Trustmark Corp (TRMK) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Trustmark Corporation Third Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded. It is now my pleasure to introduce Joey Rein, Director of Investor Relations at Trustmark.

Good morning. I would like to remind everyone that a copy of our third 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'd like to introduce Richard Hickson, Chairman and CEO of Trustmark.

Good morning. Thank you, Joey and thank all of you for joining us today. I have with me this morning, Jerry Host, our CEO Designee and Chief Operating Officer; Louis Greer, our Chief Financial Officer; Barry Harvey, our Chief Credit Officer; and other executives who will be available to make comments or answer any questions that you might have after my comments.

Trustmark had a very solid quarter. We are in a fully offensive mode. This weekend, we are having an all-site strategic planning for our top 30 executives as we work and refine our plans for next year and our three-year strategic plans. We fully recognize that the economy is slowly coming out of a great recession. We hear there is not significant loan demand around the country. We are expecting slow growth.

Our management team intends to manage through that. We are accustomed to non-high growth markets. We know how to control expenses. We are in a fully offensive mode with our capital in looking for good loan growth. Mississippi is sluggish, but we do not feel it is seeing the continued downturn in real estate as a number of other states.

Net income available to common shareholders this quarter was approximately $26 million; earnings per share $0.40, a return on average tangible equity of approximately 12.4%. Our board comfortably declared a cash dividend of $0.23 per share, which is the same rate we've had for the last couple of years; payout ratio at a very comfortable level based on the level of equity and pretax, pre-provision earnings.

Solid financial results - still a robust net interest income, very diversified noninterest income and continued disciplined expense management. Our solid capital base has positioned us to take advantage of opportunities in the marketplace that we assure you will build shareholder value.

As I talk about credit quality, I think you would just follow me on page six of our stat sheets, which has a five-quarter running average. The provision for loan losses was $12.3 million per quarter, less than net charge-offs of $18.5 million or 1.18% of loans. There are three or four reasons that our provisioning was less than charge-offs, but principally, we experienced a $21 million reduction in classified loans of which $15 million was in Florida. We also experienced a slower migration into new classified loans.

Let me peel it back a level further than our press release. Substandard, or classified substandard loans, brought $10 million. Those that related to charge-offs had been previously reserved for and that released approximately $4.0 million in reserves. In addition, Trustmark has traditionally impaired and immediately written off all impaired loans, which are principally real estate, down to market at the $1.0 million level.

We made a decision to lower our impairment level, as we were seeing a buildup of smaller credits where we feel there will be resolution but were building and not clearing as quickly. So we have lowered our impairment level from $1.0 million to $500,000. This resulted in the classification of doubtful, dropping from approximately $13 million down to $4.0 million. This was all previously reserved for, resulting in the principle increase of charge-offs above reserving.

Our allowance for loan losses is approximately $95 million, 1.97% of our commercial loans, and 0.81% of our consumer and home loans, or 1.57% of total loss.

We are seeing and feeling an improvement in credit quality. If you take a look at the five-quarter moving averages on page six, you will notice that non-performing loans appear to have peaked into the first quarter, that Florida's bond performing is down significantly from approximately $80 million to $66 million. You will see that EBIT, with a drop in non-performing other real estate has begin to fall; Florida down significantly from $46 million at the end of the year to $31 million.

When we take a look at our loan loss reserve, our auto book is now down under $250 million. We have reserves there at a level that we were experiencing charge-offs earlier and therefore, as we are seeing paydowns in the auto book, which was approximately $50 million this quarter, reserves are being released. That approximated $500,000 this quarter and as you know, we do not intend to rebuild that auto portfolio. So we would expect continuing reserve release as that pays down. It's down from approximately $800 million and our loss level, net losses in that book, was $700,000 this quarter, so its actually not getting worse as it gets smaller.

In addition, our home mortgage hold portfolio at $875 million is essentially flat, with no significant signs of deterioration. Foreclosures are very small. The rates are holding on it. The refinance rate on our whole portfolio has not been significant and it requires very little reserving, based on our loss history. I think we're carrying it now at about 50 basis points, which is entirely sufficient, and we charged them all off at the (inaudible).

