Trustmark Corp (TRMK) 2008 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 there will be a question-and-answer session. As a reminder this call is being recorded.

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

Thank you and good morning. 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 website at Trustmark.com by clicking on the news releases 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 earnings release and our other filings with the Securities and Exchange Commission.

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

Good morning. Thank you for joining us. I know we have most all of the analysts that cover us onboard. I know you are busy this week and we appreciate you taking the time as well as our shareholders. I have with me this morning Louis Greer, our Chief Financial Officer; Buddy Wood, our Chief Risk Officer; and the managers of our various credit areas.

I characterize the quarter as a good quarter, particularly in this environment. It's our second quarter in a row with absolutely what I would call no noise in it to detract you from the core earnings of the Company. We are $24 million or $0.42 a share, return on tangible equity of approximately 15%, ROA 1 over 7.

Year-over-year, for a year Trustmark earned $91 million over a 1% ROA and at a 15% return on tangible equity. It doesn't feel like that thinking about last year. But looking at it holistic I would say, in light of the environment, we can't be immune to the economy; a very good year for our company.

The results in characterizing last quarter, I would call it relatively stable in the credit quality area, particularly in light of the environment. We will be very granular and thorough in our comments and transparent. Increased capital strength, both from earnings, and you know, our acceptance of the preferred stock with the TARP. Very disciplined expense management; our expenses have been flat for multiple quarters. Bottom line -- profitable, well-capitalized, strong and adequate liquidity, a very diversified business mix, and financial flexibility to succeed in this challenging environment.

I would like to take you to our stat sheets behind our news release to page 3 and I would like to talk about credit quality. You will note that we give you this information by market. Non-accrual loans increased $8.8 million in the quarter; there were really no large loans moving in the quarter.

Florida increased $4 million. I can tie that back to about five loans between $1 million and $3 million. These were lot loans; a couple of pieces of commercial property which are very good lots, a few houses, and one storage unit company.

Mississippi increased $6 million. There was one $3 million loan on the Gulf Coast very near the casinos in Biloxi consisting of 12 condo units. It is very well-secured. We are carrying these units on the books at between $200,000 and $250,000 each. We have appraisals; we do not see any loss in this credit.

Tennessee was down $0.5 million and Texas down about $1 million. Looking at it holistically, the rest of Mississippi was either auto or consumer credits or mortgages making up between $3 million and $4 million. Essentially all of our increases in non-accrual loans as we are trying to be very consistent in following appraisals were impaired and written down to what we think a disposable value is.

Other real estate increased $6 million; $3 million of it was in Florida. We foreclosed on one property that was $1.8 million with ADV in low and received a $400,000 cash payment; wrote it down further to $1.4 million well covered by appraisal. It consists of around six lots, two of which are beach front very near San Destin. We are not expecting any additional loss.

In Texas you see that other real estate went from $200,000 to $2.3 million. We foreclosed on a piece of land down in League City. It is a very nice piece of property; we have offers on it. Our original appraisal was approximately $3 million. We are carrying it on the books at $2 million. We are waiting for an updated appraisal so that we are sure we get proper value for the piece of land. We expect no loss from it.

Let me take you back up to non-performings for a moment to Texas. The Texas is essentially still the syncrude credit at $10 million. We are still expecting some asset sales in the first and second quarter. We are well secured. It has been non-performing; we are carrying it as substandard. We have seen nothing that would give us an indication that we will be reserving more for our syncrude exposure. You will recall we are in the smaller, fully-secured facility. It's possible we could have a recovery there during the year.

Looking at past due loans, no real change in loans past due 90 days, from $3.6 million to $5 million. There seems to be a little confusion and I would like to clarify again. Those loans held for sale, guaranteed by Ginnie Mae, the $18 million, that is not on our books. We have no requirement to repurchase it.

We have the ability to repurchase it and resell it if we wish to. And we choose to carry these loans in this category, even though they are not on our balance sheet, as a matter of conservatism and transparency to you. Therefore, loans passed due has not increased.

