Trustmark Corp (TRMK) 2009 Q4 法說會逐字稿

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

It is now my pleasure to introduce Joey Rein, Director of Investor Relations at Trustmark.

Good morning. I would like to remind everyone that a copy of our fourth-quarter earnings release as well as supporting financial information is available on the investor relations section of our website at Trustmark.com.

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

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

Good morning. Thank you for joining us this morning. We look forward to chatting with you this morning on what we consider a very good quarter for Trustmark.

Net income available to common shareholders totaled $13.9 million for the quarter and $73 million for the year. As we discuss this, I'll be joined by Jerry Host, our Chief Operating Officer; Louis Greer, our Chief Financial Officer; and other executives involved with credit and other risk in the Company.

Earnings per share of $0.23 for the quarter. There was a -- earnings in the fourth quarter included a one-time non-cash charge of $8.2 million or $0.14 a share for the accelerated accretion of discount associated with a full redemption of the $215 million preferred stock from the U.S. Treasury.

Performance reflects solid net interest income with an expanded net interest margin, reduced operating expenses, and increased tangible common equity. Pretax pre-provision earnings were approximately $53 million -- very consistent, very profitable, and predictable. There were no core extraordinary items for the quarter.

Before we go into credit quality today, I would like to take a moment and reflect on 2009 as we completed our assessment of what we accomplished during the year. When you look at the year overall, net income to common shareholders of $73 million was down from the $91 million of 2008. However, net income before the preferred dividend was actually up $1 million at $93 million versus $92 million; and the pretax, pre-provision net income was $214 million versus $212 million.

When you look at the pretax pre-provision income, I think I should point out to you that 2009 was a very poor year for Trustmark, where 2008 had a few extraordinary items. When we compare year-over-year we earned the $214 million even when our FDIC premium was $16 million this year compared to $3.5 million the year before. Our real estate foreclosure expense was $13 million this year, compared to $2.5 million a year before. The year before we had approximately $6.5 million pretax from selling our Visa and MasterCard stock. And in 2008, the year before, we had an $11 million pretax gain in our MSR hedging.

That really reinforces how good 2009 was, when you take a look that our margin was up well over $30 million and we did an exceptional job again on mortgage loan sales this year.

Looking at some of our operating lines, a major for management across Trustmark was a reduced exposure to construction and land development lending, eliminating the related concentration by proactively managing our portfolio and enhancing underwriting. Total CRE is now no longer any type of concentration compared to total risk capital.

Total risk-based capital is a little over $970 million. Total construction lending is $827 million. Non-owner-occupied commercial real estate is around $820 million. So the two together, a little over $1.6 billion, is compared to our $970 million in total risk-based, puts us in a very strong position when real estate lending kicks off again. With good quality margins and good income-producing properties and good loans, Trustmark will be in a very strong position to do that.

We also implemented the Argo system across all of our branches with our new sales and service and teller systems. It's a big positive for us. They tell me we've gone from 20 minutes of opening an account down to five minutes -- and 20 minutes wasn't bad. It should make a significant difference over the next few years with our cross-sell.

We conducted very targeted and very significant business development programs on key customers and prospects throughout all of our markets throughout the year. And we maintained a very dominant deposit market share in our legacy markets.

In our mortgage business, we expanded origination by 33% to $1.9 billion. We achieved secondary marketing gains of approximately $20 million. In the fourth quarter, we executed a $1 billion bulk sale of servicing at its carrying value with no loss to us. This is a very positive for us. It reduces our exposure; reduces our hedge; but even more important, has us in line where we are in a position to selectively grow hedging again, which will make our mortgage business more profitable.

Hedging programs for our mortgage pipeline and mortgage servicing assets were extremely successful. The total change in our MSR hedging after absorbing the cost of hedging was a positive $21,000 hedging $5 billion. That is what we intended it to do, and we are very, very pleased with that. It's taken a lot of risk out of our full-service mortgage business.

Our wealth management group increased total assets under management by 4% to $8 billion even in these volatile markets.

In the insurance business, we converted Bottrell and Fisher-Brown to one state-of-the-art management agency software application, resulting in a more effective management oversight and enhanced cost savings. And we'll see this going forward.

