Trustmark Corp (TRMK) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Trustmark Corporation Second Quarter Earnings Conference Call. (Operator instructions)

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

Our 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 other filings with the Securities and Exchange Commission.

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

Good morning. Thank you for joining us this morning.

I have with me Jerry Host, our Chief Operating Officer; Louis Greer, our Chief Financial Officer; and other executives representing our Investment Department and Credit Administration to answer any questions that you might have this morning.

Let me begin by saying I feel it was a good quarter; from some perspectives, a very good quarter. There were no really significant surprises. We remain cautious about the future. However, I would say that Trustmark has turned its ship and moved to the offensive.

Someone said at our board meeting yesterday, as we were looking where we are and where others are, we are fully cognizant that we're seeing a number of institutions still incurring problems -- problems in our market. We're aware of that. We're very cautious of that, and we're concerned of that.

Someone told me yesterday that today's peacock is always tomorrow's feather duster. So we know we had a pretty good quarter, but we surely don't think we're at the end of anything. Maybe it's dropped down to a new level. But we'll talk about that, and you can form your own opinions.

Net income available to common shareholders was approximately $26 million, $0.41 a share. Our return on tangible common equity, which we key toward, was approximately 13%, up from about 12% on a linked-quarter. Our Board did declare its usual cash dividend of $0.43, which we had a good coverage ratio on. Pretax pre-provision earnings held steady at approximately $49 million.

We saw some revenue growth compared to a year ago, some improved credit quality. And we continue with a very disciplined expense management, which we'll be more granular on later in our call.

We had two items which you might consider non-core. One was $2.3 million positive after-tax, as we hedge our MSR. Buddy Wood will have some comments about why and our expectations later on that.

Our security gains now are approaching $70 million, $65 million to $70 million. We took about $1.1 million in after-tax gains. That was some credits that we felt that any move -- bonds with any move would take away the income.

In my mind, as we take very small profits in bond portfolio, it is detracting from the future margin, maybe over a three-or four-year period. So margin would be even better if we had not been taking these small profits. We will address that issue and whatever is the best opinion of our Investment Department, as they know our portfolio very well.

Tangible common equity continued to grow -- it's now about $833 million, or about 9.3%. Risk-based capital continues to grow principally with the types of loans that are leaving our balance sheet and loans leaving as we are de-risking.

I can comment on the loan portfolio for a moment at this time. Linked-quarter, it was down about $115 million. Looking at it, land and land development was down $67 million. Consumer auto was down $50 million. That gives you your $115 million. Everything else was essentially flat. We're seeing some renewed activity, which we'll discuss more in depth on the C&I side.

There's not going to be much loan growth until the economy turns. But we are seeing the loans move off that we wish to move off. The construction land development was principally about $40 million in Texas and $15 million in Mississippi, and about $10 million in Florida. So that many of us would view as positive. When a construction loan pays off or migrates, it's a big help.

We no longer have any kind of concentration when it comes to construction or total CRE. And Barry Harvey will cover [any of] those numbers later, if you have a question about.

I'm going to go ahead into credit quality. It was the best quarter we have had in quite awhile. I would say the major reason that we have seen this peaking -- and I might take you to page six of our stat sheet, so you can see five quarters across, with assets, provisions, charge-offs, et cetera.

We had about $35 million migrate into non-accrual in the quarter. In the previous three quarters, it had run between $50 million and $60 million; the four quarters before that, $40 million to $45 million. And we have to go back to the first quarter of '08, which would be 10 quarters back, to find a number lower, which was $30 million.

We're hopeful and optimistic that we're seeing a new level. We can't ever be positive, but we do feel pretty good about the migration at this time.

A couple of loans that migrated during the quarter have seen significant things happen to the positive since then. For example, there was one $7 million loan in Mississippi with some income-producing property, where the borrower had other properties, took everything into bankruptcy; and the judge turned our properties around, because they both have cash flows that cover reasonable debt service. Whether we'll upgrade them or not this quarter -- doubt it. But it's not what we were expecting front-end.

