Trustmark Corp (TRMK) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's fourth quarter earnings conference call. At this time all participants are in a listen-only mode. Following the presentation this morning, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

As a reminder today's call is being recorded.

Now it is my pleasure to introduce Mr. Joey Rein, Director of Investor Relations at Trustmark. Please go ahead, Sir.

Good morning and thank you, Operator. I would like to remind everyone that a copy of our fourth quarter earnings release and supporting financial information is available on the Investor Relations section of our web site at Trustmark.com by clicking on the News Releases path.

During the course of our call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We want 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 will turn the call over to Richard Hickson, Chairman and CEO of Trustmark.

Good morning, Joey. Good morning. Thank you for joining us this morning. I have with me Gerry Host, President of our General Bank; Louis Greer, our Chief Financial Officer; Bob Hardison, our Chief Commercial Credit Officer and we look forward to visiting with you this morning.

Let me begin by saying that Trustmark had a very respectable quarter, despite proactive reserving related to our loan portfolio in the Panhandle of Florida. We reported net income of $23.8 million. Earnings per share of $0.42. Our return on tangible equity was above 16%. Our net interest margin expanded to 3.95%, and our efficiency ratio improved to a little under 57%.

Trustmark is a profitable, well-capitalized company with a lot of financial flexibility, with a very strong earnings stream, diversified both by line of business and geographically.

I know you are all interested in the Florida situation. We will spend a significant amount of time talking about it, giving you the clarity that we have on it and as much transparency as we can see in the marketplace at this time. But first, let me tell you about a number of other things at Trustmark.

No. 1, you noticed early in our press release that we had taken a accrual as you have seen a number of financial institutions do, related to the Visa litigation. It was about $500,000 after-tax for us.

We also discovered through our SoX work an under accrual of interest income for prior periods related to loan fees. This dates back to FASB 91, which we implemented back in 1998, and we were too conservative in some of our revenue and cost recognitions. Most of that took place in the last three or four years, and we decided to go ahead and visit KPMG with others about it and we decided to go ahead and clear the matter this quarter and it amounted to approximately $2 million. That gave us a $0.02 a share positive impact from those two items for the quarter.

If you will go to page 5 in our stat sheet, I think you are probably most interested in our [link] quarter results and I will go through that with you. Link quarter and net interest income excluding the previous under accrual of interest income actually expanded $1.7 million. Or 4 basis points to 3.95%. This is being caused by the continued replacement of low yielding securities with quality loans. Also we have been doing a very good job of lowering our interest-bearing costs, relative to the [three drops] by the Fed last year.

We have been expecting our margin to continue like this. We expect that we will see the same process continue in the future and expect a margin to stay in this area or a small expansion during the year. We do not feel at this time that these rate cuts are going to do anything significant to our margin.

Dropping down to provision for loan losses, we provision $17 million in the quarter, proactively addressing what we saw was a further weakening principally related to the residential side of the Florida market. We increased our non-performing assets by $22 million. This is attributable to four loans in Florida, two of which we talked with you about before and two others, which are quality homebuilders that are having simple problems to the extent that no product is moving.

We will talk about them more thoroughly later.

Net charge-offs to average loans were 53 basis points. We take a look at that -- our charge-offs were about $9.5 million. About $3.7 million of its actually related to Florida. We charged off a little over $1 million on a homebuilder in Memphis. We feel our Memphis portfolio is clean at this point. We had about $4 million charge-offs in Mississippi, not related to the real estate markets. Some were credits that we had been working on for a long time and it just became time to charge them off. One was an auto dealer. Houston had about $600,000 in losses. Houston is doing very well. Do not foresee anything on the credit horizon that would be of any significance at this time.

Trustmark is not a sub-prime lender. However, we are not immune to the impact of a slowdown in the residential industry. We have conducted a number of target reviews in the Florida Panhandle and across our Company. We are monitoring and proactively managing what many are describing as a homebuilder credit deterioration in the Florida Panhandle.

Gerry Host and Bob Hardison will comment on that after my comments and give you more clarity into our exposure and compartmentalizing [for] you. And I think you'll feel more positive about it once you've had a chance to digest what they have to say in their comments.

The loan portfolios in our other geographic areas and other lines of business which make up 90% of the exposure of this Company are not experiencing any significant credit issues. We feel Trustmark is very adequately reserved.

As you know, our commercial and real estate loan portfolio is approximately $4 billion. We are reserved now [at] 1.48% of that. Recall that Trustmark is a very balanced and diversified company with its loan portfolio and that we have about an $800 million home mortgage portfolio, principally from Mississippi customers. We are experiencing no issues with that.