In our corporate finance area, we completed a very successful follow-on common stock issuance of $115 million. And we completed full re-TARP-payment of $215 million and repurchased our warrant.

In technology, we completed the conversion of check operations to an all-image environment with an estimated annual savings of over $2 million. And that means 100% checkless.

We renegotiated numerous processing contracts, which we believe will result in the future savings of an additional $1 million annually. In the human resources area, we reduced full-time equivalent staffing by 83 positions or 3.2% during the year, without layoffs, while salary and benefit expense decreased nearly $2 million. We also significantly increased delivery of Web-based training, with a 41% reduction in associated travel expense with that.

In risk management, we established three new loan committees -- one for commercial, one for real estate, and one for working criticized and problem assets. These loan committees are populated with professionals with those particular skill sets, from all geographic regions. Therefore, we are getting great interdiscussion and understanding, and generating much more consistency across Trustmark with underwriting and working of problems.

We redefined our allowance for loan loss methodology for commercial loans through classification into 13 homogeneous loan types.

Also in risk management, we purchased approximately $700 million of investment securities; sold about $183 million that no longer met our goals, with a pretax gain of around $5 million. At year-end, our investment securities portfolio had a great cash flow and an unrealized gain of approximately $60 million.

We think 2009 was a great year at Trustmark, where we accomplished a lot in credit quality, but also in many other areas, which allowed us to produce a very consistent $214 million really top-of-class pretax pre-provision income.

At this time, I'll take you to page 3 of our stat sheet and we'll talk about credit quality. Excluding our impaired loans of $74 million, our allowance for loan losses represented 155% of nonperforming loans. Linked-quarter nonperforming loans increased less than $3 million to a total of $141 million or about 2.16% of total loans.

Foreclosed real estate increased $18 million, principally due to one loan in our Florida market and one loan in our Houston market; and I will cover those in detail.

Nonperforming assets total approximately $230 million, representing about 3.5% of total loans in real estate.

Our provision for loan losses totaled $17.7 million compared to charge-offs of $17.1 million. The allowance moved to $103.7 million, 1.64% of total loans, however a very strong 2.1% of commercial loans and 80 basis points on consumer and home mortgages.

Taking a look at some of the detail, nonaccrual loans were relatively flat. I would like to point out to you that of our nonaccrual loans of $141 million, $74 million have been impaired, or 53%; and there has been a significant writedown in those loans that are impaired.

The impaired loans in Florida have been written down 35%. That 35% has taken place over approximately three years. All of these properties have been appraised many times. We think we have a good handle on it.

All of our other impaired loans have been written down approximately 6% in our Texas market and Mississippi market. We have not experienced a big appreciation there, nor have we seen any big drops there in value.

When we take a look at other real estate, Florida moved up approximately $11 million. We had one $10 million deed in lieu in the state of Florida. It was a loan that had not gone nonperforming, but we expected it to do so in the fourth quarter.

They're properties that we are very familiar with. It's made up principally of beachfront, not Gulf view; housing, single-family housing; and beachfront, not Gulf view lots. We already have two or three different contracts in place to sell nearly 60% of this property. We are not anticipating any loss on these particular properties.

The change in ORE in Mississippi and Tennessee were negligible. In Texas we had an increase, principally one loan to a residential real estate company. In Texas, different from Florida, there is a very rapid foreclosure process.

This is a residential builder who was working with a couple of the S&Ls that failed, and the FDIC was not making advances. They elected to not move forward. We have foreclosed; Bob Hardison can answer any particular questions.

We have taken a writedown of about 10% in this portfolio. We are not expecting any losses of significance. There a number of these houses already under contract. And we do not see Texas as another Florida in any extent.

Nonperforming assets, $231 million versus $210 million. Our provision for loan losses -- we had a provision in Florida of $11.3 million compared to a recovery the quarter before.

Let me say we went on a search in Florida looking for any gap, looking for any place that we could go ahead and set to a specific reserve based on what we might anticipate would happen with a new appraisal coming in 2010. We looked at our impaired portfolio and set up reserves against it in order to try to remove a great deal of that second-quarter lump.

There were two significant charge-offs in Florida. One for $2.6 million, writing down of a piece of land. The second was $1.2 million on the final writeoff in one of our major problems that we've had over the last couple of years. That was an $8 million residential development of which we have now written off approximately 100%.

