other facilities with him. We have a house that he was building for himself. We have some additional lots independent of this particular development I have been talking about. He had a boat we had financed, and he sold the boat, and we were paid off on that. And I think that is about it.

And so, Bob, if you're sitting there, there is 22 houses in this development and they are all completed now?

Yes.

So on average the loan to value or the average loan per house would be about $320,000.

Yes, probably a little more than that, and we have some additional lots. The original development was 52 lots, and he built on 22. So we've got about 30 lots left plus the house.

If we reserve for an entire relationship like that and we have had offers on his various properties without -- some of them without a loss in them at all. But we're waiting and he is very cooperative with us at this stage of the game. It is a clear case where he overleveraged himself, and we do have no exposure in the Birmingham market. But he has a number of banks with a lot of exposure up there, and we may be ahead of the game, you never know.

We do not anticipate a bankruptcy filing here, so we expect to move through this relatively expeditiously and getting ownership of these houses and lots and proceeding with sales however we elect to do that. Just briefly the other --

And they are about how far from the ocean? A mile?

A mile.

About a mile. They are very attractive.

And I guess really it looks like if you're saying that the houses that have sold have sold in the 5 to 650 range?

Yes, they closed in the 550 to 600 range, the 5 did closed. They closed under the original contracts.

Okay. (multiple speakers)

(multiple speakers) -- is how long we have to carry the lots.

Okay. Got you.

Will you talk about --

Yes, the other credit is in Memphis. It is the -- we had a line of credit for a lot acquisition and home construction to the largest homebuilder in Memphis. He had an excellent year in '06. He was moving into '07, had a large lot inventory and a number of presold homes that were under construction for his customers. And when the subprime market had its meltdown, he lost most of those presold contracts by the by.

Our exposure we have seven completed houses and some lots. They are split roughly 50-50 into $3.6 million or so we have in that deal, and they are split roughly 50-50 between houses and lots. They are completed houses. We have looked at all of them. They are in decent subdivisions. Again, we will have to move through that. We do it expect a bankruptcy in this case, which will slow the resolution of this matter. But again we have looked at it, and we think we have it adequately reserved for that property and the exposure in the market. And so we will let that hand play out.

So is the 3.6 the total exposure to this builder?

Yes.

Okay. So between the two, you had $7 million in the Panhandle --

No, the Panhandle was about 12.

12, okay.

The total exposure to that Panhandle borrower but it is not all in the subdivision, it is some scattered home or two or lot or two or whatever scattered around.

Bob, would you talk about financing residential homebuilders in Trustmark, how we do it in the different areas and what you do, etc. A little bit of color on that. And how do we love with these highly leveraged banks with everyone homebuilders?

Well, by far and away, our largest single family homebuilding operation is here in Jackson in the Metro area, which we have been doing for a number of years with builders in this market, and we have a very good history with them and a very good track record with them. We have done some single-family lot acquisition and development in Memphis, so it is pretty limited.

In Florida we do not use our traditional approach where we would give people extensive lines of credit to borrowers in which to purchase lots and build homes because of the price down there. It was really about a one and two type situation.

This one in Panama City was an exception. It was a large project. When we made the Republican acquisition, Republic did not do single-family construction loans at all. Other than case-by-case, they did not have lines of credit to homebuilders.

We have since initiated that product in Houston, and we had a little bit of that with our Allied acquisition out there. But so far it is really not -- we have not -- we want to develop that market out there, but we have not made a big enough input into that area yet in Houston. And we underwrite them as we do normal type loans. Of course, we look at our borrower, know our borrower, collateral, where they are building.

Yes, Bob, do you use interest reserves for your construction loans, or is that on a case-by-case basis?

Well, we have industry norms we look at in terms of advanced rates on lots and on the construction part. We have margins that we adhere to that we do going in, yes.

I think the one thing that John Summerall has driven into us, and I think he has driven into you in his visits, is that he did his best to get equity in our real estate lending in Florida. And there were no significant charge-offs in Florida last quarter for us. We're reserving against individual loan downgrades, and we will continue to do so as that happens. I don't think we are going to see any kind of wave of losses down there just come bouncing out all of a sudden. I think it is going to be a long-term process in the Panhandle of Florida, just like the entire state of Florida.