We had a similar situation in Texas, where we downgraded a significant credit and had some major changes on it that are positive -- with payments, reserves, interest called up, whatever. So I guess if I looked at this number -- we still had our loans going on nonperforming. For the first time -- I'll hit them in a minute -- we saw more than one or two upgrades of credits in Florida. So they're beginning to move both directions, which I think is helping this.

On the provision -- you can see that there was very little provisioning in Florida. The situation in Mississippi was a couple of loans, one of which we had about a $2 million credit that had some issues in it related to borrowing basis being correct. And we charged that credit off and know that we -- for $1 million -- and know that we're in good shape at this time. With it, I don't see any significant potential losses on it.

In Tennessee, we provisioned about $3.6 million, which ticked up. And it was essentially three loans -- one a $6 million or $7 million loan with two shopping centers that have tenants in it but aren't cash-flowing fully, and we wrote those down $1 million. We had an apartment building that we wrote down $1 million, and the third shopping center didn't fully cash [flowing]. We wrote down another $800,000. So it was three specific credits. It's not raw land or something.

Memphis has been a very tough market. Good news I have about Memphis is we have very little left there that is not classified and then written down. So we'll answer any other questions you have about the provision later.

The allowance -- we did end up releasing $1 million or so in reserves. Our commercial reserve is now at 2.1%; consumer at 0.82%, 1.66% of total loans. If you pull out our impaired loans, our nonperforming have 149% coverage -- that is excluding the loans with no specific reserves.

To talk about ORE for a moment -- ORE remained generally flat. If I look at migration -- we had approximately $35 million go into nonperforming. We foreclosed on about $18 million.

There were four credits above $1 million. One was a residential builder in Jackson for $1 million. One was a piece of land that we acquired through the acquisition of the Barret Bank in about 2001, that's sold off quite a bit as a piece of commercial property, and time just took care of the borrowers.

One was a house for a couple of million dollars, about a half-mile from Rice University in Houston, from a builder. This was a loan that had been with us for quite awhile. The builder was using it -- built for a primary residence for himself. We expect that to move away in this quarter.

And the other was six beach lots about 75 yards from the beach in Florida -- that we value all six at $1.2 million. So you can see the write-down there.

When we look at ORE -- it's still at $91 million. The amount of ORE in Florida has dropped significantly to about $32 million now from about $46 million at year end. And it has been written down very significantly.

If we look at the ORE in Texas, it's principally three properties we have reserved. We do not see any significant losses in these properties, like you might have had in Tennessee or Florida. Actually, Florida's down quite a bit.

If I take a look at all ORE of the $91 million in excess of $500,000 -- they're about 42 properties. They were on our books at impairment at $134 million, and now they are $66 million. They've been written down 41%.

Now, when you go more granular -- the Florida was $75 million, and now it's $24 million. And those properties have been written down, everything -- I'm looking at the list -- from 52% to 73%. So there's really not a lot remaining in that $24 million of the $31 million in Florida that's over $500,000. There are two $3 million credits, and the rest get down to below $1 million, or $1 million, in a hurry.

If we look at Mississippi -- there are about a dozen credits totaling $16 million, and they were $25 million. And that's principally that condo in Memphis that we've written down 41% -- the one that we're the participant in -- that was built on the bluffs there, just a little south of downtown. And we took the opportunity and wrote off a little over 30% of the only condos we have on the Mississippi Gulf Coast. We have been selling them. We started out with probably 15 or 16, down to eight or nine. And we think they are priced to move. It's the only condo project there in the Biloxi area [and] address that.

When you take a look at Tennessee -- it's been written down from 11 to seven. And then Texas had been written down from 24 to 18. There's been a couple of projects that we went ahead and took heavier write-down in Texas. But generally, they're holding up well.

I will tell you that when I look in a granular way at Texas -- which I think you will be interested in -- the two larger residential properties that were $6 million, $7 million, $8 million each -- we have sold about $5 million worth of lots and houses year-to-date. And we earned -- we made a profit of $300,000 on all the houses and lost $300,000 on all the lots, so about breakeven. We got another $2 million under contract, and that just leaves $2 million or $3 million. So this is essentially moving on through.