Our non-performing loans are 140% of our non-impaired, non-performing. I think we've proven over the last few quarters that our reserving methodology, particularly for losses, is accurate. We feel our ability to grade loans as a national bank and a Federal Reserve Bank is very accurate. We have few disagreements with our regulators when they come in behind our lending teams and loan review teams.

Other real estate declined $6.7 million, which was a positive, and I'll discuss that more thoroughly later.

As to Florida, we had continued progress in the resolution of Florida construction and land development. Last 12 months it was down by 31%. Most interesting, last quarter Florida construction and land and lots was down $28 million, $23 million of which was criticized.

You will note that in Florida, even with that reduction, there was no increase in ORE in Florida, so that tells you that we're working them out and we're moving the Florida real estate without any significant loss at this time for that that we're moving. And I am expecting some more movement in Florida ORE during this quarter that should be significant to the Florida number of $31 million, based on closings that are anticipated.

Our non-impaired construction and land development in Florida is now down to $116 million from a very elevated figure two years ago, with an associated reserve of $13 million or 11%. The Florida bucket has gotten much smaller. We have also seen a couple of positive things happen to a couple of major credits in Florida, which we feel will be very positive against their future migration towards the negative category.

Those are the comments that I'll make at this moment on our credit quality. I will emphasize our tangible equity at $850 million and 9.34% of tangible assets gives us tremendous flexibility. Out total risk-based capital continues to be high, as do our pretax, pre-provision earnings.

As to the balance sheet, average loans totaled $6.2 billion, a decline of $70 million in the linked quarter, of which $50 million was auto. Current conditions still point to reduced loan demand, but our C&I lending is holding in there. We are seeing some growth, some good opportunities in Texas.

And Mississippi is sluggish, but we are seeing some activity. I can relate that in that we manage our total Mississippi Bank outside of our headquarter Jackson CRE department and our corporate department as a Community Bank in Mississippi. It is a significant portion of our loan portfolio. It is actually up, year-to-date, a marginal amount. That means we're very competitive in defending and any opportunity that comes up in our state where we have a shot at it and we feel very good about that.

We're beginning to see our situation in Texas so that we are comfortable. We have the capital and staff on ground there to move ahead with lending opportunities there.

Our average investment portfolio is holding steady. It was up $45 million, having average earning assets remain steady at $8.2 billion. We are still pricing out of any non-relationship deposits, particularly anything that is expensive. We had a nice average increase in noninterest bearing deposits of $93 million. We have looked thoroughly at that. Its not concentrated. A number of companies are up $1.0 million, $2.0 million or $3.0 million. My assumption is that they're profitable and they're building earnings and they're leading, for the time being, in their DDA.

We did see a decline in CD and public money as we managed through our needs for deposits. We feel we have the ability to accelerate deposit growth at any time, particularly in Houston in public or CDs in the State of Mississippi. We have significant liquidity and we're taking advantage of some of that liquidity.

Our net interest income at approximately $91 million resulted in a net interest margin still at a very robust 4.39%. On the non-interest income side, we have a very solid low-risk, high volume mortgage company that's been in business for years, relative to our markets, extremely well managed, competitive with branding.

Trustmark has experienced no significant repurchase activity, essentially $1.0 million year-to-date. We have not been engaged in robo-signing or participating in private level securitization.

We were, on the service charge side, very successful with Opt-In. In addition, it gave us an opportunity to have conversations with the vast majority of our customer base. We expect that we will still see some revenue decline from NSFs as we make all of our final adjustments and we've said in the past this should run somewhat over $5.0 million on an annual basis.

Insurance revenues had a good quarter, up around $862,000. It was a seasonal event with us, as we have summer renewals on some significant public entities. Wealth management is holding solid at $5.2 million. Bankcard and other fees remain very stable at $6.0 million.

On the net interest expense side, our net interest expenses are still well controlled. Foreclosure expense only decreased $550,000, which was a disappointment to us, at $8.7 million.

I can tell you that we have substantially completed our 2010 reappraisal process for Florida and other markets. We did 59 appraisals during the third quarter, bringing to 130 in this portfolio. It's very up to date.

The $8.7 million was principally made up of three loans. One was the large condominium project in Memphis that we have talked about where it was of Trustmark's customers but we participate in a credit. That's now been written down $4.0 million to what we feel is a fairly reasonable value; $2.0 million of it was this quarter. There is no expectation of another credit causing that level of write-down with our ORE.