We also have been in the auto business for many, many years and we are experiencing nothing significant relative to that business. We are seeing no significant deterioration in our home equity lending. We have reserved against our $1.8 billion in consumer and our $800 million in home mortgage approximately 59 basis points. That would be over a year's losses; yet we take those losses at 90, 120, 180 days based on various [lulls].

So there is no question when you look at us that you need to segment our exposures. We are not totally a commercial bank.

Let me take you to non-interest income. Non-interest income increased $700,000 or 1.7% per link quarter. You'll notice a decline in insurance premiums. This relates to the seasonality of our business. One of our major businesses is insurance for the public school system and that takes place in the third quarter.

We are seeing some softening in rates in the Panhandle of Florida. That is very good for our own portfolio. It is like when the Fed lowered interest rates 75 basis points yesterday. I said, "Well, that cut the interest bill down there about 10% for this year."

I think that's very important. Our margin won't have a problem with it but it will sure help the credit quality portfolio.

Fisher Brown has just finished its three-year earnout. It did very well. They are moving forward. They have strong market share, and we are not expecting this softening market to have any material impact on them this year.

Wealth management had a very good quarter, up around 7% link quarter, up around 11% on an annual basis. We are having good success moving assets under management through our Company and very good success with our performance fund family. Our MidCap fund was recently in the category [king] by the Wall Street journal as one of the top 10 funds last year. We are very pleased with that and we are taking advantage of that in the marketplace.

A very positive for us was our net mortgage banking for the quarter. It increased $2.5 million link quarter. Our mortgage originations were actually up for the year.

We feel very positive. We are probably being helped because of our long-term reputation in the marketplace against those that we are competing that are having more issues and more press. Our hedging program at the end of its second year turned out to be one of the most positive decisions we have made in many years in the Company. We actually had a hedging profit pretax in the range of a couple of million dollars. This came about due to an expansion widening of spreads.

Our interest rate hedge worked very well. We are on top of the hedge. We are comfortable with where we are and we think it came at a very good time. If there are any other questions about the hedge later, Buddy Wood, our Chief Risk Officer, will answer them.

Non-interest expense control continues to be a hallmark of our Company. $69 million. This included the $800,000 contingency for Visa. In addition we put approximately another $800,000 in the fourth quarter building our health insurance reserve, which we carry and share the cost with our associates.

We had had a couple of medical issues that had come up in the third quarter and fourth quarter and we decided to go ahead and build that reserve to a level that it should be. Salaries and benefits maintained very well-controlled. Excluding our medical plan expenses, salary, and benefit, expenses declined 1.4% of prior quarter.

Our efficiency ratio improved to a little under 57.

Let me take you to our balance sheet on page 4 of the stat sheet. We continue our repositioning strategy. We had very strong loan growth in the fourth quarter, $179 million or 2.6%. Link quarter loans including held for sale increased $137 million. Our commercial loans, principally commercial and income-producing and owner-occupied real estate, increased $172 million. Consumer loans were relatively flat at $1.8 billion portfolio increasing $13 million.

We continued our very disciplined reduction of our home mortgage portfolio where we are experiencing no problems. This is for rate issues and it declined about $62 million. Loans held for sale were up $14 million, due to our increased and mortgage originations which are sold.

Geographically, it is really two areas and two issues. No. 1, we are seeing positive effects from Katrina. Our corporate area increased about $37 million. This is principally major customers in the Jackson area going down and doing business on the Gulf Coast.

An example might be one of our longest term customers and strongest who builds apartments, building an apartment in Biloxi. It is the type of business we're doing. It's great business. We have seen continued growth in southern Mississippi.

You recall a year before that we had between $300 and $400 million deposit growth in southern Mississippi. Last year, we had approximately $100 million loan growth coming out of smaller cities and towns in southern Mississippi, where our customer bases there are drawing lines, staging and they are 50 to 100 miles above the Mississippi Gulf Coast and they are really benefiting from this rebuilding. And we are seeing the (inaudible).

Other loan growth is coming out of Houston. Houston is stable. Our loan portfolio is in the range of $825 million there. It's quality. Our deposits are holding. We've hired a number of good people. Houston is very stable and moving forward.

The loan growth there is diversified. A lot of small business lending, some real estate lending and some energy-related lending. Solid credits. We feel very good about Houston.

