Trustmark Corp (TRMK) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Trustmark Corporation's Second Quarter Earnings Conference call. At this time all participants are in a listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (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. Mr. Rein, the floor is yours sir.

Thank you. Good afternoon, everyone. I would like to remind you that a copy of our second quarter earnings release and supporting financial information can be found on the Investor Relations section of our website at trustmark.com.

During the course of our call this afternoon, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We'd 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 Jerry Host, President and CEO of Trustmark.

Thank you, Joey, and good afternoon everyone. We appreciate you calling in so late in the day. With us today we have Louis Greer, our Chief Financial Officer; Barry Harvey, our Chief Credit Officer; and Buddy Wood, our Chief Risk Officer.

I'd like to say that I understand that we haven't given you a great opportunity to look at the stat sheet so we'll try to highlight some of the things on it relative to second quarter results.

The second quarter we continued to produce strong financial results, primarily through the experienced growth in our traditional banking business, net interest income as well as non-interest income. We experienced expanded profitability in both the mortgage banking and the insurance businesses.

Second quarter net income available to common shareholders was $31.6 million, basic and diluted EPS of $0.49 per share, return on average tangible common equity of $14.71 and a return on average assets of 1.32%. We also declared a quarterly cash dividend of $0.23 per common share and that is payable on September the 15th.

As you know, we completed an FDIC assisted transaction on April the 15th. I'm happy to announce that we have completed the consolidation of the Heritage Banking Group of Carthage, Mississippi into Trustmark. As a reminder, it's a 90 year old bank with longstanding customer relationships. It has a leading deposit market share and is a natural extension of our Central Mississippi franchise.

Fair value of the loans with $97 million in deposits about $190 million at 630. The transaction generated of non-reoccurring income of $4.6 million as a result of an after tax bargain purchase gain and that added about $0.07 to EPS.

I'm also happy to report that the transaction generated operating net income of roughly $600,000 during the quarter and that is from reporting period of April 15th through the end of the quarter. It was in our eyes a very successful transaction. It was accretive to earnings and tangible book value from day one and we look forward to other opportunities to help build shareholder value in the future.

I'd also like to take this opportunity because I know there are a number of Heritage associates and Trustmark associates on the call; I'd like to take this opportunity to thank them for the hard work and such a smooth and seamless conversion.

Let me turn now to the balance sheet on a link quarter basis. Average earning assets totaled $8.6 billion, which was an increase of $71 million. Net interest income totaled $91.5 million, which was an increase of $1.5 million from the prior quarter. Net interest margin was 429, down one basis point from previous quarter. That was primarily the result of lower deposit costs and a continued disciplined towards loan pricing.

Our focus is on maintaining that net interest income to a level of $90 million or greater each quarter. Our cost of interest-bearing deposits improved during the quarter to 0.66 basis points. The average deposits during the quarter increased $512 million or roughly 7.1% and now stand at $7.7 billion.

Average interest bearing deposits increased 7.5% and non-interest bearing deposits grew 5.8% due to the increase in commercial DDAs. End-of-period deposits increased $206 million or 2.8 and are at $7.6 billion.

Turning to loans and a recap of the quarter, our total loans and covered loans totaled $6 billion, which is an increase of roughly $31 million link quarter. Let me break that down a little bit more and tell you that single family mortgage portfolio increased roughly $33 million. Other loans expanded by $50 million and most of that is the Heritage transaction.

Our efforts to reduce exposure to construction in land development lending, as well as the decision to discontinue indirect auto financing, was also reflected in our loan totals.

Construction and land development loans declined approximately $34 million linked quarter and the indirect auto portfolio fell approximately $32 million linked quarter and now stands at $137 million. So that portfolio continues to migrate off and the credit quality associated with the remaining portfolio is very good.

As far as loan demand, we're finding that many business and companies are continuing to use excess liquidity to fund their existing needs and to pay down credit lines and that of course is putting pressure on our loan totals.

As far as some of the changes in the commercial loan portfolio, we have seen reductions in Florida of approximately $20 million, most of which is due to transfers into the other real estate portfolio. We had somewhat of a surprise in Memphis this quarter. Loans were down approximately $24 million, mainly due to four church loans and those church loans are very thinly priced. We had the opportunity to keep those loans, but with the maturity extension and the very, very thin margin on those we chose to allow those loans to transfer to other banking organizations and that is very much a reflection of how competitive the environment is out there.