We had one project in Florida that is in litigation and is a matter of proper due diligence. We wrote it down $1.0 million.

ORE in Florida, now at $31 million, is relatively small related to our Company. It has been written down approximately 50% from government -- from customer view. ORE in Trustmark's Mississippi, Tennessee and Texas market, which represent approximately 63% in the total, has not experienced a significant increase in real estate prices during the current economic cycle, as did Florida. So we're of the opinion that the bulk of our ORE write-down is behind us.

Other than ORE, expenses at Trustmark are a non-issue, they were up less than 1.0% in the prior quarter. We are accustomed to expense control, always working, renegotiating vendor contracts, looking for ways to operate in a better environment. We are anticipating now that ARGO, or our retail systems, are fully rolled out in our call centers in all of our branches. On our sales and service in our branches that, over the next year, we will see efficiencies from having state of the art operations in place there.

Overall, on strategic direction, we continue to manage credit with a very able, trained, qualified, experienced staff. We continue to manage our balance sheet, our bond portfolio, our liquidity and our interest rate risk within very normal bounds. We are aggressively pursuing logical revenue generation, accretive expense management and we seek opportunities to build shareholder value where it is accretive.

Anticipating your comments, I would like to make a couple of comments about our failed acquisition of Cadence Corporation. It was obviously a difficult decision on the part of Trustmark management not to raise our bid to match. It required a lot of discipline. It was, obviously, on the human side, a disappointment. There are three comments I would like to make about Trustmark's perspective.

I'm going to tell you what we told you before, is that first Trustmark did a very thorough, deep and accurate due diligence involving a significant number of people, a significant amount of time. We know the major markets. We spent a considerable amount of time actually looking at all real estate, from our perspective, of over $1.0 million.

We have obviously talked about it and we have come to the conclusion that we marked the loan portfolio properly. That there was a high level of construction, land and lots, and CRE that would be a long, difficult workout process.

Second, we have said we are and plan to continue to be disciplined with the extremely valuable capital that Trustmark has at 9.34% tangent, plus, our human capital, which is extremely and equally as valuable in working through problem situations.

Third, with our model, even with the significant, I believe we said, approximately 29% expense cuts, at the higher rate it was not accretive to our earnings per share, our tangible book value, the reasonable near-term. And we felt there would be other opportunities for our capital, which could more strategically impact our Company over the next 6-to-24 months.

Thank you for hearing my comments and we'll be happy to turn to your questions.

(Operator Instructions) And our first question comes from Steven Alexopoulos at JPMorgan.

Hey. Good morning, everyone.

Good morning.

Maybe I'll start, Richard, given your comments on credit, overall should we expect the reserve balance to continue to fall in coming quarters? I'm not sure how you're thinking about this in terms of matching charge-offs and provision reserve to loan ratio.

That's a good question. You will notice that Mississippi had an uptick of $10 million or $12 million in non-performing. It was one loan. It is not a real estate loan. It is a manufacturing company that supplies product to the construction industry.

We went through what we used to call in the old days "a good scorched earth" look at this company and we've gone ahead and reserved 25% against this credit. We are not sure we will anticipate any loss. We will probably be doing some additional appraisals, but this is reserving inventory and receivables down to fairly low liquidation levels.

So we are looking ahead as much as we can. We do not wish for our reserves to go down. We will do a lot of qualitative work on this level. For a number of years, when I first came with the Company, when reserves where very high, higher, I guess. It was well above two-and-a-half. We reserved charge-offs for a number of years.

We do not have any intent or thought of releasing a significant number of reserves, but we've used the methodology that's required and we've proven to be fairly accurate in our reserving, so we understand the portfolio. I would assume that you will not see this kind of release - $4.0 million, $5.0 million, $6.0 million - as a lot of it was brought about by moving that impairment level down to a very low level for a company our size and clearing out a buildup of doubtful credit that were already reserved for.

Does that address it for you?

Yes. That's actually very helpful. Maybe I could follow-up? Given the comments on the ORE costs maybe now being behind you, what's a good rate for us to assume there, here, for that ORE line? It was like $9.0 million of expense or so this quarter.