Our Florida portfolio is stable. We are making a few very good loans there. Our investment securities declined about $81 million, leading to the expansion of our margins.

Link quarter deposits in the period declined about $33 million. We are still intentionally reducing higher cost deposits.

Last, we no longer have anything that you would relate to as a broker CD. It's all direct customer-driven. We reduced that about $200 million last year.

We are in a position that we are able to pick and choose our deposits. We ran our public deposits down on a link quarter about $70 million. We actually saw some increase, probably seasonal and non-interest-bearing.

The deposit market is challenging as customers are moving to the highest yield that they can find. We are able to accommodate them. We have a very strong core deposit base. It has served us well for decades and it is serving us well at this time.

Our strategic direction is to continue to assess any problem assets that we might [receive] on our balance sheet and move them off of our balance sheet. Preserve and grow tangible equity. Our tangible equity is at 6.94%. Strong. Well-capitalized.

We will continue our balance sheet deleveraging both on the home mortgage and the securities until we see opportune times to reinvest. We are continuing our positioning for the future. As we have told you, we opened five, very attractive, very well-placed banking centers in high-growth markets last year. We will repeat that process this year and will open five or six new branches during the year. We recognized our cost from that.

Let me let you know that we are reallocating our expenses to higher growth markets. We actually reduced our headcount by 23 in the Company on a link quarter basis and 95 year-over-year with no layoffs. We actually closed some branches, restructured branches when we opened new ones and we are very conscious of expenses.

We continued to maintain this very lower level of cash and due from that we were able to take out in the third quarter. Our imaging process is moving ahead. We are continuing in all of our branches across the system of check imaging, still continuing to cut career costs. And we are very pleased that we are now doing our total cash letters with the Feds both incoming and outgoing and with other financial institutions. This is working well for us.

We are challenging, continuing to challenge any status quo regarding expenses. Trustmark has a lot of positive things going on. We are looking forward to a good year in 2008. We are very profitable. We're very diversified in our income stream. We are very well-capitalized. Where flexible, we have a liquid balance sheet. We have both financial flexibility to succeed very well in a changing marketplace.

I'll make one or two comments about Florida; and then I'm going to ask Gerry Host to make a couple of comments.

The Florida Panhandle -- and I'm sure all of you have been there -- is not a very large place. It is a very beautiful place. It is blessed with what are probably the most beautiful beaches in the Western Hemisphere, if not the world. It is about 60 miles long and about three miles wide -- four miles wide.

There's not a lot of land down there because the U.S. military and Air Force and Navy have major facilities down there. There are many, many state parks. And the St. Joe Paper Company owns a very significant amount of land and they have exited the home-building business and holding that land.

I am not in the Chamber of Commerce of the Panhandle of Florida, but I will tell you, it is not that large as an area. There are literally millions of Americans who live within a five- or six-hour drive. They are overbuilt and is being compounded by the national and global situation.

It will merely take time to move the inventory that is there. What we have there is very quality product. We feel it will move and we will address it.

Our people there are solid. They are the same people we have had for years. We have a very strong Board of Directors down there. They are major customers of ours. They have been in business down there for a lifetime. They understand that marketplace.

With that, I'm going to turn it to our President, Gerry Host, who has spent a very significant amount of time down there and he can talk with you about what he is seeing firsthand in the Panhandle today. And then Bob Hardison will make a few comments on our portfolio. Gerry.

Thank you, Richard, and yes I would like to add a little color to what you party said about the Florida Panhandle. If I had to pick a color it would be emerald green for those of you who have not been down there. They are the most beautiful beaches in the world with white sand and then the emerald green water.

About Trustmark in the Florida Panhandle. Let me say that we have as seasoned and experienced a staff of lending officers as any organization in that area. Our franchise there is one of both commercial, small business and retail customers. It is not a [loan] production office.

The president of our Florida region is John [Summerall]. We have owned the franchise for four years now. Prior to that it was the Emerald Coast Bank and John has been with that bank since its inception seven years prior to our acquisition.

He knows the market, he knows the people, he's put together a fabulous group of lenders and they've done what we believe is a very good job. The issue in Florida is the market. Here it is.

As far as our Board, Richard mentioned we have a 12 member Advisory Board. It is a cross-section of business leaders and community leaders throughout the Panhandle. We meet with them every two months, regularly scheduled Board meetings. I met with the Board last Thursday night and asked for some input on what is going on in that market and I'll share with you some of their thoughts.