On the positive front though I will tell you that our Corporate Group had a net increase in loans of approximately $32 million for the quarter and that includes, of course, significant pay downs that they experienced. So we're starting to see some movement in some of our larger credits and that is a very positive sign.

Looking at the credit quality, let me point out that the information I'm about to go over does not include the covered loans in the Heritage transaction. As you know, those covered loans and ORE are significantly different because of the loss protection provided by the FDIC and virtually all the loans, other than a small amount of consumer loans, were covered in this transactions, therefore, not included in these numbers.

Our non-performing loans for the quarter decreased $5.8 million for 4.6% and now stand at $121 million and that's just slightly over 2% of total loans. This marks the fifth consecutive quarter of improvement in non-performing loans. Of note, Florida declined $13.8 million link quarter and now stands at right around $31 million.

Other real estate increased $800,000 to total $90 million. Breakdown of that is that our new ORE was $13.3 million. The ORE sales for the quarter were just over $8 million and the write down of ORE was approximately $4.4 million. If you recall, second quarter is the quarter in which we get significant number of appraisals on that $4.4 million write down was a result of about 42 appraisals that we received for the quarter.

And, as in non-performing loans over the past five quarters, non-performing asset balances have decreased by $40 million or 16% and most of that being in the Florida market.

Net charge offs during the second quarter totaled $14.7 million and represent 0.97% of average loans. The majority of the charge offs were due to the reevaluation of existing impaired loans that were reserved for in prior periods as well as the addition of new impaired loans.

Turning to the provision, the provision for loan losses totaled $8.1 million. Linked quarter criticized loan balances have decreased $19.8 million in our Florida market and again over the last five quarters Trustmark has experienced a steady and continued reduction in criticized loans by $85.6 million or 16.2% mainly in the Florida market.

As far as the allowance, it now stands at $86.8 million and that represents 1.84% of commercial loans, 0.76% of consumer and home mortgages and 1.47% of total loans. Now that's a 182% of non-performing loans excluding impaired loans with no specific reserves.

As I mentioned, we're seeing continued progress in Florida in terms of credit quality, construction and land development in particular. During the last 12 months that portfolio has been reduced by $36 million and now stands at about $111 million. Of that remaining $111 million we have a reserve of $12.4 million or just over 11% as of June 30th. As a reminder, we remain focused on managing the credit risks from not only the Florida market but throughout the rest of the franchise.

Non-interest income totaled $46.4 million and represented about a third of total revenue and we feel very solid performance there. It also reflects the bargain purchase gain of $7.5 million pretax from Heritage. Service charges on deposit accounts totaled about $13 million, an increase of about $950,000 link quarter. Part of this was because of the Heritage transaction but also because of seasonality in that line of business.

Year-over-year service charges are down $1.4 million due largely to the reduction in NSF fees resulting from the impact of regulatory changes and I'll cover that in a little more detail later on.

Bank cards and other fees totaled approximately $7 million during the second quarter. Mortgage banking income totaled $6.3 million and that was an increase of $1.5 million or about 33% link quarter. This reflected stable mortgage servicing income, solid secondary marketing gains and a continued success within our mortgage servicing rights hedging program.

Insurance revenue totaled $6.9 million, which was an increase of 5.4% link quarter. There is some seasonality reflected in that business primarily in commercial property and causality income.

Wealth management income remained relatively stable at $5.8 million starting the quarter.

Let me give you -- we have talked before about the potential impact of Reg E and Durbin so let me give you a little flavor if I could relative to those two topics along with Reg-Q.

On Reg E we previously indicated reduction in revenue from the opt-in/opt-out of between $3 million and $4 million for the year and that remains on target. We are in the process of receiving final guidance. It is in comment period right now from our primary regulator relative to various overdraft protection programs, but we are prepared, once we get that final guidance, to address issues like posting order and number of occurrences relative to our plan.