It was way off market, up north of the interstate. It was one of our blind chicken loans, and it is now 100% behind us. I expect it will be sold for some level of recovery in 2010 or '11.

We will be happy to cover any things that you wish to discuss in particular about the different markets.

Florida credit quality. The main thing I look at with Florida, we have now reduced the exposure in the last 24 months in construction by 48%, by about $187 million down to $198 million. So our total exposure in Florida on construction is now less than our pretax pre-provision earnings for last year. If we keep that up, we'll have it down to zero within another 24 months -- as we kid each other.

Our non-impaired construction and land development loans totaled $163 million with an associated reserve of $24 million in Florida against that $163 million, or 14.6%, with a 6.77% reserve against Florida.

We continue to work in Florida. We continue to have a very experienced group. Systemwide, we have eight credit deputies, all of which are long-term experienced. We have them all in our major markets, plus two in Texas to handle the volume of business that we are doing here, to be sure that we are sticking to our underwriting standards.

Our credit deputies are not inside jobs. They are also outside, calling with our loan officers, looking at all of our projects, which gives us a double shot at good, solid underwriting.

To move away from credit quality to asset liability management, we did have a small increase in our investment portfolio up to $1.9 billion. This is acting just as we had hoped it would.

Pre-payments are not at the level of our model. It is earning and producing from the Bank at a time when we do not have any significant loan demand. So it's worked out extremely well for Trustmark.

Our net interest margin totaled right at $91 million, very consistent, very predictable. Expanded 5 basis points to 4.33% at a time when we were intentionally reducing loan earning assets.

Loans held for investment were $6.3 billion, down $62 million, reflecting a continued reduction in construction and land development and our decision two years ago to exit the indirect auto business, which has proved to be a very positive decision for us from a risk, from a loss, and from a generation of excess capital.

Total deposits increased over $300 million to $7.2 billion. Our capital strength and strong liquidity continue to be reflected in lower interest-bearing cost, down 12 basis points to 1.21%. Again best in class, showing our strength and dominance in our legacy markets.

Noninterest income is a real positive for Trustmark. The diversification is a real strength. The consistency, stability is a big positive for our earnings. Noninterest income was $40 million.

Service charges remain stable at $14 million.

Mortgage banking had another stellar quarter at $6.6 million with a $400,000 change in our MSR. General banking increased $6 million, reflecting increased debit card revenue. Insurance revenue totaled $6.4 million, and expected seasonal decline in wealth management remains stable at $5.4 million.

This again has been a strength of Trustmark. We think our diversification is giving us good strong pre-provision earnings and should continue to do so.

On the noninterest expense side we were $75.6 million, down $3.6 million over the linked quarter. Salaries and benefits $42 million, a decrease of $400,000 for the quarter. As I mentioned, over the last three years we have worked by attrition our full-time equivalents down significantly.

Our total expenses were $14.4 million, a decrease of $3.1 million. We were able to lower our foreclosure expense a little over $2 million.

Our efficiency ratio coming in just over 57% for the fourth quarter ranks us consistently as one of the best expense managers in our peer group. We feel we are well positioned to take advantage of the opportunities in the marketplace.

As far as strategic direction for 2010, we intend to continue to manage credit and balance sheet risk. We are pushing for revenue generation through prudent expense management investments. We'll have a very strong calling program. We're in a position if we see an acquisition opportunity that interests us, we can take advantage of it to increase shareholder value.

Thank you for listening to us this morning. I'll conclude my remarks and open it up for questions from our group. Thank you.

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

Good morning, everyone. Richard, I was wondering; I've got two questions. First, can you give us some sense on your outlook for the margin? I keep thinking for the past few quarters that this margin is getting close to peaking, and it proves me wrong. But now at over 4.30%, how should we look at that margin going forward?

Then secondly, if you can give us some sense for credit -- I know there's been a lot of probably companies that have been more stressed than you calling the peak in losses and pointing to normalizing credit. But what do you guys see for yourselves in terms of when you suspect you might see a peak in losses and provisions, NPAs, and then how that relates to reserve building? Thanks.

Thanks, Kevin. On the margin, we did a number of things during the year which we did not foresee that we were going to be as successful. One, was putting in floors on our loan portfolio. And we have been diligent, our customers have been understanding, and our -- Jerry Host and his commercial teams have just done an exceptional job there.