Yes. You know I think you're going to need to look at it and maybe assume -- we have $30 million of ORE in Florida. Put a number on it, 12%, 15%, 20% over the winter, if you think it would fall. Then that doesn't put a significant number out there for 2011 for Florida. I would say to pay the taxes and carry this real estate you're probably talking about $3.0 million or so.

One of the issues that we've had this year, particularly in Texas, which we're not anticipating next year, is that we had some residential properties that were significant, that we brought in, that the taxes were two and three-years in arrears and we had to pay those taxes and we had to pay those taxes. And we've done a very, very granular, thorough look at that issue in our impaired portfolio, so I would hope that next year we would cut our ORE carry generally in half.

Okay. That's really helpful (inaudible - multiple speakers).

And I would expect the fourth quarter, unless something that we've overlooked jumps up, to look more inline with the first quarter because we've substantially finished the year's appraisal process.

Okay. Maybe I could just jump for a second to the securities portfolio, just looking at the taxable yield. It came in around 4.1. Can you, one, just remind us what's in there that's giving you such a high yield at this point? And an offset is its coming down very sharply. Maybe you could comment on that and how we'll think about that continued compression here in the securities yields? Thanks.

Well, first, as we've shown by our history with our securities portfolio, we will manage it and if pain needs to be taken we'll take it. You recall that from '05 to '08 we brought that portfolio down significantly and what's in there with the yield, its excellent quality. It was the timing of when it was purchased, in April and October of '08, and it still has a $70 million-plus profit in yet.

But I will ask Mitch Bleske and Buddy Wood if they want to make any comments, of their opinion of the bond market today and their stance.

The investment portfolio, as you know, is almost all agency securities, either direct agencies or its in the form of mortgage-related agency securities. As Richard points out, we had excellent results due to some timing as to the structure of the portfolio and we've maintained between a 3.5 and 4.5-year average life.

We, in this most recent quarter, purchased approximately $300 million worth of government-related securities, agency call-ables, CMOs and mortgage backed securities. And the 4-year average life target is and remains to be what we're very interested in doing, with good structure, that has a tight couple of years extension in a worst case structure and approximately a 285 yield that were able to obtain during this past quarter.

We do have a forecast that shows we run about $60 million a month off of that portfolio and as you saw it, the net effective that was also to show growth of about $158 million during the quarter and about $45 million net. Very high quality, very strong base to complement the asset liability mix, which we carry a significant amount of durable assets.

So to have a 3-year average maturity in the investment portfolio nets us a slight liability-sensitive position that is only about 1.5% in a 200 basis point of shock, so we need that structure. It works well with the overall balance sheet management, so it is a compliment to the overall cash flow of the Company.

Okay, thanks guys.

Adam Barkstrom, Sterne Agee

Hey, gentlemen, good morning.

Good morning, Adam.

I wondered if -- I was kind of just looking through the credit numbers and curious specifically with the Tennessee markets, what you guys are seeing in I guess the Nashville and the Memphis markets? Just anecdotally, hearing from some others that Memphis is pretty tough. And then, I guess along those lines, looking at the -- just curious looking at the provision, how you guys break that out on a per-market basis. You actually took a negative provision for Tennessee, but the charge-offs basically tripled. So I wonder if that was kind of a cleanup there and again some color on Nashville and Memphis?

Sure. We had one customer that we -- we had two customers who came in our acquisition of Barret Bancorp ten years ago, customers who struggled for ten years in Memphis with land and I think we have three shopping centers in Memphis, small ones, and they were all with the other customer.

We essentially foreclosed on the land finally, after ten years. It was already reserved for, fully wrote it down and we wrote off the three small shopping centers by $3.0 million. That was what went on non-accruals at about $8.0 million and had been written down to about $4.0 million. They are not vacant, but we are moving aggressively anywhere we can in writing down and it was previously reserved for.

Now the bad news in Memphis is we hadn't been able to grow our loan portfolio. The good news in Memphis is we hadn't been able to grow our loan portfolio and it's down to about $100 million in all of the areas up there and its an enigma. That place is just -- you know it's a big town, but we know Jackson.