So when we look at credit, compared to short-end history, it looks very good. We saw a small decrease in nonperforming assets. I am expecting ORE to continue to move down. If you do the math on ORE, it says that we sold about $12 million worth of ORE at no significant loss. One was about a $3.5 million property in Florida that we were able to clear, and there was no additional loss or gain on it.

I'm going to leave credit and talk about a couple of other issues. And we can come back in any way that you would like to.

I know you will want to look at our Florida chart. But you'll see this Florida number is getting much smaller -- a very heavy reserve against our non-impaired loans that are in the construction category. It's down in the 130s, and just something that we believe is very manageable for Trustmark at this time.

Moving on to the balance sheet -- the net interest income was very solid, at approximately $92 million. The margin expanded somewhat at 5 basis points. We continue to have success lowering our deposit cost about 11 basis points -- principally CDs. And Mr. Host and team are doing a great job on holding the rates on loans.

Loans averaged about $6.3 billion; I've covered that. The investment portfolio was essentially flat at $1.9 billion. We're working at this stage to try to keep these earning assets at $8.2 million or $8.3 million. We're buying the least number of securities that we must. We are staying in a very solid, no-risk [thought] from the bonds that we're buying. There's opportunity there if we wish to, because of our equity. And Buddy Wood or Mitch Bleske can comment on that.

Deposits -- relatively flat, except where we're pricing them -- a little kick-up in non-interest-bearing. Noninterest income was just very solid. The mortgage company had an approximately $600 million quarter, up from year-ago $300 million and up from $225 million in first quarter. We can comment on that -- it was principally refinancing and gain on sale, and some gain. I think we would have been impaired about $8 million if we were not hedging.

Our hedging has turned out over the last three years to just be a very positive situation from us. And we think we have released but we actually sold about $1 billion to $1.2 billion in servicing, more or less at par. It was loans that we had originated principally in Alabama. And we sold them, since we don't have a retail marketing base in that state. It helped us in a number of ways.

The car fees increased about $500,000. We'll comment on that later. Insurance remained fairly stable at $6.9 million, as did wealth management.

Our noninterest expenses were up 1.2% if you pull out foreclosed property cost and the FDIC. We appraised a very significant amount of our impaired loans and a very significant amount of our ORE -- about the same amount that we did last year.

I would say that we appraised approximately two thirds of everything that will be appraised this year. We were as aggressive as we could be on the ORE. Principally it was smaller -- like $3 million, which -- we had a couple of properties, two or three in Florida -- off-beach land. And it dropped precipitously down to a level that you think must be a bottom. That was nearly $4 million of the $7 million write-off.

We continue to appraise. We continue to be on top of our properties. We have heard the phone ringing more since the well has been capped.

I'll make one comment on the well. We did a significant amount of work over the last month in looking at our loan portfolios. We do not see anything at this time that we believe would require us to create a specific reserve. We have negligible exposure in Louisiana -- very little relative to our balance sheet -- along the Gulf Coast of Mississippi that would in any way, I think, be impacted.

And I believe so far, we've dodged a bullet over in the Panhandle. Gulf Shores was hit a little bit. But we just haven't seen it in [Sandestin] and Panama City, South Walton.

We have had extensive visits. One of our major customers is number two -- Condo Management Company. They manage and lease 700 condo units between Pensacola and Panama City. They have managed it well. Their revenues through July 15th were down about 8%. That's pretty representative of a blend across the Panhandle.

They did a great job in managing their overhead and were generally flat. They were expecting the last month to be slower than last year. They are getting payments from BP. And they were encouraged that people who had canceled this year had said, Hey, keep my place in the condo I like for next year. And so their bookings for '11 were up significantly compared to the year.

Same way we have a client who is a major hotel room -- well over 1,000 units. They had been discounting. They're principally on the Eastern end of the Panhandle, and they had hired, let's say, 800 people for the season instead of 1,000. So what we're seeing -- and they were pretty well breakeven with the year before. Everyone was expecting a significant increase. There is discounting going on, there is cancellation going on. But for the major players that we talk to, they're managing the process.