Okay. And just -- (multiple speakers)

It's going to take us a long time to work through this. And I don't know what a long time means, but it is not going to be next spring. Now we have gone two years without a hurricane. We're seeing some relief on the insurance side. We're seeing boats come in there and buying houses or condominiums that are end users, and we're seeing tons of folks coming in from all over the country looking for some bloodbath to buy everything in some big discount, lease it all up and resell it in three years. But we are not doing anything with those people at this point in time, nor do I think they are being extremely successful.

It is just going to be there is a lot of liquidity behind the individual owners of lots or houses that we are financing for individuals in Florida, and we had a lot program, and that is a significant part of our exposure in Florida. We are updating these loans. They are moving to amortizing. They are being renewed for some doctor or guy from Atlanta or St. Louis or New Orleans or Jackson, and they are being put on amortization schedules. So they know they have the house, but these are low score people. So we will see what happens. Anything can happen, but we are really close.

John and his people and Bob, we know what we have in Florida. And we're all down there constantly, and we're all down there during the lending process of the last four years.

Okay. I guess one last question, and I will let someone else get on. Out of the $1.2 billion in total construction and land development, how much of that is in Florida versus Mississippi? Would it be around the same? You gave the breakout of the total loans. Is it along the same breakout?

We would have more in Mississippi. I don't know that we have got the exact numbers on that. We have it available. I don't know -- we don't really break it out quite like that. We have a different way we look at it. But the preponderance would be in Mississippi and in Florida. As Richard said, we have to be careful how we compare Mississippi to Florida because some of the lot loans we have there are to individuals and not part of a homebuilder, whereas in Jackson most of our lots are to homebuilders, and the construction through homebuilders in Florida, they are to individual borrowers. So we have to look -- we look at it a little different way.

We may have a very strong borrower from Jackson that has one investment in the Panhandle of Florida that we're financing, you know, mid seven figure, high -- anywhere from 4 to 8 or $10 million, and it is not going to effect their operations. So when we look at it, geography just does not handle it.

We have been very fortunate in following since we're dominant in this privately owned market of 200, 250 companies in Mississippi, gosh, they will go to (inaudible) Texas and build an apartment, and we will finance it from here. And they are on the Gulf Coast. They are in the Panhandle. That is their backyard.

Great. Thanks for the detail. Appreciate it.

Peyton Green, FTN Midwest Securities.

A couple of questions for you. I was wondering the deposit fees slipped a little bit year-over-year, and I was just wondering if there was any opportunity with the drop in rates that the earnings credit might change and you might get some benefit going forward?

Buddy, did you hear that? Would you answer that? Buddy Wood will answer that.

We have made a small adjustment. It is in the competitiveness of earnings credit ratings. We're not going to make a dramatic move just because the Fed did. One of the things that Trustmark's customer base relies on us to do is to not just take short-term major moves. And so we might be able to get 20 to 30% of a move in a short period of time. If it is consistently down as it was several years ago, we will get the full benefit of it. But it will take a little bit of time.

Okay.

Buddy, talk about like $2.5 billion in CDs. Some of it is on auto renewal. What, about two-thirds or something?

Exactly. Our customers again whether we talk about commercial or consumer expect Trustmark to maintain a competitive and yet probably not the highest player on an ongoing basis. But we also don't drop the rates from underneath them when we're having these cyclical or business cycle changes.

So the 80% then Richard is referring to are people who roll over consistently in our CDs and do it at good rates, but don't force us into doing specials as much or as often as you might see some other people doing it. And, at the same time, we do use specials, and you will see them in our program. But they are relationship based. You do need to have checking accounts with us in order to get our best rates, and that helps with some of our growth strategy.

Okay. And then the buyback was fairly inactive in the third quarter, and I was just wondering I mean with your strong returns, that implies a fair amount of capital building. At what levels do you start to get interested in buying the stock back, or should we read into this that there's going to be more M&A opportunity for you?