We had previously indicated that these changes would have an annual impact of approximately $5 million on additional income, additional to the opt-in/opt-out and since we are in the second half of the year we would anticipate that that number could have about a $2 million impact on the remaining portion of this year but would anticipate it being $5 million for a full year.

In an effort to mitigate a portion of that, we've been reviewing and revising some of our specific account offerings and that we estimate that additional revenue, because of restructuring some of our accounts as well as some reduced expenses associated with some of our card gift programs, we would be able to mitigate somewhere close to $4 million worth of that reduction annually.

As far as the Durbin Amendment, we received clarity as I think most of you know, on interchange as a result of the Fed's rulings and we do not expect any impact from Durbin for 2011. Now as far as 2012, we're close to that $10 billion level that if our assets are over $10 billion on 12/31/11 then we would estimate the impact of Durbin to be somewhere around $7 million for the year. And of course if assets remain below $10 billion then we would certainly not receive that level of impact.

Reg Q, which covers interest on commercial accounts, we have spent a considerable amount of time evaluating new product set and in this particular interest rate environment and the structure we've put in place, we do not anticipate much of an impact at all from Reg Q and paying interest on commercial accounts.

As you know, as interest rates change, that is subject to change anyway but at this point we don't really anticipate any significant impact at all.

Turning to the non-interest expense side, we continue to stay focused on controlling our costs. Our non-interest expense remained at well controlled and totaled $81 million. For the quarter it's up about $1.3 million. $800,000 of that increase was attributable to the Heritage acquisition.

FDIC expense declined $800,000 as a result of the implementation of the new revised deposit insurance assessment methodology moving from deposits to assets.

And then finally, covering our capital position, our tangible common equity increased to $886 million and that is 9.43% of tangible assets.

Total risk-based capital increased to 16.47%, which as you know significantly exceeds the 10% regulatory requirement to be classified as well capitalized and significant flexibility -- we have significant flexibility to increase our assets anywhere between $2 billion to $3 billion and remain very well capitalized at appropriate levels. That can be done through growth or can be done through acquisitions.

So that wraps up the comments that I have and I think at this time, operator, we can open it up for questions.

(Operator Instructions). The first question we have comes from Andy Stapp of B. Riley.

Hi, guys, nice quarter. Could you give some color on the loan pipeline and prospects for organic loan growth? Are you seeing any encouraging signs?

Andy, we had commented at the end of the first quarter that pipelines looked very healthy, the best we seen in a number of years and that was consistent with the (inaudible) for [full] percent GDP growth and a strong economic environment. We've since then, of course, as you all know with the issues with the U.S. debt, unemployment back up again over 9% have seen a slow down in what has happened to our pipeline. It's a reflection of what's in the economy.

In the commercial area a number of the loans are new and have booked and added in. We're still working to overcome some of the run off though out of indirect and out of the construction and land portfolio, so encouraging signs tailed off a little bit from what we've been seeing the first quarter but still good activity in the corporate area and in the Houston market.

Okay and what is the outlook for the net interest margin?

Outlook for net interest margin for the remainder of the year, Andy, I know we keep saying that we expect it to tail off. We've just been very aggressive about managing deposit costs and the comment that I made relative to the $23 million worth of loans in Memphis that ran off, purely a function of not wanting to go that low on assets that had a much longer duration. So, although we continue to see pressure on the margin, we would anticipate that by year end it could be in the 410 to 425 range and, Buddy, I don't know if you want to add to that any.

Just a small amount of color, that large amount of consumer and commercial deposits has given us an opportunity to match those investment portfolio duration assets that we've been bringing on in a more comfortable way. If you recall, in March we reported that 200 basis point chalk would bring us down to about 2.6%. Today we're closer to 2%. So we've gradually managed the net interest income in the model downward, still slightly liability sensitive, but it's shown some improvement there as well.

Okay, got you and do you happen to have early stage delinquencies at quarter end?

Barry?

Sure, glad to. As far as the 30 days or more at a corporate level with 2.3%, that's down from the previous five quarters. Is that pretty much what you wanted there?

Is that total delinquencies including the 90 plus and non-accruals?

That's correct. It's going to be 30 days or more minus any non-accruals that are current. So it's just -- it's going to be your 30 points right there, 2.3%.