We also talked with another customer who is [in] charge of the cleanup. They've hired about 1,200 people for the beach cleanup. They're being paid by BP. It is creating a significant number of jobs -- about 1,200. They're paying these people a little over $12 an hour and time-and-a-half overtime. Their comments are, We've been lucky. They have the manpower to address tar balls or whatever else comes ashore.

There's still a lot of uncertainty as to what's on top of the water and what any storms might do. No one is relaxing. As you know, it has been breaking up significantly and degrading. So we're hopeful but cautious.

As far as strategic direction for us -- we continue to manage credit aggressively. We're working on our balance sheet. We're still de-risking. We are looking for loans, and we're making some loans. We are doing anything we can on investment side that will generate revenues. We're still controlling expenses, keeping our headcount flat.

We are looking at FDIC transactions, but we haven't found one that interests us strategically at this point. We're looking at them in a very granular way. We don't know what the future holds for a [number] of other institutions. But if anything is available that we think will make a strategic difference for Trustmark, we'll be in the study room aggressively.

On legislation -- Mr. Host can answer any of those questions. He presented to our Board yesterday. Principally, he said there are a lot of studies to be done, and a lot of it is a great deal away. He has some very good news for you on opt-in/opt-out that I'm going to ask him to comment on.

Thank you, Richard.

As Richard mentioned, there's a lot ahead of us for all of us in the financial services industry relative to this new financial reform regulation. And we are studying it very carefully. And we are in the early stages of putting together projections in terms of the impact on our balance sheet and income statement.

More specifically, though, as it relates to the Reg E change opt-in and opt-out -- I will tell you that to date we have approximately a 90% response rate from all of the accounts that we have contacted. Of that response, approximately 88% have opted in. And even a higher percentage -- approximately 92 percent -- have opted in on those users that are more frequent users of the overdraft protection product.

So based on some indications we had given you a quarter earlier, we feel better about where we we'll actually end up. You all recall that for existing customers, change takes place on August the 15th. So it will be approximately a four and a half-, five-month event for us for the remainder of this year.

Richard?

Thanks. We'll open it for questions.

(Operator instructions) Steven Alexopoulos, J.P. Morgan.

Hey, good morning, Richard.

Morning, Steven, how are you?

Okay, great.

Maybe we could start -- given the review of the coastal [rift] that you did in the quarter, can you break out the total dollars of loans that you have in coastal MSAs; then maybe what's maybe a little bit more direct risk in those MSAs?

Yes. It is not significant in Mississippi. What we have there is not likely to be impacted based on what we've seen to date. I think you can look in our stat sheets, and you can see Florida -- Joey, what page of our stat sheet would be the best to look at to see (inaudible) breakdown --

Page eight.

-- by type?

Page eight of the financial supplement, [Steve]. It's under note two.

So at the bottom, you can see in Florida, we have, in hotel/motel, $13 million. That's two adjoining properties. They are at Sandestin. They're cash-flowing and have strong owners.

I was there week before last; stayed there. I couldn't park. Our Chief of Credit Administration was there last weekend and had trouble parking. It's just a busy place. We're not expecting -- if some big globs cover the beach, things are going to happen. But it doesn't -- it appears we're past that, hopefully, at this point in time. We don't really have any restaurants to amount to anything anywhere relative to our size. And it's -- we just don't see it at this time.

What we looked at when we saw it, Steven, is we said okay, if we have these loans, we don't really know what's going to happen to them. If they migrate one grade or two grades, or three grades, the cost of that migration would [dip] well into our budget.

So remember, we came in immediately after Katrina -- which was very impactive to Mississippi -- and set up a $10 million reserve. After two or three years, we didn't use any of it. I think we used a couple of hundred thousand dollars, and brought it back and released it.

We are not a coast bank. Our bank is off the coast. [And if] it's a positive right now, because a lot of jobs are created, a lot of money.