Well, we did not do any stock buyback in the quarter. It would be mildly accretive if we elected to buy back. At this time I think we built $22 million of tangible equity. We are going to look at the opportunities relative to a buyback. But if this situation continues with the credit issues, let's say three times now we have made acquisitions of companies that were, let's say, troubled with their credit quality one way or the other. And at that time, it was Memphis and we had a great buy. It was Allied Bank, which turned out to be an amazing buy for $10 million, and we bought our Florida franchise for $46 million. So I want to be ready to go if these opportunities present themselves to Joey in his long list of companies that he is watching all the time.

So we know how to repair a loan portfolio, and we think we do a pretty good job in due diligence. But we are now a year beyond Republic. Jim Outlaw and his group are doing fine. We have a good strong staff. Jim gave me a list yesterday, and we're hiring some excellent people who appear to want to work for a bank like Trustmark from a number of institutions. I looked I think this year we had hired 10 or 12 lending officers. We're having no trouble getting very experienced people at our retail branches from the larger institutions. So they are steady. We are prepared for a good acquisition that makes sense to us.

Okay. And then just in terms of thinking about the conditions in Florida, I mean do you expect loan volumes? I mean you underwrite good customers down there, and they should be paying you back, and it is obviously harder to make loans down there --

I don't see loan growth in Florida because we're going to be amortizing what we have. We're going to see a lot of people which -- you know, I met with a super homebuilder from a major Metropolitan area who also had business in Florida, very professional staff, and he's trying to do all sorts of creative things with land to bring in housing which you can sell at a lower price in the market. So I think everyone is going to be trying to lower their debt in the Panhandle. So I don't see any growth there.

I mean is it something that shrinks 10% in kind of the conditions that we are in, or do you think it is --?

I don't think I know the answer to that. I really don't.

That is fair enough. Now for a minute if you think about Republic being under Trustmark's hands for a year and you look out into next year, do you feel a lot better about producing volume net of kind of the reunderwriting of their portfolio, or how do things feel?

Yes, but it has been pretty good this year. I think how much are loans up year-to-date in Houston? 75, $80 million? We are never going to go out there and grow a portfolio 20 or 30% in a year. They are $780 million now. While I enjoy calling on Republic's customers down there, there are just some fantastic small and midsize companies.

So I don't see an explosion down there. I see continued basic in the Gulf Coast of Mississippi. We are making good headway right now on some significant companies up in your neck of the woods. It is much easier -- I will go call on a $75 million company, and I know everybody does it. But I say, well, at mega elephant bank one where you bank, what is the most senior person you have ever met? And I say, yes, we're going into a downturn. You will want to call that person if you do not have a great year next year? And you know, we're working it hard like any banker would. And a $10 billion hard-hitting flexible good credit underwriting company whose senior management is out making calls all day everyday is going to make some headway. And Jerry Host is on the phone because he is out doing that this morning south of Memphis.

Okay. And then with respect to Memphis, do you think there's any other homebuilding issues that might affect kind of the heritage of the Company just in how you acquired it years ago and what their focus was?

What -- you say which company?

I mean the acquisitions that you all made tended to be far more --?

I sat down with Gene Henson and Bob and Jerry, and he went through that entire portfolio. And I don't see anything -- we don't have any larger loans up there than the loan that we put on nonaccrual do we in homebuilding or anything?

Not in homebuilding.

And we drop out -- when I look at our growth of $183 million, I always have Jerry Host who tracks everything everyday on top of his loan portfolio and his pipeline, he gives me a list, and he gave me a list of every loan that advanced our line over $2.5 million. And the largest thing was $9 million for a large public company. But it was mainly a church here, an apartment being built there. A couple of hospital deals. Two or three nursing home things. Three or four companies. We have a major building going up by Parkway, a New York Stock Exchange Company. You know the tallest thing that has been built here in 40 years, and we and regions are doing that together.

We have probably the largest insurance company and one of the wealthiest people in the state doing a lot of development in the Madison area for major companies that are headquartered here. We're seeing some draws under that. It was the kind of stuff we would really like to see. And I hate to sit here and tell you that when our nonperformings are going up, and we're all worried about the residential industry. But this quarter it was not that.