Net charge-offs were $12 million for the quarter. That was principally seven loans in Florida. Although there may have been 23 different small loans, none of the charge-offs -- one was about $900,000 on some lots we have written down. The others are relatively small, under $0.5 million, totaling $7 million in Florida.

About $4 million in our auto portfolio, about $0.5 million loan in Tennessee and not much else for the quarter.

Our Loan Review group was in Texas, did a very thorough review during the quarter. Our Special Assets groups in Florida, which is five very seasoned professionals, we reworked the Florida portfolio very thoroughly during the quarter. Our management team here is reviewing a couple of times a quarter all loans in Florida; over $250,000. Very granular; we are working a number of credits and I will cover it a little more thoroughly for you.

Let me talk about the provision for loan losses for the quarter. It was $16.7 million. I know you look at that cautiously and so do we. If I go into the quarter, our substandard loans quarter-over-quarter were up $3 million. Doubtful loans were flat, actually down $0.5 million; especially mention loans were up around $7 million. That is very stable for a loan portfolio of this size.

Bob Hardison, our Chief Commercial Credit Officer, has indicated to me that we did not see downgrading in Mississippi during the fourth quarter. That it was isolated in the third quarter to a couple of credits that I mentioned related to the housing industry. We are not seeing any more significant downgrading in Tennessee or Texas at this time.

We did impair around eight or 10 other loans, principally in Florida. They had been reserved for. Holistically, they were no significant movement beyond the reserving; they were all braced on current appraisals. We are taking a process where we can to go ahead and impair a loan and move it into that category where we have it written to a level that we feel it could be liquidated.

On the consumer side, our branch originated consumer purpose loans did not see much change during the quarter. Our auto loans were down $57 million from $712 million to $654 million. Both that $750 million consumer portfolio and $650 million auto portfolio non-accruals moved from $6 million to $8 million, up $2 million.

Our residential home mortgage portfolio not held for sale, we let it run off right at $30 million. Total non-performing of that $790 million was $7 million, up from $5 million or up $2 million dollars. So when you move out of Florida the remainder of the non-performing was really consumer.

If we look at the reserve, it is 1.41% of total loans; 1.79% of our $4.3 billion commercial portfolio. It has moved up to about 68 basis points on our consumer portfolio because of the $4 million increase of non-accrual being pooled. Overall, moving from 135 to 141 we feel that under the established methods that we are well reserved.

A couple of you have reflected in your overnight write-ups about our non-performing coverage ratios. One thing that I would suggest you reflect on and think about doing is take our non-performing loans, the $114 million, recall that we had specifically impaired $57 million appraised and written down. If you back out that $57 million impaired you get non-performing loans of about $57 million. You take a look at that on a consolidated basis that coverage ratio moves from 83% to 166% and moves in Florida from around 28% to 88%.

For Florida credit quality you will see that Florida loans -- and I think the best place for you to go for that would be page 8 in your stat sheets. Construction loans were down about $7 million. Commercial loans were up about $7 million holistically. The Florida portfolio year-over-year is down about $90 million, all of it in the construction section.

If I take a look at the individual categories, lot loans at $76 million. This is really made of 350 loans. The vast majority of these in the last year have been re-worked with the owners; put on amortization schedules. No real deterioration quarter-over-quarter. As I look at the lot loans and I look at all of those over $250,000, most anything of any size at all has been recognized, worked through, and properly graded.

As I look at the development loans, the $35 million that actually consists of 36 loans. Anything of any size at all that we feel that there are any issues with have been criticized, classified, and impaired.

As we look at unimproved land that is really 63 loans. There are two loans of any size from your perspective in that unimproved land. Both of them have either a very high appraised value recently; strong owners with other assets and other cash flows. We have conservatively criticized both of them as -- if we see a change in a piece of land, we will go ahead and criticize it, even though we have a strong guarantor. But they have other cash flows.

One- to four-family is really made up of 18 loans and I would make the same comments about that.

Other construction, most everything in there has been criticized or classified. The things that have not are things like a YMCA or a large church loft, which seems to be doing fine. So I am cautious, skeptical, and optimistic about where we are now in Florida.