But we just -- Northern Mississippi, that DeSoto area, just planned for a lot of growth, which has just not happened yet. I think it was just -- maybe it was a little bit like, on a much smaller scale, part of it like Atlanta where you had a number of smaller banks that just did not have the underwriting processes in place that a national bank might have had. And maybe it just calls to an overheating and overabundance of money, I mean, available, but there was a significant development.

And I don't think that its any bank just took massive share. I just think the market was just way overbuilt for anticipated growth. It turned out hindsight that a number of the major builders in Memphis were the first to go down because it was a big subprime market and it was a surprise. It caught out all the banks. Our situation is now it won't be significant to us as far as real estate is on the books going forward.

Okay and then, as a follow-up, hey remind us. The TDRs, I guess you guys don't really utilize the TDR structure. Kind of talk about that for a minute and kind of remind us of your stance on that?

Yes. I'm going to let Bob Hardison say that and cover that, but you know we have taken a hard line in grading loans. And if we have a land loan who continued to pass it, we've been moving toward a 7- or 8-year straight line AM, because we are looking not only with our guarantors of having the ability to amortize, but also a willingness.

Bob, do you want to talk about this TDR issue and what it is and --?

Well, what we do is adhere to all the regulations that are required by our regulators and the accountants with regard to TDRs and we do recognize TDRs and we have a process in place that identifies TDRs. All of our impaired loans would fall into that category.

In addition, we evaluate individual credits in the normal process of our asset review that would fall under that category and we've had discussions with our regulators about methodology and so forth and I think we're in agreement with them on how we treat it. So we do follow all the prescribed regulations and we do report TDRs as we accounted them and according to the way we think they should by done.

Well and we probably have about six TDRs in total and which is not many. We're very careful about making concessions, which is what the definition of TDR is about is making concessions outside of you would normally do in your underwriting process. And what we've run into, especially as it relates to where our problems have been historically, which is Florida, a concession down there really didn't buy us anything.

Those loans were such that the borrower was in enough financial stress that by lowering an interest rate below market or extending a term beyond what you would normally do or moving them from AM to interest-only for a period of time, that wasn't going to resolve the situation and the borrower knew that. There was no reason to make those concessions when it wasn't going to resolve the issues.

So we've not had maybe the need that maybe some of our peers that you may be looking at the call report and seeing the TDR information now. We just haven't had the need or desire to create any TDRs unnecessarily.

All right. Did you say six TDRs and then for whatever number you said, if you could repeat that? And then what is the accruing portion of your TDR book?

Well, none of our TDRs are -- I mean, of the six TDRs that we report, none of them are accruing. They're all non-accruals and its six credits in total, which is just insignificant as it relates to any of our financial data.

They're short-term, I guess.

Right.

And another part of that is that when a loan -- and good, bad or indifferent, but our workout strategy has been when a loan goes to non-accrual, which is almost, not quite, but almost synonymous with TDR, we move pretty aggressively when it rolls to non-accrual.

And we -- our workout strategy is not particularly flexible. Once it hits that non-accrual status we move pretty aggressively to do what we need to do, legally or otherwise, to move that loan on through the system. So we really have not been one to grant a lot of concessions when we don't see any light at the end of the tunnel as far as the credit's concerned.

Bob, I noticed, particularly on Tanner and you don't take some real estate loan and put it on a 5-year workout.

Yes.

Its six months or one year renewal.

Right and with so many of our non-performings, at least historically, related to Florida and related to stalled real estate projects. There again the concession doesn't -- its not going to resolve anything, whether it be interest rate, whether it be term. The project's stalled. The involved no longer has the financial resources to even cover the interest. So you're not -- there's nothing you're going to salvage there.

All right. Thank you, gentlemen.

Kevin Fitzsimmons, Sandler O'Neill & Partners LP

Good morning, gentlemen.

Good morning, Kevin.

Good morning, Kevin.

I was wondering, Richard. You made the comment earlier that you have more opportunities to use your strong capital in terms of expansion. I was wondering if you could just expand on that a little bit? And I guess where I'm going with this is, if you were looking at the appetite for where to use that capital, where does it fall between FDIC-assisted or LAHD deals and if in LAHD deals, would you look for stressed opportunities like Cadence was, or more healthy institutions? Would you look -- do you think there are other larger in-market possibilities out there like a Cadence? Or is it going to be more of cobbling together smaller institutions? Thanks.