Just so you'll know, our franchise covers three markets -- Okaloosa, Walton and Bank counties. From Fort Walton Beach east to Panama City. The concentration of loans that we have within a market are limited to those three counties. That's where we have focused our attention on lending. We have done it for people that we have known for many years in that marketplace.

In terms of reflections from the Board that are in that market all day, every day, doing business these are some of their thoughts.

First of all, a positive note. Tourism was up 15% as measured by rental sales over '06 levels. They felt as though this was positive for not only the revenue within the three county market but also retail sales, entertainment, restaurant business -- all benefited from this.

The commercial and commercial real estate, as well as retail, they characterize as being stable. They are seeing an increase because of the three military bases -- and they're all air bases -- in that marketplace they are seeing an increase in demand for military housing and for office space and warehouse space from defense contractors.

Now a little bit of the negative. Single-family housing sales in the Panhandle area are down year-over-year between 25 and 35%. New construction permits year-over-year are down somewhere in the same category -- 25, 35%. And that is in the Florida Panhandle.

For those of you that have been dealing with banks that are working in the southern part of Florida, the central part of Florida, are probably seeing some numbers that are worse than the numbers I've just described.

I've mentioned that our lending activity is limited geographically to the Panhandle area. Our real estate projects are up with local developers that we have known for a long time. We believe, as Richard has mentioned, that this is just a matter of time and working through this market improving.

So with that little color and I would love for Bob Hardison at this time to talk a little bit about credit in general for the Florida Panhandle. Bob.

Like most banks with the Florida exposure, we are experiencing some credit headwinds in Florida in the Panhandle. (multiple speakers) As was mentioned I think in the press release about 10% of the bank's portfolio is in Florida.

We have gone through a lengthy and comprehensive analysis on that roughly $700 million to determine what type of exposure, or what type of a problem we're dealing with. And we've looked at it in a number of different ways and we feel like based on a number of factors that the portfolio that we are really dealing with is considerably less than that. For example -- that amount. For example, about a third of the portfolio is income-producing property loans including owner-occupied real estate that is performing very well.

For example retail shopping centers, warehouses, office warehouses, buildings leased to military contractors, government entities and as mentioned owner-occupied are all doing well. We don't have any delinquencies, criticized assets in that category are almost nonexistent.

We also have some single-family residence. Residential portfolio is performing well. So when you segment it like that we are probably dealing with half the portfolio that is experiencing -- is not experiencing but susceptible to various levels of stress.

Some positives, all the product that we have is finished. We don't have any large development loans that are halfway completed or a track of houses that are not completed. So we are dealing with product that is finished and on the market.

We have only one condo development loan. That project has been completed. It is in the process of selling out now. The owners have come up with some very creative incentives to make sure that the project closes out as scheduled; and we expect those closings to begin later this month and continue through the month of February (multiple speakers) beg your pardon. (multiple speakers). Yes our exposure is about $7 million.

To a very strong borrower.

Yes, a very strong borrower. Got a lot of experience in the market and again we -- it was a presold project. And all of our information at this point shows that we expect this project to close out as scheduled. But that is the only development -- condo development loan we have.

I know there is some concern, I would imagine there would be, that -- we mentioned in the press release about our residential builder portfolio. That represents about a quarter of our portfolio. So, again, it's really not of the magnitude to be devastating.

While we've got some issues in that -- there's no question about that -- but we are dealing with them. They are manageable. Our team of folks down there, we got some people who have been through work out situations before. This is the third or fourth one I've been through. I know Richard has been through several and chief credit -- the senior credit officer in Florida has been through several.

So I think we understand how we need to attack this and with hands-on management and dealing with each situation as facts present themselves to make the maximum recovery and reduce the exposure for the bank. So all in all, we feel like we are on top of it. We have spent a lot of time and energy on Florida in looking at the portfolio, and talking with borrowers to assess their situation.

But as our friends, the chairman of our competitor large bank to the east of us commented that he had some loans that 90 days ago were performing, everything was fine and that 90 days later they exhibited some problems. So while we think these types will be minimal due to our analysis of the portfolio, we don't really know how long this will continue.

Again, as Gerry says. it's market-driven and when the market starts to improve we think things will be on the outside. But in any event we think it's very well -- our exposure is contained and going to be well-managed.

Bob, let me add just to that a little bit about our process. Since September, John Summerall and his lending officers had been meeting no less than monthly to review that entire portfolio each month to determine whether or not there has been any deterioration in specific credit, to identify those and to properly risk rate those.