Now, we have on our Board some big construction companies, big heavy equipment dealers and others, who have operations along the coast. We had quite lengthy discussions about the cash flow that boat owners are receiving -- other people. And right now, if anything, it's a positive. And we just don't see it at this time. That doesn't mean something is going to change. But we've looked at it fairly closely. We've also discussed to with our regulators and accountants.

Richard, maybe I could just follow up. Even though you're not necessarily a coast bank -- given the impact just to that region from what's going on, does this force you to keep reserve levels generally higher than you would be keeping them at this stage?

No. Our loan loss reserving -- look at -- we did not lower our qualitative in any way. If conditions were to worsen, we would increase our qualitative. But we haven't seen it. And with our total exposure dropping significantly in Florida -- [was it] down in the last 12 months 30% or so -- we haven't seen the need to increase our qualitative. The remainder is -- of our reserve is just absolute loan after loan after loan, which are independently graded, looked at at our loan review, and looked at by the (inaudible) of the currency on a very regular basis. So I guess that's the best way to answer it.

We have very -- our reserves are very significant for what we have. Particularly, you're looking at a point that we're rolling off all of this auto paper and all of these construction loans. And we feel good there -- plus tangible equity at 9.3%, a strong margin; and never have we fallen below this $50 million pretax pre-provision. We've held it.

Thanks. Thanks for answering my questions.

Kevin Fitzsimmons, Sandler O'Neill.

Good morning, everyone.

Hi, Kevin.

Morning.

Richard, just two quick questions -- number one, if you can just address the margin? I know it expanded again this quarter. Just wondering if -- what you have on tap for further ability to reduce your funding cost. Can this -- can the margin really keep going up, or -- I know we've alluded to it going down for several quarters, and it keeps going up. Just wondering your feeling there.

And then secondly, if you -- you did address it briefly at the outset, that some of your peers have had credit issues. And I think the common thread on some of these has been kind of late-stage credit deterioration -- credits that banks thought were solid a few quarters ago and are just getting -- losing liquidity due to the duration of the downturn.

And so not so much focused on Florida -- because you guys have been very focused there -- but Mississippi, Texas, Memphis -- just wondering, is this something that you're seeing, but it's just being overshadowed by the improvement in Florida? Or have you seen it but you've taken care of it already, because you've had pretty extensive credit reviews because of the situation in Florida? Thanks.

Sure. Let me answer your last question first.

Our significant-in-size loan portfolios are concentrated in two places -- the Jackson MSA and the Houston MSA. I am not aware that our peers are having any problem of any significance in the Jackson MSA. It has just not suffered as much. And because we are headquartered in Jackson and have the good fortune of having been here since the beginning, I would say that if there are any good credits, we've been banking them for a long time.

And they're holding together. And houses are selling, lots are being developed; not in any real rapid rate. But it's just not come to any standstill here, because properties just never really appreciated here.

I would say Memphis has been a real negative surprise for us all the way through. I don't know why Memphis has been different than Jackson. When you look at it, maybe there was just more aggressive builders and more banks in that market from out-of-market, like us, although we're -- in the market, a lot of branches just got there.

We have had our officers, our loan review teams and our regulators almost at every nook and cranny of this company since December. We have received compliments from our loan review and our regulators on the consistency of loan grading by our officers. As a precaution, a year ago, we sent every person who had a possibility of lending commercial money in this company back through loan-grading school, one by one, and had to pass exams.

And we understand the OCC's regs on what a substandard is -- [are specially] mentioned. And I'll knock on wood -- we just don't miss very often, because we're very cognizant of it. We had some pop up in Texas. We were making some bigger loans for us -- $7 million, $8 million, $10 million.

Texas took a hit. Texas is in a pause period right now -- Houston, with this oil leak. I think residential has slowed a little bit, but it's still selling. I think it's yet to be seen what the drilling moratorium will do to Houston. But our exposure there is not big relative to the energy industry.

So I just feel that we're fortunate. We have very little turnover in our company and lending personnel. We were fortunate to have sent a number of people from Jackson to live in Houston who understand us and our credit culture. And it's been much easier for those fine people we hired there to assimilate in because of the people that move there from here.