Alright. Great. Thank you for the detail. Really appreciate it.

[Matt Olney], Stephens Inc.

Yes, good morning. Most of my questions have been answered. I just wanted to revisit the margin briefly. Did the move to loans to the NPAs have any negative effect on margin during the third quarter?

Less than half -- I would say less than $1 million, maybe less -- maybe in the $0.5 million range. And we also, Buddy, how large was that premium that you had to take early, $200,000?

$200,000.

We had a better $20 million prepayment at a mortgage-backed.

So on a basis point way of looking at it, how much would it be there?

I don't know. You will have to figure that.

I can -- (multiple speakers)

I don't think it would make a difference.

That is fine.

I just don't see that it was significant enough for us to bring to your attention. In other words, I don't see it impacting the margin in itself in the fourth quarter enough that you would be able to read our modeling.

The main thing with us is going to be we have got about 300 million of these mortgage-backeds and corporate bonds yielding 3.5% or so that are coming off, and we have got a pretty good loan pipeline. And what has been eating our lunch has been deposit rates moving up for the last year and a half, and we think that is over with, and if anything, they are going to go down. And so I am hoping to see the margin expand. But I do not see it contracting.

Could you give us an idea of the rates on CDs that are maturing that you're not renewing, what those rates are?

Our posted six-month CD rate for $100,000 is about what, Buddy?

Our posted rate is probably in the mid-3s, and we have got some 5% type of rate, 5.25% types of rates that are coming off.

But in the quarter a 5% exception where they might run 20% in a market, some markets a little higher, 30 at max. 5% -- when I looked at our exception report, it said 5%, about 5.30, about 5.20, whatever. And the vast majority -- you know, our total CD costs went down from like 4.65 to 4.63 in the quarter --

4 6 -- yes, that is right, Richard, right on the -- (multiple speakers)

So we finished that pricing up there, and we had a lot of specials that matured in the quarter, about 300 million a month. And it was fortuitous for us that they are coming up now when rates are coming down.

Okay. That is helpful. In looking at the fourth-quarter loan growth, it has traditionally been pretty challenging for Trustmark over the last few years. Is it reasonable to assume the same thing would happen next quarter?

I am afraid to be negative on loan growth right now. There is some seasonality to it. But I don't think our loan growth will be more than it was in the third quarter, but when we look at our pipeline, it is really going to depend on finishing up these hospital construction, the Parkway building in downtown, which is 80% leased right now, the sort of things. So I don't see a dead quarter on loan growth at all.

Okay. And thinking about the charge-offs going forward over the next several quarters and going back to your prepared comments, Richard, about we're no longer in the same environment as we had been in the last few years, it is closer to the range of '01, '02 and '03. When you mentioned that, I went back and kind of looked at your charge-off rate in those years, and I was seeing about 30 basis points on average for those two or three years during that time period. Is that fair to assume in this current credit cycle will eventually -- is it reasonable to assume that we could see that 30 basis points on average over the next several quarters and maybe two years?

You know, it is complicated to answer a question like that. We had a number of charge-offs from the Memphis market. I'm going to toss that to Bob Hardison. He is very close to it.

Yes, what I think we really were talking about there was that I think we told everybody at the end of '06 when our net charge-offs were about 6 basis points that that simply was not sustainable. That was an all-time low. It brought together a culmination of factors that we did not expect to see line up again probably for sometime. And we have seen now a gradual normalization of our charge-offs more along the lines of '04 and '05, not going back quite to '01, '02, which were adversely impacted by the Memphis acquisition, and we had some loans to clean up there. But if you go back in '04 and '05, they were in the 12 to 13 basis points range, which if you annualize what we have done through three-quarters, you come up with about 13 basis points. And we think that that represents a more normalization of charge-offs with the credit profile of our bank and the markets in which we operate in general in that range is what we would expect to see hopefully in the coming months.

Okay.

I do not know whether that answers your question or not I guess.

No, no, that is very helpful. Those were my questions. Thank you guys very much.

(OPERATOR INSTRUCTIONS). Brian Klock, KBW.