In addition, Bob Hardison and I have been to Florida no less than six times in working with those loan officers and with John to clearly identify what we have and to properly classify, grade and deal with those issues. We have met with numerous borrowers to assess their individual situation, as well as the market.

As Bob mentioned, it's a very fluid situation. Things can change very quickly as sales have fallen off and I want to assure you that we are doing everything we can to stay on top of it.

With that, Richard, I will turn it back over to you.

Thank you Gerry, Bob.

At this point we would be happy to attempt to answer questions that you might have.

(OPERATOR INSTRUCTIONS) Brian Klock with KBW Investment Bank.

Richard, I wondered if you could give us a little bit more detail on those four loans that (inaudible) quarter?

Could you repeat that please?

Can you give us a little more color on the additions to NPL in the quarter? You mentioned there were four loans.

Yes. I am going to let Bob Hardison comment on that. Principally they related one way or the other to home-building. Bob, go ahead.

Okay, the largest one of those was a homebuilder that's headquartered in Atlanta that had been in the Florida market for a number of years. In fact he was banked by our predecessor of the Emerald Coast Bank and we had very good success with him. He built some spec houses and then had one development loan with us. And we quite frankly were surprised when he indicated to us that he would no longer or was not going to pay us any of his bank's interest since he has a large operation in Atlanta. We met with him. Richard met with him and he outlined his reasons for doing what he did.

Protect his company. State of business.

Yes it was in his view that it was in his best interest to stop paying the banks and we didn't -- maybe so but we didn't typically agree with him.

But anyway we felt at that point that we had no choice but to put this loan on nonaccrual of the Company. Consolidate still has positive equity. It made money through the first nine months although the Florida operation lost money. He did make some money in Atlanta. And we are formulating a workout strategy on this credit and we don't know exactly. We will be aggressive but there are a number of factors we need to consider. The second loan.

Aggressively reserve for what you think any loss might (multiple speakers).

Right. We have reserves on an adequate amount. Based on our (technical difficulties) of the factors.

I guess before you get to the second one, what -- how big is that loan and I guess what -- .

We don't know if we want to get that granular with you on it. It's broken into two or three projects. Some of it is a little bit of raw land, some developed lots, and some very attractive finished product. We think that finished product will move this spring. He has priced it to move.

And I guess out of the two or three projects how much is actually developed lots versus the finished product? I guess you say you got landlocked loans.

You might break it in half.

The second largest loan we put on nonaccrual there was actually to an estate. Our borrower who was a local real estate developer was killed in a plane crash about a year ago and of course, we filed claim against the estate and that process has moved very slowly. We expect it to have made more progress in resolving that issue with the estate. They have some inexperienced people in our judgment that are managing the affairs of that estate that is causing that process to be protracted.

Given while we still believe that the assets and we have financial statements of the estate and we support it, we believe there's adequate asset protection for us for loans. Due to the length of time it is taking to resolve this issue we elected to put this loan on nonaccrual at the end of the year, feeling that this was a prudent thing to do. The loan is appropriately reserved and, again, I think we will alternately collect it. But given the timeframe we felt this was the appropriate action to take.

You'll note in our stat sheet that our loans past you over 90 days not on nonaccrual dropped about $5 million. That's the credit we referred to last quarter and it has just moved from that category into nonaccrual, Brian.

The third loan is a much smaller loan that is a land carry loan to a professional athlete and two of the borrowers who are all local Florida Panhandle residents. This loan was originated a couple of years ago for lot development and the market turned and it was not developed. They have since told us that they would not be able to keep up with the scheduled repayment plan although they offered some modified plan which we have not reached a resolution on that agreement on that at this point.

But given the fact that they had indicated to us that they would modify their repayment plan we elected to put this loan on nonaccrual. And we (multiple speakers).

(inaudible) they have liquidity.

They do. According to statements, we show they have liquidity. We are a long way from giving up on this, but we made up an adequate reserve on this to protect what we think the collateral value is worth even if the guarantors offer nothing. So we think we are well protected on that. And the fourth loan is a -- is in Memphis.

No, we are talking about the Birmingham builder that we were having the (multiple speakers) is that -- ?

Yes but we -- that one, we made a specific reserve on (inaudible) which we talked to you guys about last quarter. We had that reserved. We increased that reserve and in fact charged off part of that loan and that has moved towards resolution too.

That is essentially it of any size, Brian. There are a few other loans like we have a house in [watercolor] that is about $1 million that we've written down. Any loss that might be in it. Some other things for $1 million or $1.5 million.