We have not seen FDIC transactions with franchises within a long-term or intermediate-term value to us. We have not felt pressure at all from an earnings perspective to do financial transactions just to bring in current earnings or create this kind of equity. We would much prefer to buy a stressed franchise where we can understand, work out the credit issues and buy some lasting franchise, even though it might end up being half the franchise, that would be significant to us over time.

We would obviously also entertain a somewhat healthy company. So I don't think we would rule anything out, but, with the TARP, in these banks its going to delay, we think, a number of these institutions or even keep them from being taken by the FDIC. The number of failed banks is up, but the number of assets taken by the FDIC is significantly down.

We feel the CRE problem is centered in banks much smaller than us, at the community bank level, and it's going to depend on what actually happens with CRE over the next year or two. We are constantly modeling in due diligence and I think the financial world is not flat. Its curved and you can't really see out there beyond about six months as to what's going to happen.

We have seen some acceleration and it appears commercial real estate, with a number of institutions in the mid-South, we are not certain how that is playing out in the privately held community banks. But we would take a look at any community bank within our markets that is an older, established franchise.

We would obviously continue to look at the surrounding states, but we would not go out and tackle a couple of billion dollars of real estate in a market that we're not thoroughly familiar with. We wouldn't tackle a couple of billion dollars of real estate at any time. But I think the next level of banks that pop up with problems will be those that are very, very high real estate, commercial.

I really don't have an absolute answer for you, Kevin, but --.

No, that's fine. Its tough to pin that down. I understand. Just one follow-up in terms of the situation on Cadence, while obviously unfortunate for you guys. What is your takeaway just from that development in terms of do you walk away and say, "Well, this may be something we're going to face in future situations where there's a lot of money out there chasing these stressed situations when they come up". When a bank realizes it has that limited options and has to sell, there's pools of this money, that is, either needs to find an opportunity or it has to return the money to investors.

Do you think that's going to be a recurring thing you have to deal with and compete against and maybe it has an effect on pricing? Or is it more of a one-off things and there are ways to protect, walk your seller in, in a more secure way? Thanks.

Hindsight, it appears this was an obviously competitive situation, even from the very beginning and I think it was -- number one, the answer to your question logically would be yes. If there's a lot of money that doesn't have the same accountability as Trustmark with its shareholders equity, then it is likely to be inflationary.

However, it appears to me that Cadence was more of a unique situation than we have seen in the past and I think its still unknown and we'll get the question answered with the next couple of banks like Cadence that move to the situation Cadence was in. I know there is a lot of private equity.

I keep referring to the human capital. I can say that Trustmark has the capacity to clear and manage a distressed loan portfolio up to a certain size. I think that is going to be the issue and will tell the story for the private equity investor, whether after a year or two they've made the headway or whether they have to offload and give up their future profitability by a bulk sale. I don't think anyone knows the answer to that. Time will tell, Kevin.

Okay. Thank you very much.

But we got the capacity to do whatever we want to. We just feel that we're in a good position that we're not going to give up today. We enjoy having all of this capital and we enjoy having these earnings. And I'll tell you we enjoy more than you'll ever know to have seen two quarters and see some breakup and things moving within these problems. We're not going to jump back into it if we're not going to make some money.

(Operator Instructions) Elena Kim, UBS

Hi.

How are you?

I think most of my questions have actually been answered. I just have a couple of, well, follow-up and just one question. I'll start off with loan growth. It looks like your resi real estate and your term commercial real estate balances increased for the quarter. So could you kind of provide some color as to what's going on over there?

Well, its no significant increase. We are trying to generate more home mortgages at the 15-year and 10-year AM that we can put on our books. We have in-house products well underwritten to Fannie Mae standards. We haven't gotten enough volume to make any difference. We'd like to see that grow a little bit, because at 4.5% or so that's a very good earning asset when you have a good, professional with a good income on the other end of it.

We are finding a few commercial real estate loans. We just had a great loan a couple of weeks ago. I was at the symphony with the owner Saturday night and I thanked him and he said, "You know we moved that loan to you from a national borrower because it was good for Trustmark and it was good for us."