Just two real quick questions. The student loan sales in the third quarter, do you have that dollar amount? The gain on sale?

Louis, it was 26 or 30 --?

A little over $29 million.

$29 million, and that is more or less general and what it is every year, Brian, in September.

And that is what I mean. The gain was (multiple speakers) was what, about $1.2 million, $1.3 million?

No, it was less this year. (multiple speakers) 800,000. (multiple speakers). 800 pretax. Pretty well a little less than last year, and our portfolio is about $18 million now or something. And when those age or whatever it is they do, we will sell them next September.

Okay. And last question, you talked about the GO Zone tax credits. Now the effective tax was about 32.5, 32.6%. Now is that a good run rate for the tax rate with GO Zone credits in it, or could it go lower?

It probably would be a little higher than that because when we filed our tax return, we triggered up for '06. We're putting than in our accrual. So our marginal rate, our effective rate we expect to be shy of 34.

Is that what you have in our model for next year, Louis?

Yes.

Okay.

Okay. So the third quarter has your return to provision true-ups for the tax year?

And you hired about 500 people that fell under the GO Zone or something?

Quite a few, Richard. A little shy of 500. But most of the people that we have hired are in our GO Zone because Richard mentioned Jackson is in our GO Zone market. So we do have a significant number of people that qualified for that work opportunity credit.

Matt Olney, Stephens Inc.

Yes, a quick follow-up. The reserve allocation for Katrina is still about $1.2 million?

Yes, it was not impacted during the quarter. I'm going to let Barry Harvey comment. He has done a tremendous amount of work with Katrina. Barry is our Chief Consumer Credit Officer. Do you want to talk about Katrina and how you view it today?

Sure. We still have as you said the $1.2 million, and that is actually tagged to specific loans that we're tracking. And each quarter we get inspections on those properties, as well as look at the paydowns, the charge-offs and the loans that we have -- that we know that the insurance proceeds have been received and the collateral has been restored to a satisfactory level. So it is very much on a loan by loan basis that we make the determination as to what we need.

At this point, due to all the uncertainty in the mortgage market, we are kind of pausing, and we're constantly reassessing the need for the $1.2 million. But we are reluctant to release any more at this stage just because we want to have a little -- let a little bit more time pass before (multiple speakers) we decide that we're comfortable letting any more go at this point.

Are most of those loans collateralized by single-family mortgages?

They are.

With no other questions, I would like to turn the call back to Mr. Hickson for any additional or closing comments.

Number one, thank you for joining us today in a lengthy and we hope productive call for you. I ask Bob Hardison a moment ago if he would like to make any further comments about the credit issue, and I'm going to say, Bob, what are you doing now? What is your M/O relative to the industry, the economic situation and credit and what you're doing?

Okay. Not to belabor the point because I know we have been on awhile, but I think we feel very good about the credit quality in the bank. We have a very robust reserve methodology wherein we grade each loan, and that loan grade translates into a reserve factor that builds our reserve.

I think we would be remiss -- I know you guys follow a lot of banks that have operations in Florida, and we certainly are -- they are having some of the same issues that we are in Florida. And that is a concern. Where we are in Florida is getting a lot of our attention, a lot of management attention. I have been down there four times in the last few months. Jerry Host, the President of our General Bank, has been down there as much. Richard is going, and we're doing an in-depth analysis of loan by loan. We're sitting with the loan officer reviewing the portfolios. Because we want to make sure that we have these accurately graded which would translate into making sure we are adequately reserved, which we think is key to dealing with this problem. To make sure we have the adequate reserves provided for these problems as they come up.

As Richard said, we do not see a huge wave of problems coming in Florida. After all they comprise about 10% of our total loans. While that is material, it is not a large exposure. But we are giving it a lot of attention, and going forward we will continue to do that. We will continue to do evaluations. But that is where we are going to focus our time, is making sure that we assess that situation in Florida and make the appropriate adjustments as we deem are merited based on the facts at the time we do our reviews.

Bob, thank you very much. Thank you for joining us.

Again, that does conclude today's call. Thank you for your participation, and have a good day.