So when you look at it we are driven through this thing, and we are being very proactive in adjusting to what we feel a worst-case value is today on any of this developed lot problem that comes along. And it takes time to work through. It takes a lot of time.

Bob would you discuss the difference between Florida foreclosure that we are seeing and places like Tennessee, Mississippi, Texas. (multiple speakers) This is important for you to understand I think if you don't.

It really affects our -- not only our workout strategy but also the time it takes to get some of these matters resolved.

In Florida we have to go through what is termed -- not us, just us, all banks, all people dealing in loans -- a, what is termed a judicial foreclosure which is a foreclosure that is supervised through the courts and is a very lengthy time-consuming process to go through. When you go through that it takes anywhere from four to six months once you start.

Whereas in Mississippi, Tennessee and Texas or other markets that will close your process and normally would take four to six weeks. So it's much more expeditious in these other states but Florida, it's just where it is. It is something we have to deal with, but it makes the resolution of these matters a little more time-consuming. And we don't -- they don't ever move as fast as we would like for them to.

Bob, maybe one last question. You mentioned -- .

One thing I want to comment on too. This came into my mind. All of our old building is not at the second [home]. Some of our major customers, for example, in the Panama City market are building moderate housing for the Air Force Base. And they have been doing so and that is continuing to move ahead and I wanted to make that comment.

Excuse me. Go ahead, Brian. Did we finish your question?

Bob mentioned three of the four loans that were (inaudible). The fourth you said was in Memphis, is that right?

That was a Memphis loan that was the smallest of those. I think we had included in that for one loan that were not in new nonaccrual so when I mentioned about the charge-off. But the one in Memphis was to a cardiologist who had some health problems, became disabled for a period of time.

We have his clinic finance, his (inaudible) residents and we think he's back working now and we think that will be resolved either through a rescheduled payment plan or a foreclosure on our collateral and any exposure we have there would not be significant.

I think what you need to look at with us is that we don't have any ballooning, we are actually seeing a shrinkage of loans past due 90 days that are not on nonaccrual. We're addressing those issues quickly and we put them on nonaccrual before we get there if we think there's a problem with it.

I guess -- just one last question related to Memphis. You did say that there was $1 million charge-off to a homebuilder there. Maybe you could just talk about -- well I guess, first, how big is your Memphis loan portfolio and maybe you can talk about the housing market in Memphis. What you're seeing there.

Our portfolio is not a real estate-driven portfolio to that extreme. We looked at every homebuilder there. This was the major homebuilder in Memphis. It's well-publicized. It had public bank meetings.

We are now foreclosed in ORE and charged off about $1 million and marching through it. The whole process in OREs, couple of $3 million. It was about $2 million. It is not an issue with us that you should -- you should not had any concern with us with Memphis.

(OPERATOR INSTRUCTIONS) Gary Tenner with SunTrust Robinson.

Just a question as it relates to the balance sheet. You had mentioned your expectations for the margin, but I wonder if you could just update the runoff and the securities portfolio expense for the next couple of quarters and your expectations at this point given where the (inaudible) or continue to allow this to run off?

I will make a comment and then I will turn it to [Buddy Wood] for a second. We are budgeted. It runs off at about $20, $25 million a month. We are using our 1-to-4 portfolio which is I think still in the range of $750, $800 million of very quality loans, secure letters of credit, a Federal Home Loan Bank to continue our public funding. This is not a heavy, heavy funded bank on public funds.

So we see the ability to continue to do this as long as we need to. I will let Buddy Wood comment on our feelings about reinvestment today and the yield curve. Buddy.

Gary, we continue to monitor very closely the investment opportunities that we have. Given a combination of the preferred investments that we have which are usually in some form of mortgage-backed, usually agency-backed mortgage product, we have expectations that our yields need to be more attractive than they have been for us to start that reinvestment.

We are going to watch the shape of the yield curve which continues to steepen in recent periods and may, in fact, give us some opportunity as the year goes on as we monitor that. We are just not there yet. So we still have $20 million a month that will mature during the year. Rates are below 4% and will continue to be favorably deployed into our lending areas at the 250 basis point pickup, similar to what we have been able to do the last couple of years.

As you talk about the margin you saw, as Richard mentioned, we moved from borrowed funds in the form of CDs, which has traditionally been much tighter, to where other alternatives like the Federal Home Loan Bank has provided us and the overnight funding markets.