And do you happen to have the 30 day, nine day bucket?

I do. It's going to be from the 30 day to the 89 day bucket is going to be 1.19% and the 90 plus bucket is going to be 1.12%.

Okay, great I'll hop back into the queue.

Kevin Fitzsimmons, Sandler O'Neill.

You covered credit already but I was just wondering -- I mean the thing that kind of struck me when I looked at this was credit is improving but it seemed like -- and I don't know if maybe we're dealing with an anomaly last quarter where the linked growth was very significant. But it seemed like the linked growth in non-accruals slowed a bit.

OREO went up a bit and I know you talked about Florida and that whole reappraisal issue with the second quarter. Is that -- maybe you could address that on the non-performing side but also just wanted to touch on the provisions increased. The net charge offs increased and whether that's stemming from that same issue that the second quarter appraisal issue and maybe we can get into the under providing relative to charge offs and how you feel about that. Thanks.

Kevin, this is Barry. I guess for your first question dealing with non-performing loans, we while the decline is less than a percentage basis there's a continuation of a steady progress of bringing down the non-performing loans. The natural progression there is going to be of course into ORE so for the OREs to increase it's the ORE increase is a combination of some loans moving out of the impaired category as well as bringing in the Heritage loans at the net value that we've marked them to. We had a few credits move into the non-performing category of size but nothing that was unexpected, nothing that had not been just a steady progress over time.

As far as the under provisioning for net charge offs, I think it would be good to just look at it from the standpoint of approximately $10.8 million of our $14.7 million worth of charge offs came from revaluation of impaired loans, whether they were existing impaired loans or new impaired loans. Of that $10.8 million worth of charge offs $9.4 million worth of provision existing existed from previous quarters. So, as you can see, we only had to provide a little over $1 million worth of reserve to cover that $10.8 million worth of charge offs. So that's going to really drive the difference between the charge offs and the provision.

And in reality we did provision about $3.2 million worth of additional monies for specific reserves for loans that we feel like we may need that, we may result in charge offs in the future. So, in reality this quarter outside of non-performing loans we only needed to provision about a little less than $5 million. So the difference between net charge offs and the provision was driven purely by the revaluation of impaired loans and the fact that we had about $10.7 million worth of write downs coming from the revalue of those impaired loans that only resulted in the need for a little over $1 million worth of provision in order for that to be covered.

But is that revaluation of impaired loans something that is at a much higher pace in the second quarter? In other words, would we be expecting similar kind of revaluation of further loans next quarter or is it just it's more like you hit an annual milestone on doing a lot of them in second quarter?

Sure and we revalued about 47 credits, $57 million in the second quarter and when you look at that in the third quarter for impaired loans of what we know today, there could be some new impaired loans, but of what we know today we'll be revaluing about $7 million worth of loans versus the $57 million we revalued this quarter. And in the fourth quarter we'll be revaluing in that $20 million range worth of loans at this stage. Now that doesn't mean there can't be some new impaired loans that flow in. They normally do but of existing impaired loans today the amount of revaluation of impaired loans for the second half of the year is roughly around $29 million versus $57 million we revalued just in the second quarter. So you can see there's substantial difference there.

Okay great that's helpful. Thank you.

Bill Young, Macquarie Research Equities.

Could you just talk about any OREO sales if you qualify that, if any this quarter, and just kind of how pricing came in versus expectations and maybe anything you might have in the pipeline for the third quarter?

Yes we will. Bottom line there is activity has slowed from first quarter but still there and I'll let Barry quote a little bit more in detail.

We had OREO sales of about $8.1 million, $8.2 million this quarter and we actually resulted in a small gain on a net basis of about $160,000 so that would evidence the fact that we're of the OREO that we are able to move we've got it marked at the appropriate level to reflect what's going on in the marketplace and, as you know, we've revalued our ORE at least annually if not more often depending on what's going on in the marketplace and that's actually going out and buying appraisals from independent sources and then remarking that ORE down to value less cost of sale.

Great and then in terms of anything you might have under contract so far this quarter?

We've got a few properties under contract that we've been working hard on. Those are always -- those are going to be just LOIs that have a due diligence period that we're working through but we do have some properties in our Houston market as well as a property or two in our Florida market that we're hopeful that will come to fruition during the third quarter but those things are fairly fluid but we do have activity.