That's about all we can say. I am somewhat optimistic that this migration number should not exceed this and could possibly start trending down more.

Let me turn to the margin. We have quite a few layers of committees and about 30 community bank presidents -- and I don't know how many other people in branches -- that are focused on deposit cost on a continuous basis. Very minute decisions on deposit cost are elevated to a very high level, so that we have vision across the country and discussion of what we've done yesterday and last week. And we don't have inconsistency of pricing. And we're being as competitive as the two senior investment officers in the company and the COO want to be. We are maintaining the relationship, losing some small amount of CDs.

As the earning assets go down, the dollar amount of the margin's going to go down. So we're focused not on the percent; on the dollar. We want to keep it where it is or grow it.

We have not accelerated bond buying. There are some opportunities there. We have plenty of capital to do most anything. But we're watching, trying not to waste our [powder]. We're seeing some C&I loans coming in. That's all holding flat.

Obviously, the percent is going to go down as we add more bonds and more loans. It's been trending up. One of the reasons, Kevin, is this auto portfolio. We had capitalized dealer reserves, and we're amortizing that in lockstep with these auto paper going off. And therefore, it wasn't very, really, profitable business. So it's not hurting us as much to see this auto runoff as you might expect.

We have a very solid cadre of lending officers in every market. We're comfortable with that level. So when there is growth, we'll get our share.

Okay. Thank you very much.

Andy Stapp, B. Riley & Company.

Good morning, and nice quarter.

Thank you, Andy.

Do you have the 30- to 89-day delinquencies at quarter end?

Yes. Don't think there's any real change from last quarter. I'll let Barry Harvey touch on them.

Okay. The 30 days or more past-dues as of quarter end for the Corporation was 3.5%. And I think it bears mentioning that if you back the Florida portfolio out of that equation, we're down to about 2.2%. So we're comfortable with that.

Was there another question there, Andy?

Talk about your auto.

Okay.

Yes.

On the auto portfolio -- we reserve at about 1.3%. And [in assets] the runoff is occurring. This second quarter, we've noticed a very positive trend as it relates to charge-offs. Our charge-offs were probably down $1 million this quarter versus the first quarter of the year -- first quarter being about $1.4 million; this quarter being a little less than $400,000.

That trend is a little bit seasonal due to the tax refunds, and people being able to catch up on their past-due payments. We see that routinely. But we do feel like that we've begun to turn down. And while it may not be less than $400,000 the next quarter, or the next quarter, we do feel like that we're going to gradually continue to move down in terms of the net charge-offs that we are experiencing in our portfolio.

Yes, we're a small business lender -- average loan probably under $100,000. The past-dues have always been higher in our small business portfolio. And you don't seem to have many losses there. So I don't -- I guess this number is not exceptionally high for us in Mississippi or whatever.

No, it's trending pretty -- it's been fairly stable throughout the last five or six quarters.

Okay. And I believe that you said that mortgage -- your mortgage banking volume was up linked-quarter. Just help me reconcile -- why were the gains on loan sales down?

Well --

Maybe you could also talk about your mortgage (inaudible) --

Yes, I'm going to let somebody -- but we have a lot of volatility in how the two or three largest players in the company price their business. And we are a very full-service mortgage company and have the strength to take advantage of their moves as the spreads -- different spreads change. And of course, we probably hadn't even sold a lot that's in the pipeline that we did this quarter.

Okay.

-- actually move out next quarter.

[Okay].

Jerry, you want to comment on that any more --

I [think you're right]. It's more of a timing issue, although you're absolutely right -- we've almost doubled the volume in the second quarter in the mortgage company in terms of our production. Those loans are sold forward, and the gain on those will not be recognized until next quarter.

Okay.

But you're right.

And also help me out on your average earning assets. Would your -- [with] the runoff in your construction and development in auto loans, and interest rates coming down so far, how can you protect the earning assets?