Now this is two fellows that we've been banking for years and we sort of took them from the stage of struggling to the stage of being folks that are making the symphony keep going and other things. And this was just a good amortizing apartment at about $10 million or so. That's the kind of loan we're looking for.

We traditionally don't have very much income-producing real estate. You know it's only about $800 million. We have absolutely no concentrations. Our construction is way down, in the $600 million compared to almost $1.0 billion in tier one. So we're looking in Texas for great, mature real estate. We're looking in Mississippi. We're taking every opportunity to reach in there and pick up a good loan out of a stressed community bank with a good borrower and they're having to step out of things where they can.

Thank you.

A lot of this is going on, that growth, in towns like Laurel and Hattiesburg, Mississippi and Columbus, where there was no inflationary bubble, just a kind of a rehab of Main Street.

Okay, great. Thanks for the color. Could you give us an idea of what net charge-offs were this quarter by loan products, as opposed to geographically?

I don't believe we had any charge-offs of any significance that weren't real estate, principally residential real estate. We did charge off, as I mentioned, the $3.0 million, which was those shopping centers, three small centers strategically around the perimeter of Memphis. They're not vacant, but they weren't fully leased up and we went ahead and wrote them down.

We have essentially four non-performing loans in Houston that make up about 80% of our non-performings. Let me say they are not dead real estate like we've experienced in Florida. I will tell you that all four credits are what I would call active. In other words, there are things going on with them that could be positive. We wrote one of the residential properties down by almost $2.0 million.

I will say also, on the ORE side, we are reaching final negotiations with one of the nation's largest homebuilders in a number of subdivisions, particularly in Florida where we will start this quarter seeing lot takedowns, so it's still with us.

I would make a comment. If I looked at our especially mentioned and substandard loans, in particular outside of the State of the Florida, it is a lot of operating companies that were in the construction business or related to it or are still revising small entities, where as the country moderates out of this recession and over time as we see more employment, these management teams that are onboard in these companies I believe will help us take these problems down. But they're going to need revenue regeneration.

But that's different than just land, lots of land, lots of land and that's what I would say has changed within our classified numbers over the last two years.

Great, thank you.

I would be disappointed if we don't see continued study improvement in those numbers.

Great. Thank you.

Thank you.

Brian Klock, Keefe, Bruyette & Woods

Good morning, gentlemen.

Good morning.

Good morning, Brian.

And again, most of my questions have been answered already. I guess, on the margin, Richard, I guess you've continued to have a pretty strong margin here at about 4.0 or 4.4%. Looking at where the reinvestment opportunities are, obviously it's a difficult yield curve environment. If the loan growth, I guess, continues to lag, I guess, what do you think we should be thinking about as where the margin may head to and is there any sort of funding, re-pricing that you can do to offset some of the margin compression? Or maybe just give us some guidance on the margins.

I think

There are no further questions

I think a reasonable expectation would be, as rates remain low, we're going to see the margin slowly progress back to a little over 4.0%. We have very significant flexibility to add assets. We can be extremely competitive in pricing, because we've essentially - this year - built $50 million of tangible equity after dividend from earnings. We're fortunate that we're carrying all of our ORE and a great deal of our non-performing loans from a tangible equity build over the last two or three years.

So, as far as our peers, we feel we're in good shape. We're not going to hit our head against the wall, though, trying to beat a low rate environment by taking a significant risk that will be long-term. When it gets down to pure dollars, we have a lot of flexibility within our balance sheet to add just some margin earnings, but we've been refraining. We'll wait to see with the Fed does.

We'll make some decisions about what we're expecting to happen over the next 12 months. But clearly, without adding unreasonable risk, its not going to be full force.

Okay and I guess with the assumption that your deposit levels may remain sort of steady and you have the continued runoff, you would kind of do the same sort of average duration investing on the securities portfolio?

It's -- we've been very pleased with how our largest competitors are not managing their deposit costs and we have traditionally been able to fund our deposits at a lower level than they have. So we're not going to see what we've seen in the past, but its not absolutely over with either.

Okay, great.

And we may move into, based on government monetary policy, even a lower interest rate environment for a period of time. It's enigmatic.

Well, yes. I mean, I think the outlook isn't all that great here from the level of interest rates going forward. I think we're going to be stuck with this for a while, but --.