We were just plain lucky when we bought bonds in the timing of April and October of '08. We tried to stay out of the way and we took the portfolio down quite a bit, and we're just having the benefit of that.

We were really able to do some things on lowering our deposit costs, and we're still expecting to see some of that in our CD portfolio this year, but obviously, not as much as last year. We're not looking for a 4.33%, but we are not looking for anything lower 4% for next year.

When you say that, is that kind of a -- would you think it happens gradually or suddenly, or --?

I'm going to let Louis Greer tackle that one and Buddy Wood.

Kevin, this is Louis. We would see that coming down on a quarterly basis. Nothing that is shocking unless something just tremendously happened with interest rates. But I think in our models we've got it coming down very slowly.

Buddy?

It's possible, if we keep with this indirect auto running off -- and there was a lot of dealer reserve had to be accreted against that auto portfolio, so it is not a lot of profitability in it right now. The margin -- it just looks okay for next year. Buddy?

Let me add one other thought about the margin. We have a balance sheet structure that we have spent a good deal of time putting together that has a deposit base that even the interest-bearing short-term deposits that we have, which make up the majority of our core deposits, along with our non-interest-bearing indeterminate maturity checking accounts, we operate with a 40% beta to the movement of interest rates on a liability side.

We have more than one-third of our loans in a variable position, so that we don't see either the asset or the liability side of our balance sheet moving very far away from a very tight range that we target.

We used some fixed-rate assets because we needed to. We were actually too asset-sensitive, and the extension of the investment portfolio along with a small amount of increased preference by our customers in fixed-rate lending has allowed us to maintain a balance that puts that 4% range very comfortably in a management focus.

We've got a lot of tools that we haven't used as much as we feel that we can, especially in the borrowed funds area, as you can see from the amount that we're using compared to the very significant amount of availability. So those types of asset liability and interest sensitivity management, proactive ways, is what gives us the 2010 comfort that Richard is referring to.

Okay, thank you.

Let me let Bob Hardison and Barry Harvey. Bob will be able to comment by market on credit and Barry overall. Bob just spent all of last week, five days in Texas, pretty well going through everything there and is spending a significant amount of time in Florida.

Bob, would you comment on where you think we are in the cycle and what's out there by market as we look into '10?

Okay. I guess this is the answer to the second part of your question, Kevin, with regard to credit. Looking forward, I guess what we are looking at is -- and Florida is such a big part of that. If you look it's about 50% of our things like our nonperforming and our charge-off and our provision expense and so forth. And it is still uncertain in that market.

We've been about 18 months into our concentrated workout effort with dedicated people in that market, working credits down there. Early on, the property values fell so far so fast it was really difficult. We spent a lot of time trying to get our arms around it.

But now over the last number of months, we feel like we do have an understanding. We do have our arms around what's going on. We are actively working the credits, and we are seeing some of the fruits of that labor.

We can't say Florida is behind us. We still have more work to do. But I think -- and maybe Barry can comment a little on this in a few minutes -- that we are to some degree able to make some type of estimations and predictions about what we think the credit costs are going to be in Florida.

Again, it is still uncertain. It is difficult to predict. But I think we have it hemmed up now enough to where we can start looking at sort of the things you want to see. I don't think we can tell you with any degree of accuracy that we're there yet; but we're getting closer.

With regard to Texas, I was out there, and went through the portfolios, and talked to a lot of people, and talked to some customers. And we think that market out there is fairly stable. I think if you look at the unemployment rate and things like that, that they are below the national average.

Housing starts, where they were 40,000 a year in the boom times are now going to be between 15,000 and 20,000 predicted for '10, which is still pretty good. Pretty good activity.

Our problems I think in Texas are really centered in eight credits that have our attention. Two are companies related to natural gas production, one in a distribution company. We have two land loans, one development loan, one large house, and one office park building development.

So it's sort of spread out. Each has its own set of issues. The land loans and development loans, we have good loan-to-values. The single-family residence is about a $2.5 million house appraised for $3.3 million, $3.4 million; so have we got good loan-to-values.

And given the activity, we just don't see a great deal of problems in Texas. We are going to have the kinds of problems you would expect to see when you have a recession of this magnitude. I think Houston is weathering it better than most, but we're on top of these problems.