We know we are in a dark period in the panhandle. It's wintertime, nothing is selling. We are expecting in the spring, once there are some comps, to incur another full appraisal process like we did last year. But these loans have been written down significantly and I am not expecting the dollar amount to be in the same range as this year.

There is a lot of speculation about everything is down 10%. Well, we can handle that just fine. Everything is down 15%; we don't really know. There are a lot of properties selling down there. We have been able to liquidate the subdivision that we foreclosed on in Panama City with 17 houses and 54 lots. We are down to the last houses and the last lots. We expect all of that to clear out from contracts in the first quarter and there will be no additional losses from where we had it written down.

We are still in a very serious situation in the panhandle of Florida, but we are at least three years into the downturn. I don't expect it to end. I expect that it will recover after we see recoveries beginning in Atlanta and Birmingham and other areas where people drive to. But we have spent a great deal of time on this portfolio and we believe we understand it.

There is still down side in it. I am sure we will see more non-accruals come along. We are working aggressively to get resolution to these impaired loans. We have professionals working on selling our properties. We are not, with our level of properties, looking at some bulk sales and there are no bulk sale buyers that we see. The people that we are talking to and selling things to are end-users, are strategic buyers that plan to develop and use the land, the lots after the economy recovers -- whenever that is.

Let me move away from credit quality, talk for a second about our capital strength. Tangible common equity has increased $58 million year-over-year from earnings after dividends. We paid out about 58% to 59% of earnings in dividend. That is a very good coverage ratio in this market. We declared a dividend yesterday; $0.23. We feel good about the sustainability of the dividend this year based on our budget and projections and where we see.

As you know we issued some senior preferred stock; $215 million. Our tangible common equity dropped a few basis points to 695 from 722. That was from some releveraging of our balance sheet with mortgage-backed securities that I will talk about. Tier 1 risk-based capital has expanded up to the 13% level and total risk-based capital to the 15% level.

I don't think there is any question that Trustmark has plenty of capital. Generating capital from earnings; has a lot of dry powder in the corner and can handle about anything that would come from what we see relative to our portfolio. We are moving mentally from a defensive to an offensive position.

Taking a look at the balance sheet, I think your best look would be on page seven of the stat sheet. I would like to talk about loans. Loans are essentially flat for the quarter. Continuing to see the movement down in our indirect auto business that you recall we began moving out of October a year ago. Home mortgage and then some growth in our commercial business.

If we look year-over-year, our loans are down about $227 million; Florida was down $90 million, auto $200 million, home mortgage $90 million. The assets that we wanted to move away from and our other loans were up about $200 million.

On the deposit side, you would be best to look, I believe, at page four of the stat sheet. Year-over-year, as you can see in the five quarter moving averages, December '07, December '08, we held our total deposits generally flat. During the fourth quarter you will see that our deposits were down a little over $200 million.

Principally this was public funds where we didn't feel that we wanted to compete with some of our local brethren for the rate and we allowed some CDs to run off; principally we were battling a large regional bank who was willing to pay 100 basis points over market for deposits. And because of our strength we moved into some wholesale funding through the Federal Reserve's program using our ample collateral and a little bit in the Federal Home Loan Bank but principally open, unsecured Fed funds at extremely attractive rates.

If you take a look at our net interest margin, uniquely it expanded about 19 basis points in the quarter. This is attributable to two things. We went ahead and releveraged our balance sheet bringing our bond portfolio to about 18%, which is still, I think, below the median of our 20 bank peer group.

We did this at a fortuitous time in October and November. During that time about $650 million and a yield a little over 5.5%. It's obvious when we turned around and funded that at today's interest rates we saw a significant margin expansion.

We had purchased about $1.5 billion bonds of this year, principally in March and April when rates were positive, and then again now when the yield curve steepened. Buddy Wood would be able to comment on that. These are not bonds with risk; they are all guaranteed. Fannie Mae, many of them we bought as they came on the market from distressed sellers. Many of them are seasoned portfolios. The risk that we would see would be that of prepayment since we already have a very significant comprehensive profit in these bonds that we have bought since then.