I think you should look at our ability to maintain and work with our non-interest income and let our history be your guide in our willingness to take expenses down when necessary.

Got you. Got you and hey, thanks again for taking my question.

Sure, Brian.

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 listening in. I'm going to ask Jerry Host, our CEO Designee, if he would like to make a few comments.

Richard, thank you. I'd like to comment on two things. The first, I want to assure those of you on the call, despite the fact that we have seen a decrease in our outstanding loans, as Richard has explained, has come from a conscious effort to decrease the indirect portfolio and real estate-related concentrations specifically in the land area.

Secondly, I think everyone is thoroughly aware of the fact that loan growth in general, nationally as well as internationally, has been extremely slow. Most companies have deleveraged. The consumer has deleveraged. They've looked for ways to operate more efficiently, with less debt, with less people, which has in many ways kept us from moving towards a more robust economic recovery as we've seen in the past.

However, we have not ceased our calling efforts amongst customers and prospects. I remember the old airline commercial where the guy walked in, he had his management team sitting around the table and he threw airline tickets out and told people to get out and call on their customers, that they had forgotten about that. And he was going to call on an old customer who had just said, "We're moving our business because we haven't heard from you." We have not allowed that to happen in this Company.

We've been out steady and I think the results of having done that, made those calls, stayed in touch, is the fact that our loan levels have remained steady. Our yields have remained very strong on the lending side. On the deposit side, we've grown non-public, low-cost loans. We've been able to maintain those core deposits and I think that's because of the calling effort that's in place.

So, although we've spent a lot of time on these earnings calls looking at specific areas of focus, I wanted just to point out that in the line side of the bank there is still a great deal of excitement about going out, looking for opportunities, maintaining those relationships. So when this economy recovers, we'll have those relationships intact and be able to take advantage of that.

Secondly, let me comment. Richard mentioned at the very beginning of the call that this weekend we'll take the executive management team for an off-site conference. He and I both feel that it is very, very important that, as we transition through this management change in this Company, that there is a spontaneity and a renewed focus on where this Company is headed and how we keep it moving in the right direction.

We are not -- although we're a multifaceted organization, we try not to be too complex and try not to allow ourselves to become confused. Its always good to back away from the day-to-day and I think you can see that this management team understands a great deal what's going on within the Company in all of its businesses. But it's always good to back away to 30,000 feet and take a look at where we're headed and that's what we plan to do.

There's going to be, I think, a very focused approach. First, we'll remind ourselves about controlling expenses. That's something we can't allow ourselves to back off of. We've become very efficient. However, there are still improvements that can be made. There are changes that can be made to improve process, to provide better service and we've got to talk about those things in the different business lines to understand how we can bring about change to improve efficiency and control expenses.

The rest of the time, though, we're going to spend on what Richard refers to as the "three R's" and I don't mean reading, 'riting and 'rithmetic. In our case, we refer to it as regulation, reserves and revenue. We all know that the Dodd-Frank legislation has brought about or will bring about tremendous change in the financial services industry.

We've got to focus on making sure we understand what impact that's going to have on our industry and on this organization specifically and ensure that we prepare for it. We know it may have some negative impact on revenues, especially as it relates to consumer revenues, what are we what going to do making those revenues up. We know that it can slow us down if we're not in compliance with the new regulations. We're going to look to focus on what it is we have to do and are we prepared in how we deal with this new legislation.

On the reserve side, what we mean there is a focus on credit and credit process. We've got to look to see if the existing credit processes that have helped us weather the most severe economic climate, that I think any of us have seen in our work careers, whether or not that same process will hold true as we begin to work through this slow economic recovery, and what changes and adjustments do we have to make.

And the third and the most important, I think we all know, is the revenue side. There's a variety of different ways. The organic revenue with existing lines of business, business expansion in new areas that compliment what we do as a financial services company and then finally, the acquisition side, which Richard has touched on. All of those will be discussed as we go through this process/

So we wanted to just share with the group that, as we go through this management, of getting the team together, we're refocusing our efforts and look forward to what we believe is a very positive future for this Company. We'd like to thank you all for calling in this morning and being part of the call and your questions and we look forward to the next quarter.

This concludes today's conference. Thank you for attending today's presentation. You may now disconnect. 10