One loan, one deposit at the time. Pricing, discipline -- whatever happens to the industry has to happen to Trustmark. We to date have just been very fortunate. But look, we manage on a very granular way. And we're fairly centralized, in that there are constant discussions going on between Mr. Host and those presidents all across our system. And they're very focused and incented to maintain their margin.

Let me add one comment to that, Richard. And you're very much on target in terms of the incentives and the measurements we've put in place for our bank presidents relative to their margins. As Richard's mentioned, most of the decrease -- or essentially all the decrease -- in the loan volume is a function of runoff in indirect and real estate-related projects.

On the commercial side -- we have maintained the base of customers we've always had. But so many businesses have deleveraged themselves that we have worked to build new relationships just to keep ourselves flat. The pricing on existing relationships, as well as new, has been enhanced. Because as we have renewed those loans, we have been able to negotiate floors on a very large number of those loans. And that has helped to maintain our margin.

And as the economy recovers, and as businesses feel more comfortable about expanding, we would anticipate that that customer base we have will utilize those lines. And that in itself should help our loan growth going forward. So it's a matter of the economic environment and when businesses feel more comfortable borrowing.

Thank you, Jerry.

I'm going to ask Buddy Wood if he would comment on the margin from his perspective as it might relate to investments and other issues. And then, Buddy, since it was there, you may want to comment on the hedge.

Okay.

Those two items.

Be glad to.

The (inaudible) protecting the margin is probably the second most discussed subject in this company next to the credit work that's being done. And it's not just because of what we look at internally. But we also have extensive discussion about what other peer banks are doing, what other opportunities there are in the marketplace; and we look at them very carefully at various levels. But it goes all the way to the top of the organization on a very proactive basis.

We recognize that -- with the amount of capital, the amount of liquidity, and a very stable interest rate risk position that we've got the Company set up for at this point -- that while we're going through what appears to be an extended recession period, we're going to have to use the investment portfolio at times, which is very custom and ordinary at the low end of a bowl of a recession like we're going through.

We've looked at a lot of alternatives. We are a conservative investment company. We will continue to be. At the same time, we believe that there's some incremental opportunities for us. And it would strictly be around the edges in order for us to maintain as much the margin as we want, both in percentage and also in dollars.

There's a lot of our peers who are using very short-term instruments, for example, to add some incremental dollars. We look at that on a regular basis. It's not out of the question for us to pay attention to that and to take advantage of the fact that we don't use very much in the least-cost part of our company's liabilities, which is in our borrowings. We've had much higher levels of borrowings, as you look in the past, than we have today. And there's opportunities for us to see something there, as well as to look at a very small amount of some incremental alternative investments as well.

We model extensively what the margin looks like. We've got a lot of confidence in it, although we know that the level that it's at today is very difficult to view that as sustainable. But we also have a lot of confidence that it's going to be very competitive.

Our investment portfolio's only in the 20% range. So you know that there are banks who are using the -- much more extensive in their very high-quality organizations. And so there's plenty of room for us to do that, both from liquidity investments as a percentage, the borrowing capacity, the interest rate risk profile, and of course the capital profile that we have.

So both from a dollar and a percentage point of view, we know that there's a lot of challenges. We meet very actively on it, and we think that there's some alternatives that'll help us get through the bottom of a recession till we see that loan growth come back.

Talk about the hedge, Buddy, (inaudible) [your field].

The hedge is a very interesting hedging program that we use. As you know, we're using a US Treasury, which is a fixed-income, non-convex hedging program. And at the same time, if you look at the reason that we do that is our MSR is not a single MSR product; it is a portfolio. Therefore, convexity is not the issue. We manage it through these various periods of time. If you look at the 130-basis point move that we've had in compression over the past 17 months -- we've got a positive set of results through that.

So we have confidence in it. We still have a positive yield curve, and we have a moderate level of volatility, since volatility is a positive, because we're using options. We have a high degree of confidence that our hedge will continue to perform very well in a positively sloped yield curve, even though we'll have some periods like we've had recently, where we'll have a small narrowing versus the widening that we had due to the large move in treasuries during this past quarter.

Okay, thank you.

Thank you.