We don't see systemic issues in Texas at this point. They appear to be isolated. Unfortunate, they are isolated in -- these credits are rather large, probably averaging $4 million or $5 million apiece, maybe not quite that much.

But in Tennessee, we don't expect much. I think we've dealt with our issues in Tennessee. May be some isolated cases there.

Then Mississippi, our market has been very stable. We do have some problems that have been identified. We don't see a whole wave of new problems coming in Mississippi. We are going to have a few isolated cases.

But we don't really -- again, we didn't have the big run-up in real estate values in Mississippi, so the market has held pretty steady. So we will move through Mississippi in general fashion that we have in the past. So, Barry, you got --?

Barry, would you comment also on -- we've always been a fairly large consumer Bank, what you are seeing there. And relative to our collection efforts, any change? Auto, the mortgage, just broadly cover that side.

I'd be glad to.

Just on reserve.

And reserve, okay. Back on the provisioning losses and nonperforming assets that Bob was commenting on, I think holistically from a provisioning standpoint and from a loss standpoint, we see '10 to be in our minds below '09. To what degree, we don't know at this point.

But just through our analysis and taking the same approach that we took when we looked -- when we projected out '09 to project out '10, we feel like that we've, as Bob indicated, addressed a number of our credits, especially in Florida addressing our larger credits.

And I think we're seeing that clearly when we looked at our loans that moved -- became impaired this quarter and our loans that moved into ORE, we basically had no further write-down in total for the loans that moved into the impaired category and for the loans that moved into ORE from what we already had provisioned. Which leads me to believe that we've got the majority of our problem loans that we know about today pretty well provisioned, which that evidences.

When it comes to the nonperforming asset side of it, I think a lot of what we see there is going to be a function of our ability to move the ORE out the door that we have today, and what will be proceeding into ORE from the impaired category as we move through '10.

We've got a decent number of Florida credits that are impaired today that have been going through the legal process for quite a while and should move on into the ORE category as the year progresses. So we will just need to look and see how well that market responds and how well we are able to move out some of that product.

What we have moved in from other markets, we feel very good about our ability to move that ORE product out the door because those markets are a little more solid at this point.

As it relates to the consumer side specifically, our performance from a past-due standpoint, our past-dues continue to creep up, as you would expect in this type of environment.

From an automobile perspective, the dollars past-due remained fairly constant. The percentage obviously goes up because of our denominator shrinking so greatly with the runoff. But the dollars past-due that we are trying to manage remain fairly constant.

In our mortgage portfolio we do see an increase in past-dues. But we've been very fortunate in that portfolio because of the way it was built on 15 or less year paper. That just has resulted in a much better credit quality type of individual for us. And the performance being around 50 basis points worth of losses in the year 2009 evidences that versus what the industry is experiencing.

Kevin, did that cover the credit and the outlook?

Yes, that was great. Just the one other thing is if you could get a sense for reserve building, how you feel about that. Some companies have started releasing already a few; and others have kind of indicated we are going to continue to build but probably at a slowing rate. I'm just wondering how you feel about it.

Barry, would you comment on that?

Sure. I would see us probably in the first category, Kevin. Eventually -- we don't necessarily know when that will occur. But we do feel like as a result of us having our Florida credits properly reserved for today -- and those being the predominant credits that are going to move their way, become impaired if they are not already impaired, or move their way directly into ORE. Because of that and because of the levels of reserving we have on those credits, we could see a reasonable, maybe a large amount of reserve being released as those credits move through their natural process.

So we very well could find ourselves sooner rather than later in a situation where we don't need as much reserves, or we don't have as many new problems coming on board, and the combination of the two resulting in a lower provisioning and possibly in a situation where net charge-offs exceeds the provision based upon the activity going on.

Okay, great. Thank you, guys.

I think, Barry, that that could be pushed a little bit too by the rapid payoff of this auto paper. We've got a reserve a little in excess of 120 basis points --

That's correct.

-- on that paper. And of course we are taking our charge-offs there out of earnings. So we will see a little pressure on that part of the reserve. That would be almost $5 million.

That is correct.

We are hopeful, but we are still searching for gaps in anything we feel we need to reserve for, doing so each quarter.