When they got to the point where we saw 40 basis points of differential we started making that shift. We continued to see that type of benefit for us, which is significant. We also took several steps during the year to improve our earning asset ratio and you'll see almost $200 million of additional earning assets, which contribute to our margin.

And the third is that as we see our less expensive opportunities in funding, we should be able to continue to have 30 to 40 basis points by using the yield curve which is an important part of our overall structure.

From a liquidity point of view, we always monitor that we have enough longer-term funding mixed into the total. We've got significant amounts of approaching $2 billion of available liquidity that we don't tap on a regular basis within the Company. Very strong pledging capability with the home loan bank, the discount window and other places.

So if that is helpful I'll be glad to comment on other related balance sheet subjects, if you like.

Peyton Green with FTN Midwest Securities.

I was just wondering if you could give a little color on where you think we are in the cycle? And do you think the 75 basis point move changes a lot or a little or -- ?

I'm getting a little bit of static. Can you repeat that question? I apologize.

Yes. No, I was just wondering if you could comment on what you think the effect of 75 basis point cut is? Is it really going to be something that helps the carry of your borrowers that are feeling stress or does it prolong the inevitable?

I suspect you've asked that question to a number of people much brighter than I am in the last 24 hours.

The point I made if my interest bill were $1 million and now it is going to be $900,000 that ain't going to solve the [world] but it's going to help. And I think what we're dealing with in the state of Florida holistically is, we have to see some transparency in the global situation. There has to be a situation worked through the national markets. And then once people get there, they're going to say, "Well, I want to buy a new house or a new a lot or a new whatever in Florida."

I think that is going to take time in these rate cuts and the lowering of rates most of this is floating rate debt. I suppose everyone has down there and it is also holding down mortgage rates. So I think it is going to -- however long it takes -- improve the situation somewhat.

I don't think there's any panacea to the situation down there except eventually and we are seeing that now to an extent. People are going to say, "There are great bargains down there and I don't believe I want to buy any more stocks right now. I'm going to buy something down there."

Let me give an example. Over the holidays I mentioned to a major investor here in Jackson that I thought things were going to get right down there. Called me yesterday. "We want to go down there next week. We want to visit with your president. We want to understand more about this market down here."

There's a lot of discussion and a lot of interest and the people we see are hedge fund discounted bottom feeders. They are folks that want to buy one or two things down there. Permanent or whatever. So it's not turned around yet but that's about how I see it.

I think the point I would make on the Panhandle is no one has really good transparency at this time down there. Gerry was down there. The people on our Board, you know, don't run a small retail shop. They are the major owners down there and they've been in the big projects for 30 to 40 years. And they are seeing that this thing will begin to change here this spring and summer and fall and all we can do is look to them. They have been through this many times. (technical difficulties) and I think it is just a question of waiting to see as transparency comes up.

So they do expect some improvement in the spring/summer selling season?

Gerry?

The answer is they are guarded with their optimism. Let me put it that way. The things, the lowering of the rate environment is going to help the borrowers. There's the hope that it will stimulate some additional investments in that marketplace. As we've said all along, it's a matter of time, and it's a matter of when people start going and buying properties in that marketplace.

(multiple speakers) borrower can get credit down there.

Yes. We have seen values dropped. That has helped the situation. That is working to stimulate some activity. At this point it is still very slow, though.

(OPERATOR INSTRUCTIONS) (inaudible) Sandler O'Neill.

It's actually Charlie Ernst. Can you actually walk through the Florida portfolio again? It was a little unclear to me. You started out by saying a third was income-producing property and then it started to get a little bit confusing after that.

One of the issues that we are having and we actually called at the people in your community. Everybody is using a word, homebuilder. We are not sure what that means. I think everybody is using these terms to means different things. And we can categorize our portfolio for you to an extent that is driven by various [sync] codes and whatever.

But if you said raw land, it depends on whether King Kong owns the raw land and it's part of 3% of their net worth or whether or not it's owned by someone who is a strong builder or a weak builder or someone who is doing it as a hobby or a sideline. That is the complexity and that is what concerns us because we have plenty of regulators and credit officers so I would not jump to any conclusions. I don't think it means a lot. We can give you some of this breakdown.

Can you just -- can you say what -- I mean, we understand that but can you just say how much of your portfolio is land, how much is construction?

Is it in our call report? (multiple speakers)

We can give you some broad ranges. If I were going to give you a -- I mean, No. 1, we are not talking about billions of dollars here. We are talking about into tens of millions. So relative to -- I'm going to ask him to give you some broad numbers, but I would not react if we said we had $100 million of this unless you went through with me and you looked at the quality and strength of the borrowers. Bob.