We got out ahead of the government's announcement of a buyback, therefore, rates dropped significantly right after we bought them. We feel very fortunate with our timing. We viewed it, since we assumed we would take the TARP, that we went out and bought those securities early reflecting on leveraging our TARP money immediately. And now we have a very reasonable cash flow from this to fund loan growth that we might have this year.

The net interest margin also expanded because of the unusual relationship between LIBOR and our cost of funds during October and part of November. That is probably half the increase; it has since dissipated.

Our thoughts that our margin in '09 will end the year at least in the range of where we were for the full year '08. We may see the margin higher than that for the first couple of quarters of the year, but none of us can see transparency as to what prepayments will actually be in our mortgage-backed security portfolio. As you know, Fannie Mae, others have tightened their standards. Our models say we will see large prepayments, but we haven't yet. We are not quite sure what that will do and that could impact the margin.

It will also depend -- we have pushed and been very diligent in our deposit pricing. We have pushed what was around 3% year-ago to right at 1.5% for our total cost of interest-bearing funds. So we feel we have done a very good job of managing our margin. We have put floors on a lot of our lending. A lot of our local competitors have not.

We have moved out of some LIBOR funding where when you are looking at a 30-day LIBOR rate of 0.5% and a couple of hundred over, we are not interested in lending money at CD rates. And so we will pull and make those loans that are creditworthy and profitable with a very serious business development effort going on.

Non-interest income, service charges were up a little bit, about 1% in linked quarter. Our insurance commissions were flat seasonally with this quarter a year ago. Wealth management is holding up very well, flat; down a couple of hundred thousand linked quarter. And with the margin across the board down where it is, they are holding in fairly well. They have brought in a lot of new business this year and we expect them to be able to hold their own in '09 versus '08.

We have had very diligent expense management. Salary and benefits actually decreased in the quarter about 2%. Occupancy declined about $0.5 million. Other expenses were up about $400,000 due to franchise taxes. So few if you look overall, a very stable quarter. Return on assets above the 1%; not where we need like it.

If I look for a moment at the year holistically, a number of very good things happened in this company. We reduced the credit exposures that we should be reducing. We took advantage of steeper yield curve and increased our security portfolio. We maintained a very stable deposit base, despite higher interest rates driven by the liquidity needs of larger banking institutions around our markets.

We held firm; did it because of our market share. We managed interest rate volatility extremely well. Our hedging programs for our mortgage pipe line and mortgage servicing asset worked extremely well. Our MSR hedging was positive $300,000. Our MSR dropped about $35 million. We are very pleased we have been hedging for two years now. We feel positive about the hedging prospects with this steeper yield curve.

We reserved $15 million more than we charged off. We charged off about $42 million in Florida and about $8 million in our auto portfolio. Beyond that, we have not had anything above what you would expect in normal. We finished our total excess of dealer services and we expect that to run off.

We do not expect at this time the nominal amount of our charge-offs there to increase. We expect as it goes down the good ones will leave, some of those bad ones will say, and the percentage of charge-off might go up. But the number looks fairly good to us. Our Florida asset group is in place, functioning, knows the credits, in contact with the customers, getting financials, getting appraisals, and working through it.

We generated $58 million of new tangible equity. Tangible book value per share increased almost 10% during the year to $11.49. Risk-based capital is not an issue with us. We opened six new branches -- two in Houston, one in Memphis, one in Florida, one on the Gulf Coast, and one here in Jackson. That replicates '07. I do not see over maybe one or two branches opening this year. We closed a couple of branches last year. We will probably close a couple this year.

We have seven less people than we had a year ago and we opened six new branches. We have the same number of people we had 2.5 years ago at the time we bought Republic. We run lean; our efficiency ratio is pushing the mid-50s again. However, we invested $7 million in a new deposit system. We are finishing it up. It has been installed for a quarter in our contact center.