Okay, thank you.

Brian Klock, KBW.

Good morning, guys. How are you doing? Richard, let me just see if I understand correctly Kevin's questions about the margin. Are you guys saying that you think the margin will be down to 4% by the end of 2010? Or you just think that it could see some pressure here from the level that it is at currently?

I would say I was just putting some rails on the baby bed, so (multiple speakers) think it would roll off in either way.

Okay. Then I guess I would imagine that -- maybe you can give some color on the good, solid core deposit growth you had. Seemed like it came in at the end of the year, and so that funding impact isn't in your margin for the fourth quarter. So it seems there could be a positive impact on your margin for the first quarter of 2010 from that good, solid DDA growth.

I'm going to let Jerry Host, Chief Operating Officer, who is day to day in this, talk about that.

Brian, what that increase in deposits is, is the result of some public monies that come in typically at year-end and then are spent out through the first six months of the fiscal year. The state is on a 6/30 fiscal cycle, so that's why you have that spending that takes place over that period of time.

Core deposits overall from both a retail standpoint and a business standpoint have remained very steady and increased slightly. That's despite the fact that we are very, very close controlled on our deposit rates. We use a heavy focus on technology to maintain customer relationships.

One of the things we've accomplished over the last year is that we have completely eliminated all paper checks within the Company. Two months ago, we unplugged our last 3890 check reading machine, so we are completely paperless.

We are taking that technology out to our customers and offering remote deposit capture very aggressively, to increase their efficiency and to help lock those core deposits into them.

So we feel good about the stability of the deposits within the organization. Pricing is very solid and we will continue to work to grow those core deposits.

Hey, Jerry, just follow up on that, how much was the public deposit money influence in the fourth quarter?

It was approximately $200 million.

Okay. Let me just ask one more and I'll get back in the queue. Richard, maybe you can talk about -- and I apologize if I missed this earlier. The Texas NPAs went down about $3 million linked-quarter. So did the SemCrude credit, did that come out of that NPA?

Yes, we did sell the SemCrude note; had a recovery on that within our reserves, which we left in the reserves, and that was principally the reason for the drop. I think that was between $7 million and $8 million.

Okay, great. Thank you.

(Operator Instructions) Andy Stapp, B. Riley & Company.

Good morning. Could you add a little bit more color? You said you are, I take it, pretty balanced interest rate sensitivity-wise to slightly asset sensitive. As interest rates began to tick upward, what do you see the impact there, including the impact of floors on loans?

We'll let Buddy Wood comment on that, and then Jerry Host may want to comment on the floors.

I think one of the key tests that we run is pivoting around the yield curve in a number of different ways so that we don't just shock, we don't just wrap, but we also twist our curves and do a variety of other types of adjustments to see what could happen with all of the unknown potentials of the outlook for interest rates and the change in shapes of the yield curve.

With all of that, we have run approximately less than 2% in a rising interest rate sometime later in the year of our net interest income. And we would say that in a worse case that might run up to a little bit over 3%. So somewhere in the range of a -- if we don't do anything in order to adjust it, which is highly unlikely, because at least twice a month we have a special review where we just talk about all of the alternatives from structured product to longer-term deposit programs and all of the various borrowing that is available to us from so many different sources at reasonably inexpensive rates.

But that range would say that worst case the way we look at it is that we could see a $6 million to $10 million negative hit if we did nothing at all. And we believe that that is well within a tolerance of where we want to start this and just continue to monitor that closely as we see the behavior of the Fed as early as today.

Buddy, I will add to that relative to the situation on the floors. Our asset liability modeling and the comments that Richard made earlier about where we think the margin might go are all reflective of the impact of rising interest rates on those loans that are priced with floors. So in other words, many of the spreads, as we put floors in and we renewed loans, we generally increased the spread to the existing indices, whether it's prime-based or LIBOR-based. So the gap is not that significant.

We have included it in our models. We've also included a projection on what we think will happen with loan volume over the next year. So what you have heard today I think incorporates all those things in our modeling process.

Okay. Speaking of loan volume I guess in your last call you were pretty pessimistic about loan growth and loan demand. Any glimmers of hope there?