Yes. I will try to run back through. If I wasn't clear I apologize. What I was trying to do is less to more or less frame the portfolio and get it down to a number that we think we need to work with. But starting at the $700 million, what I was saying was about a third of that is income-producing properties that is performing very well secured by (multiple speakers)

A lot of it is not even real estate. Say maybe 500 is real estate related (multiple speakers)

Right. The wholesale 100 is not -- there's some C&I, there's consumer loans and some other things. But about a third of it is income property loans that we are -- like I said are performing very well. Of concern I mentioned was the residential builder portfolio which would represent about a fourth of the portfolio.

And separate and apart from that we went through a detailed analysis, stratifying the portfolio where we thought the problems might -- the potential might be for concern and got it down to about half the portfolio. Once we take out the income property, take out the consumer and some of the C&I, get it down to a level where we think there may be a -- the amount of money that might be at risk at some degree at some point. So that's what (multiple speakers)

In no way are we saying that that is a problem today or that we think that might be a problem.

No but we tried to -- we tried to come away with what we think is not a problem and once you take away what we think is not a problem we come with, roughly, half of the portfolio.

Half of the real estate not half of the (multiple speakers)

Yes. Half of the real estate. It could be a problem.

It couldn't. We don't think it could be a problem. This thing goes on and on and on it might be a problem, but a lot of these are extremely strong borrowers.

And you know your stock is down 6.5% today when the stocks overall are very strong. So -- .

(inaudible) I think the ones that announced this morning in yesterday. When you look at it. I saw it when I came back in. What was it? It dropped down and was back up around -- I don't know where it is at this time.

Okay. It's down 6.5%. But, so obviously the market thinks that you guys have a problem in this portfolio and the stock has been going down during the call. So my guess is that that means that people don't feel like the questions have really been answered in terms of what the risks are in the portfolio.

So is there anything else that you can add to your color and commentary that would give people maybe a better -- ?

I've read an awful lot of releases and listened to a lot of calls. And I've been here, being very thorough for 45 minutes. I don't believe I have heard other institutions any more granular than we have been or any more positive than we've been or really any more negative than we are being. We can't sit here and tell you about transparency, but I told you we collectively reserve and charge off down there in the fourth quarter. (multiple speakers) -- and we are on top of it. And this is not a company to win in bulk and put together a bank that was cobbled together down in Florida Panhandle and we know that market.

We essentially know all the borrowers and everything we are lending is very well. So I don't know what else I can tell you. We can take our loan portfolio and go loan by loan with you.

Can you just talk about, given that the stock is now where it is, $19.50 -- where do you guys stand with regards to capital management and thinking about buying back the stock?

We have not bought back any stocks since early in the second quarter. We are earning well over twice our dividend on a core basis. We plan to build tangible equity through earnings. We are not anticipating with the run-off of one to fours, others. We don't see really heavy asset growth holistically for the year and we see our Tier 1 and Tier 2 capital levels moving up quickly over the next two quarters.

So given that the stock is where it is does that make you more or less inclined to buy it back?

I don't have any comments on the buy back at this time. We have not been in the buy back mode and you know you say since we started talking our stock is down 6%. We will have to figure that out and make a business decision.

Lastly, Richard, you guys have talked about expense initiatives in the recent past. Where do you stand on those and what should we expect over the year?

You should expect us to hold firm in our efficiency ratio. We met essentially 90% of our salary-related expenses for last year. I think you should see some continued revenue growth in the Company and very well-controlled expenses. We will not cut expenses absolutely on a dollar value above what they ran this year. But we will control them just as we always have traditionally, Charlie. They are not getting ready to get out of hand or anything.

So you kind of said two conflicting things. You said you would hold the efficiency ratio but then you said that you were going to see decent revenue growth with controlled expenses, which -- .

Charlie, I am talking about 1 or 2% one way or the other. Does that make sense?

All right. Thanks a lot.

Gentlemen, there appear to be no further questions. At this time I would like to turn the call back to Mr. Hickson for any additional or closing comments.

Excellent. Thank you for joining us. Again we earned $24 million for the quarter. We had good solid loan growth. We are proactively addressing the issues that exist in Florida Panhandle with a very strong professional staff. We appreciate you joining us.

We need you to reflect realistically on the earnings strength of this Company, the diversification of its income both geographically and by line of business, and this is something that we have all the capability of handling and moving directly through. Thank you very much.

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