We have converted four green screens to one point and click system. We have reduced training time from weeks to days. We have reduced headcount through productivity. It will be moving out to our financial services and branch managers during this quarter. The teller system will go out in the second quarter. We are very pleased with what the Argo system will do within Trustmark.

We continue to lead in image technology. We have converted essentially everything that can convert to inbound/outbound imaging with the Fed, with our correspondents. The only checks we are handling at our company are the checks for correspondent banks who are behind in their technology and still forcing us to handle their checks.

We will have finished remote capture in all of Trustmark branches by the end of this quarter. It's everywhere now except Jackson. Couriers are going away, airplanes are going away, direct sends have gone from 50 down to a couple. We are putting in merchant capture deployment; it's being well received. We are doing it with large customers at this time and we are being sure that we educate small customers.

We have repopulated Houston with a very high caliber personnel. We have opened six new banking centers since we did our last acquisition 2.5 years go. In '09 we are going to manage credit, manage our real estate exposure, manage our balance sheet. We are enhancing and expanding our corporate banking business development with our larger customers. We will continue to develop and add quality personnel in Houston.

We will vigorously defend our leadership position in these equity legacy and markets. We will continue to preserve equity and we will very selectively seek failed bank acquisition opportunities to increase our deposit base.

I thank you for hearing me out. I know it was lengthy, but I wanted to be granular and have as much transparency as possible. We will be happy to answer questions.

(Operator Instructions) Kevin Fitzsimmons, Sandler O'Neill.

Good morning, everyone. I just had a couple of questions, Richard. First, I just wanted to clarify your margin guidance. You said -- I think you said it was going to end the year 2009 somewhere around where you ended it year-end 2007, which I think fourth quarter 2007 margin was 393. Or were you talking about a full-year margin?

I believe it will be a little higher than that. What I don't want to leave you with is an expectation that it's going to stay at 420. We have remodeled our margin numerous times since the historic rate cut in mid-December. We were a little bit positively gapped. However, we have been able to take deposit rates down. And looking forward I would say it will drop 10 basis points or so in the first or second quarter, but it could drop another 10 or 15 basis points in the third quarter.

However, these things are manageable six months out. But we are not looking for anything precipitous in the margin compared to generally where it was throughout '08. Buddy, would you want to add anything to that?

I think the point that you made earlier regarding that our asset sensitivity was enhanced as we purchased these investment securities and were able to fund them where we needed some funding on a short-term basis and created a very neutral position. We have run both the interest rate risk and our earnings value of equity in a variety of different shock scenarios and are able to achieve what Richard has described in all but the most extreme conditions.

So would we -- is the way to kind of think of it that the securities might be level to even increasing from here, but that funding is going to change over time to be more in deposits which is going to be a higher cost relative to the source you were able to use?

Our deposit and our lending changes almost mirror one another. We have enough variable-priced assets and enough long-term liabilities that when we use the short-term borrowing nicks in that position, we end up with a near neutral adjustment. We have not had to go after any expensive funding which would have been an impact to this margin conversation.

Fortunately, we find that our competitors are now coming into us after having been much wider and much more costly. So it is with a good degree of comfort that unless we have something -- and it may fall into what we might call political and, therefore, unknown category would be the only stress level of the margin that is unknown to us. Otherwise, we feel that we can manage it on a very stable basis.

Okay. Additionally, you mentioned Texas earlier in the call, Richard. Obviously, there is more concern about energy these days with what the price of oil has done. Can you talk about what you are seeing there and if you are seeing any early signs of stress and how you are dealing with that? Thanks.

Sure. Obviously, everyone in Texas is cautious; some slow down that we have seen all year in the number of housing starts. We hear that there are some issues with a number of strip shopping centers that sort of stuff out on the fringes. We don't have any significant amount of that. We are not heavily exposed directly to the energy industry through a large portfolio there.

As you know, well over half of our portfolio is just small business lending there. So I think you would find better people to give you more accurate information that are more directly involved in that market, Kevin.