This is Jerry Host and I will answer that question. Our loan -- anticipated loan volume continues to be, let's call it, slightly anemic. We are like the rest of the economy. As we visit with our customers, we hear that they are reducing their inventory levels. Any CapEx projects that they had on the board have either been postponed or completely eliminated.

As we've talked to you before, we have done away with the indirect auto business, so we are seeing that portfolio run off. We've done away with the student loan business, so we've seen a decrease in volumes that we once had in the past.

So what we're working on is a focus on existing customers, as well as opportunities that might exist with customers that are with banks that they don't feel like they are getting either the service or the opportunity to work with as they had at one time. So we think that being able to maintain a flat to slightly down level of volume throughout 2010 will serve us well, and that also is built into our ALCO models.

Okay. One last question and I'll get back in the queue. Has your appetite for FDIC deals changed materially from what you previously discussed?

Also, maybe you could talk about where you would be looking for such deals. Do you want to stay in your footprint or potentially move outside your footprint?

Well, guess the first comment I would make about that is it's mighty nice to be TARP-less and warrant-less.

I can appreciate that.

Number two, we have spent a very significant amount of time trying to understand what it really means to take on and go into business with the US government. We are viewing and refining the accounting of FDIC-related transactions.

We are also spending a significant amount of time trying to understand how much effort working the loan problem portfolios will be, the reporting, the decision-making, who will make the decisions, and the fact that Trustmark is not interested in getting all of our extremely skilled workout people working out deals that don't impact Trustmark favorably.

That does not mean we are not interested in FDIC transactions. It means that we want to go into anything that we do heads up. We want to know that it's accretive. That after we work on it for two or three or four years, that we have something that makes sense for the Company when we get through.

We do not want to go out and purchase a franchise with four to 40 branches of which we don't like any of them, where we would end up having to move them all two blocks, repaint them, rebuild half of them, and make another $50 million investment.

So we will look at it very pragmatically. We would love to be in a transaction where we think we could increase our core deposits, where it would be meaningful for us, particularly a couple years down the road, in managing our ALCO position.

When I think of our footprint, that covers Mississippi, Tennessee, Florida, and Texas, and anything in between. So I would say we would be in footprint. I don't see us in southern Florida, and I don't see us in western Texas. Other than that, we would look.

We would prefer something that has some age and some retail quality to it. We know how; we have the team to work the problem loans. But we would much prefer, if we are going to take on working out a bunch of real estate problems for the government, we would like to generally understand the land and the values.

So we are looking. We are free. We have no reins on us. We have a ton of capital. We have the earnings. And we have the personnel. If the right deal comes along, we'll be competitive.

Outside of the FDIC, we surely are not going to go try to buy a problem bank without the FDIC. But if there are some weaknesses with something outside of the FDIC that we think are of good intermediate and long-term value, and are not dilutive to us, and we can take this new Argo retail system and just convert it instantly, and save a ton of money, and use all of this imaging technology and our retail team, we can consider that also.

Would you consider central Florida as part of your footprint?

It would have to be a really good franchise. And if it's a really, really good franchise, there are enough other people down there in central Florida that I would suspect we would be tough winning it. But we would look at it; but that's not our primary, if you are talking Orlando.

Right.

Down and through the there, it's not a primary focus for us at this time.

Okay. Thank you.

Al Savastano, Macquarie.

Good morning, guys. How are you? Just two questions for you. Just in terms of balance sheet growth with the loan demand still being anemic in your terms, does that mean the balance sheet is going to stay relatively flat in '10?

Unless interest rates move up and there is some exceptional opportunity in mortgage-backeds.

Okay, great. Then I was wondering if you can expand a little bit more on your comment in terms of taking out the second-quarter volatility in charge-offs with the Florida review. Like maybe moving that forward up to the fourth quarter.

We're trying. As Barry and Bob said, we do adhere to the interagency regulatory loan-loss methodologies, and it encourages us to try to anticipate as much as we can and are allowed to do so.

Great. So did you go out and get more appraisals on the properties in the fourth quarter that you would have normally done in the second? Is that kind of what you did?

We're always appraising properties. We had a number of appraisals in the fourth quarter, but nothing like the second. But we are working to try to smooth that out as much.

We are trying to anticipate what might happen to appraisals over the winter in Florida and trying to put some level of appropriate discount rate on it.

Okay, thank you.