One more bit of data is -- I'm going to let Barry Harvey and Bob Hardison give you a little more flavor on loan activity that we see.

Sure, Richard.

I guess, before turning it over to Bob on some of the types and the quality of the credits that we're seeing come through committee, through our various senior loan committees where we're seeing the larger credits for decisioning -- during the quarter, we've had -- we had new-request dollars of about $245 million -- about 213 specific new requests that flowed through, most of which, as you can imagine, is C&I-related.

But Bob, if you want to talk a little bit about some of the specifics on some of the industries and some of the types of credits, and in which markets they tend to be flowing from?

We've generally seen a little uptick in activity, especially in second quarter, on the C&I side. And really, it runs pretty much across the board -- all types of industries, really. The real estate end of it -- it continues to be slow. But we've had a couple of nice credits come in through the efforts in our corporate area on companies in the mid-South. We've done a couple of club deals with banks in our area on larger credits, but we take a piece, and then the other banks share.

But overall, we've seen somewhat of an improvement. Of course, when we approve loans, it takes some time for these to fund up. Some of them, for competitive reasons, we may not get. So it takes awhile for the fundings to occur -- some lag effect.

But we're encouraged. I know our guys are out really aggressively calling, in a good follow-up calling program. So as Richard said earlier, if the business is there, I think for the most part we'll get a look at it, especially in the Mississippi and Houston markets.

Okay. Great, appreciate it.

Any other questions?

Erin Jacobson, KBW.

Morning, gentlemen.

Morning, Erin.

I was just wondering if -- can you hear me?

Sure.

Yes.

Okay, great. I was just wondering if you could give the size of the growth additions to nonperforming loans. You'd mentioned on the release that it was down, but I was wondering if I could get a level.

Could you repeat that question?

The growth additions? So new NPL loans?

Sure. Why don't I give you anything over $1 million?

Okay.

There was one finance-related company in Mississippi -- it was a couple of million. There was about $6 million in the credit that I mentioned that was a cash-flowing shopping center -- and that we've seen in the improvement in, with the judge refusing to let it go into bankruptcy -- and about a $3.5 million piece of developing land in Texas, and one house for $1.2 million in Florida. Below that, it was from $100,000 to $500,000. So two, eight, nine, 10, 11, 12 -- 14 of the $35 million would hit your radar screen. Very little -- half the migration. No land in Florida, whatever.

Okay, great, thank you.

And then, you had another quarter of a little reserve release. I was wondering if you could talk about your expectations there.

Depends on what happens this quarter.

Sure.

It's just loan by loan by loan. Obviously, right now, you can tell, most of what we charged off was reserved for previously.

Yes.

And I would say generally, I expect charge-offs, as we move on through, could be equal to or a little more than the reserve. We are not a company -- based on how loan loss methodology works for us -- [that] we aren't going to turn around and release a bunch of reserves, unless something happens in a very granular way in the loan portfolio.

And on the other side, if nothing happens in the loan portfolio, and we don't see any significant qualitative issues in our qualitative committees -- the executive management doesn't go to those; that's loan administration, and they're long and very granular meetings. And they just haven't seen it, [one] way or the other, a change yet.

I'm expecting it to maybe come to a new level and stay there a little while. We go back into a double-dip, maybe it'll perk up. But the buckets don't have anywhere near as much in them in Memphis and in Florida. Hope that helps you somewhat.

That does help. Thank you very much.

(Operator instructions) Al Savastano, Macquirie.

Morning, guys, how are you?

Hi, Al, how are you? Thanks for calling.

Thanks for answering my question.

I was just wondering if you can give us an update on the CEO transition and the plans there, please.

Sure. I retire as CEO at the January 1 and as Chairman at our next shareholder meeting in the middle of May. We've been undergoing succession planning at the Board level, all the way through. And we'll probably make an announcement and have a CEO-designate in the fall.

Great. Thank you.

If there are no other questions, want to thank you very much for joining us. We are significantly into the third quarter. So we'll see you again sooner than we all might think.

Thank you very much. Have a nice day.

The Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.