Well, I'm not asking so much about energy per say. I guess I'm asking about your perceived exposure to energy. So it sounds like you are characterizing it as more as indirect. If energy slows down, obviously that market slows down, but through housing and through small business and things like that.

Exactly. Our own review team was in there. Deterioration we are seeing other than that Syncrude credit is small loans. We haven't it -- we didn't have a significant number of downgrades. And let me just say, our Texas unit was thoroughly reviewed by all constituencies who would want to look at it during the fourth quarter. We don't ever comment on regulatory exams.

Okay. Just lastly, Richard, you mentioned right at the end there about being open to FDIC-assisted deals. Can you just refresh us what your wish list in terms of market is? If you were to have deals brought to you, where you would most like to expand?

Well, they have been brought to us and we have declined because we have seen no logic in a $300 million bank 200 miles outside of one of our markets. We see a number of institutions within our footprints in Florida that we think could have some issues. If they do and they make sense for us where we have branches in that market, we would be interested in it. But we are not interested in it to the extent of jumbo CDs, whatever.

So we know to buy a failed bank isn't necessarily a good thing unless we can close most of the branches, because it costs $400,000 or $500,000 a year to run a branch. We are not planning on taking on anybody's assets. I don't believe -- there could be a unique, small situation somewhere where there was no significant loan portfolio. But in general, we aren't going to step off in this environment and do anything.

If a meaningful $500 million to $2 billion sized company in our footprint gets in an assisted situation, we will give it strong consideration.

Okay, thank you very much.

Brian Klock, KBW Investments.

I know that a lot of my questions have been answered, so I just have a few. I guess when you look to page six of your financial information, good granular detail on all of the NPAs. Just what I was wondering was, I guess, looking at Florida the last two quarters as far as provisions versus charge-offs, you have provisioned less than charge-offs.

So I guess my first question is do you think then that the reserve coverage you have got there -- and maybe you can remind us on the impaired loans how much of those impaired loan balances have been charged off? That is the first question.

Second question, when you look at Texas, we know that a good lion's share of those NPLs that are [Sem Group] related, did the extra provision -- because you provisioned almost $3 million in the quarter in Texas. Was that related to be the ORE that you mentioned or are you seeing something that is in commercial or something that you want to build a reserve for in Texas? Maybe you can comment on those two things.

I am going to lead Barry Harvey in our Risk Management area address the first couple of questions, Brian. And the Bob Hardison address, if Barry doesn't have all of the information -- Bob has spent significant time in Texas and I think he can comment about that.

Barry, on the impaired loans and the write-offs and what you are seeing in expectations.

Exactly. What we are doing on the impaired loans -- excuse me, just back it up to the provision fees. The provision is driven by loan growth or a reduction in loan balances, net charge-offs, risk rate changes within our portfolio, as well as the changes in our reserving factors for our consumer portfolio. We use a 20 quarter historical rolling average for losses.

On the consumer.

On the consumer side. When looking at the provision for the fourth quarter, it was 16.7 and then net charge-offs was 12.7. When you are looking specifically at Florida, the net charge-offs, as you indicated, were $7.16 million and the provision was $6.5 million. What has to be taken into consideration is that approximately -- over $3 million of the charge-offs were actually provisioned in previous periods.

So when taking that into consideration we actually provisioned approximately $2.5 million more than we actually charged off that had not previously been provisioned for. So oftentimes these credits manifest themselves over time, and because of that the risk rate changes, the reserving occurs in previous quarters and actually results in the impairment and the write-off or write-down to value in later quarters.

So, for example, in this quarter -- in the fourth quarter we are talking about we actually provisioned more than $3 million more in Florida than we actually had in charge-offs. Does that answer --? Does that kind of give you --?

There was one $3 million pay-off of a substandard loan too.

Does that kind of give you the information you need there?

Yes. And I'm not sure if you have -- like you said, I think last quarter you said that the impaired loans in Florida were written down by 42%. So I don't know if that is still what you are seeing at the end of the year. Is that still the same sort of level?

I think that is broadly a good number. Some would be less, some would be more.