Have we reserved for the second quarter? No. Have we worked on next year? Yes.

A lot of our losses that we will see in the second quarter will be loans that are performing today. It will be smaller real estate projects where we get new financials this spring and the owners have just run out of cash.

It won't be big projects; it will be very small. Most of now things we're dealing with are under $1 million.

Okay, so probably safe to assume then that charge-offs for the first quarter, the second quarter probably won't double like they've done in the past couple years?

I didn't believe that -- if you're talking about '07 to '08, that was a big increase. If you are talking about '09 to '08, it was fairly stable.

As you know, you get most of your financials so you can do your global cash flows. You get most tax returns and most information there in the first and second quarter. And the unique nature of the Panhandle of Florida being very seasonal, since the weather isn't as warm as down in southern Florida.

But we expect to see that. We're very conscious of that, and we're working to smooth that as much as we can.

Okay, thank you.

But Barry has commented that we are very hopeful that reserving and charge-offs in 2010 will be below 2009.

Thank you.

(Operator Instructions) Brian Klock, KBW.

Hey, guys. Thanks for taking a follow-up. I just wanted to I guess double-check two things. One, within the other operating expenses, can you give us the breakout of your ORE costs in the fourth quarter?

Sure. Louis, do you have that?

Brian, I think it's in the stat sheet in the footnotes back there. It's actually Note 5. The fourth-quarter cost for other real estate expenses was about $3.6 million compared to $5.9 million.

Got it. Okay, and I guess -- thank you, Louis. Richard, for you, do you guys have an updated assessment of what the impact on your deposit service charges could be year-over-year looking at 2010 versus 2009?

We had said before -- and we are looking at the legislation that is in place, trying to anticipate what might be in place. And a long-shot guess may be $5 million to $10 million on an annualized basis. Jerry, is that still --?

Yes, that's a very early estimate. What we have done is we have fully dissected those accounts. Of all our accounts, 25% of them incur an overdraft; the other 75% of our accounts don't incur an overdraft over a year's period of time.

We've looked at where that is occurring; frequency; channels, meaning is it ATM, is it point-of-sale, is it check. And so we have all that data available and have been discussing a variety of different alternatives, options. We've looked at what do we do about a process of getting people to opt in and what that will take.

So I guess that was a long answer to your question. We are thoroughly evaluating what we have, how it works; and as various alternatives and more clarity develops I think we will be prepared. But as Richard mentioned, we've done a rough estimate. We think it may have somewhere in the $5 million to $7 million impact at this point.

Jerry, that would not be impactive until July of this year?

The legislation does not go into effect until the first of July, so that would be a half-year number; and that's when it would occur, in the second half of the year.

Okay, so the $5 million to $10 million is annualized. So half of that potentially could be in your 2010.

Depending on the legislation.

Depending upon the legislation.

Yes, depending.

We are very careful as to the projection we make there. It is just too much uncertainty at this point.

All right, great. Thanks, guys. Thanks for taking a follow-up.

Andy Stapp, B. Riley & Company.

Hi. The debit card, the impact, that $5 million to $7 million you mentioned, is that a 2010 impact or a full-year impact?

That was indicative of what it was. Joey, do you --?

2010 (multiple speakers), that's a 2010 impact.

Okay, so it's a half-year impact?

It is a half-year. That's correct.

Okay. Then you are talking about getting your hands around Florida. What are you seeing in terms of signs of stabilization in real estate values?

We are predicting -- last year we said it was 21% drop. We're predicting it's going to be less than that.

Substantially less, or -- you don't have a --?

It is very possible holistically it could be a percent a month, but we surely don't know. But in looking at properties and looking at recent appraisals and looking at what appraisers are using for their discounts and the comps they are using, I think that would be less. There is really some change; I am hoping that would take care of it.

And you are taking that into your loan-loss reserve model and valuing OREO?

Absolutely.

Okay. All right. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Richard Hickson for any closing remarks.

Thank you for joining us today. As you can see, in addition to working on the Great Recession, we have a number of other very positive things going on in the Company. We are very profitable. We have plenty of capital. We have 2,600 associates that are tenured and have very good skill sets in all of our lines of businesses.

We are seeking opportunities to increase shareholder value. And let's look forward to our results from the first quarter. Thank you for joining us.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.