That is correct. It varies, as Richard said, depending on what type of collateral is involved. Obviously, land more so than a one- to four-family finished home. But that is generally what we are seeing.

We had a couple of the impaired loans that moved in that we did not need to write-down further from our pooled levels. For example, the $3 million Mississippi one required no additional write-down. There were a couple of others in Florida where we were already there, and not every property that the guarantor can service is that depreciated. Sometimes we might be fortunate enough to have had a good project but they releveraged themselves with other institutions and we can no longer look to them.

Can I ask Bob Hardison to chat about Florida and what he did down there and what he sees and just generally and then those --?

I think I am actually okay on Florida. I guess maybe we can talk about Texas.

Sure.

Okay. The provision was about consistent with the prior quarter in Texas. In the fourth quarter it was really more attributable to the loan Richard mentioned previously that went non-accrual that we have since foreclosed on. We feel real good about that. The appraisal we recently received was consistent with the appraisal we made when the loan was originated.

There were a couple of other loans in the quarter that were downgraded out of caution the borrower showing some stress, but nothing really out of the ordinary. I think Texas still performed well. Our energy portfolio, you alluded to a minute ago, is only $80 million and it's very balanced between midstream and downstream companies. So we don't really have a big -- we only have one production loan in that portfolio.

As Richardson said, a lot of small loans and small business loans, so we have not -- although Texas and Houston is showing the effects of the national economy as a whole, albeit, I think they came to the party late, they are showing some stress and some slowdown. Certainly not to the magnitude of other markets, but we are working closely looking at Houston. I know, as Richard said, I asked a few folks that have been out there and we have not seen any significant deterioration in our portfolio nor do we expect any in the near term.

Okay. I guess just maybe if you can refresh my memory, the loan in Texas that was provisioned for -- it looks like that was taken into ORE. Was that a commercial real estate loan, was it construction, was it development? What was the type of property or --?

It was a development loan that the borrower actually had problems unrelated to our project, but was unable to keep our project current due to problems in other areas. And so we were really forced to take possession of that property.

Okay, great. I don't know, Bob, while I got you do you have the early stage delinquencies at the end of the fourth quarter versus third quarter, the 30, 89-day past due bucket?

Just a minute. In Texas?

No, overall.

Let me look. I have some of that, but I don't want to read out 25 numbers to you.

Was there a specific portfolio or just in general terms?

I guess, really I am kind of looking at the commercial real estate and C&I, the small business C&I and commercial real estate. And again just -- and even Richard maybe you can comment after that on are you seeing any deterioration starting to show up in that small business or CRE globally? That is my last two questions.

Okay. And just in terms of the entire portfolio, we are going to be about 2.41%, 30 days or more past due. And then within the commercial portfolio that is going to be approximately 2.7%, 30 days or more past due.

That includes Florida.

It does, it includes everything. So Richard, if wanted to be more granular?

No. You know a year ago, 12/31/07, our direct consumer portfolio that 750 originated branch was 1.59% and it was 1.55% at the end of '08. It dipped down a little bit and came back up.

Our auto portfolio went from 1.55 to 2.5. Small business, which is around $800 million was consistent; 336 a year ago and 328 the end of this year. Our mortgage loans 0.8 to 1.4. So when we look at it there has been some deterioration, but not anything significant. And as you can see that entire consumer portfolio has about $16 million between the indirect auto; the direct consumer, which would be HELOCS, HE loans, direct car loans; and our mortgage portfolio. And it was up to about $4 million for the quarter and the losses outside of auto have shown nothing of any significant.

The past due home mortgages that we are working that are in our portfolio we are still counting on a couple of hands. We do service for the GSEs and we are well into all of that and modifications and whatever. The modifications on our own portfolio have not been called for at this time.

Great. Thanks for taking my questions.

(Operator Instructions) Jon Pancari, JPMorgan.

This actually this is [Talli Sambo] on behalf of John. I was just wondering if you could talk about your thoughts on continuing to add to balance sheet leverage, or whether 18% of assets is sort of the top of where you want to be or whether you are willing to continue to add to that?

I think that is a good place to be. That doesn't mean it won't go up or down $100 million, but we are through leveraging. Plus we don't like the rate situation at the moment.

Okay. Can you remind us what your annual cash flows are from your bond portfolio and what the rolling off fields are about?

Well, we can surely do that. You will recall that we had deleveraged the Company down to about $400 million or $500 million in bonds totally from around $2 billion three years earlier. So we bought $1.5 million worth of bonds during the year. Buddy Wood is going to make a comment on that.

Be glad to.

What the models say and what you really expect.

The investment portfolio currently is at about $1.8 billion and a yield of around 527. We have got an average maturity of around two years on it. We structured it specifically to have cash flow balance in the first year recognizing that that cash flow we wanted to move into lending and we still do. That number probably ranges from $500 million to $700 million in the first year. The yields that we will see come off during that time will be between 5 and 5.25.

The rest of the average maturity is laid out on a declining principle basis going from two out to six years and is very tightly structured. Mostly small discounts so that we would not be faced with premium write-offs with any accelerated payments which we now are, of course, experiencing.

The tests that we ran when purchasing these securities over the last year included the 4.5 move in the 30-year, although we felt that it was probably less likely than what we have all recognized has actually occurred now. You have got the combination of both rates and the political environment that we are in. But we see some stabilization in that and that keeps us from having just a sharp drop-off beyond the forecast that we have in cash flow.

Thank you. That is very helpful. That is all of the questions that I have.

Andy Stapp, B. Riley & Co.

Good morning. In Tennessee I noticed that your provision albeit NPAs and net charge-offs were down. Could you just provide some color on that?

Yes, I am going to let Gerry Host, our COO, has been up there a couple of times this quarter looking at the asset situation in Memphis. I'm going to ask Gerry if he will comment on that.

Certainly. We recognized some issues with the Memphis real estate portfolio probably in the second and third quarter of last year. We addressed those issues very quickly. Our team on the ground in Memphis worked very aggressively to deal with those and I think you are starting to see some of the positive results from those efforts that took place in the second and third and fourth quarter of '08.

And do you have a good run rate for compensation expense going forward?

Do you mean are we getting raises? The answer is likely not.

Okay. I mean is the fourth quarter sort of a good run rate? (multiple speakers) Is the fourth quarter a fairly good run rate, blend between the third quarter and fourth quarter?

I don't see any appreciable change in our compensation categories. We are doing a lot of reengineering. We will continue to add some lending personnel in Texas. We are an extremely well-regulated company between the Fed, the OCC, and everyone else. So we have added about everything we think we would need in the compliance areas of BSA. We have added senior people into enterprise risk management in the last year so I don't see anything significant there.

When we look at our expenses for next year, the only two things -- the only one thing going up for sure that FDIC insurance for the errors of others, which we hate to see at this time. And we hope that that doesn't go any higher than the present formulas, which it showed going up to --. How much Louis for next year?

For us about seven.

Go up about $7 million to about $10 million, $11 million for the year. Then it depends on what it cost to carry and liquidate ORE, pay the taxes, the appraisals, whatever, which we pretty well built into our budget. That may be marginally more than this year. But we are generally going to hold our compensation account and other expenses in the Company other than the FDIC as flat as they can be held. And that means cutting in some areas and growing and others.

Okay, thank you. That is all I had.

With that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Hickson, I will turn the conference back over to you for any closing remarks.

We want to thank you for joining us. This is two quarters in a row at this $24 million-ish level. Earnings are at that level principally because of the level of provisioning. When we look at us, I think we have been extremely dependable in expense management, very predictable in fee income. We have talked extensively about the margin.

No one knows whether the economy will perk up toward the end of this year. We are aggressively working on Florida and we are cautiously optimistic about our Mississippi portfolio. We thank you for joining us.

Ladies and gentlemen, this does include conclude the Trustmark Corporation's fourth-quarter earnings conference call. We do appreciate your participation and you may disconnect at this time.