And then the $4 million of offsets you mentioned as a potential offset to Reg E kind of what's kind of the time line in your mind in terms of being able to fully implement that.

We believe that the product changes that we have outlined will be implemented right at the end of the third quarter or the first part of the fourth quarter and those changes will kick in at that time. And I would say then we would anticipate that the changes that we have that will result in the decrease will probably hit some time within that same time frame relative to posting order and maximum number of overdrafts per day.

We're hoping to see some offset. It doesn't offset it completely but it does to some large degree, large extent.

Got it and then just one last question, if you could just kind of I guess could you just kind of comment on -- I know you already kind of addressed this in the first question -- but just kind of comment on any kind of pockets of loan growth that you are seeing or where you see a kind of opportunity in the near term and then just kind of just a general comment maybe on the competitive environment?

I do. Pockets of loan growth are primarily in the C&I area in and around existing relationships that we have with larger customers here in Mississippi as well as in the Texas market. We have seen some improvement in Memphis. However, that was offset with the $23 million draw so that just over shadowed the growth that we've seen in the new interest in Memphis.

So, again, we look to Texas. We look to Memphis. The competitive environment has become significant to the point where those banks that we go up against are extending terms and they're cutting prices. We're seeing a lot of pressure to re-price loans without floors. Yet time has allowed us to mitigate the exposure to a rate change relative to the floors that we have in place so I think it's until we see a change in the economic climate it's just going to be out there fighting and clawing for everything we can get while we protect anything new that we can get while we protect the relationships that we have.

Thanks; could just one last question if I may, just what percentage of your loan book has floors right now in the commercial loan book?

What percent? Buddy is going to answer. What percentage?

Of your commercial loans have floors on them.

Floors on them, no. We have -- we've moved from about 70% of the new product that we had been doing perhaps six months to nine months ago. We're now to where all of new product is probably coming in around 50% and that's about what the total amount of floors that we have for the entire portfolio is at around 50%, maybe slightly over.

Great thanks a lot.

Brian Klock, KBW.

Barry, maybe you can just help me understand a little bit I guess on the revalued non-performer or the revalued impaired loans. In the quarter there was a 47 credit for $57 million so the $57 million is actually is that net of the $9.4 million you've provisioned before or that's before the provision that you would have had so that was the gross amount and now you charged it down?

That's correct. It's the gross amount, Brian. It's the -- when we went into the quarter we had -- there was $57 million worth of impaired loans plus the new ones for the quarter that we needed to get values on and then the write down would be after that.

Got it, okay, okay. And it seems like from where the charge offs that would it be too simple to think that most of that was still Florida related but based on where the net charge offs were $7.9 million out of Florida?

That's right.

So is that where most of that revaluation occurred was in Florida?

It was. It was about two-thirds of the revalue came out of Florida. Two thirds.

And I guess just to see the taxes, the $3 million, $3.1 million and net charge offs so were there anything there that's new or out of -- it seems like a big number for before that's been performing pretty good for you lately.

Sure. We had. Go ahead, Jerry.

We had one credit there that was -- it was an operating company that ended up being a situation where the business of the -- the principal of the business was indicted and after that occurred the business began to struggle and we ended up in a liquidation mode. And we had specifically provisioned for this credit last quarter because we knew it was occurring but we had not had a chance to liquidity the receivables in the inventory in an orderly fashion so we ended up having roughly $1 million write down there. That provisioned for previously and then we also had one other large land hold that we got a new appraisal on prior to the end of the quarter. It was written down by $0.5 million. It actually moved in to ORE during July so that was pretty much -- that was about half of the total charge offs for Texas of the $3 million charge offs for Texas.

Okay great and just one other question maybe Jerry or Buddy I guess, Jerry, you said that maybe the margin here in the second half of the year could be between 410 and 425. What would be the situation I guess say would it go to 410?

Do you want to answer that or do you want me to?

I think the trend line probably puts us about in the middle of that. We've had very good growth in our core deposit base and that has brought that overall funding cost from 70 basis points down to 66 so where we continue to see that as being an important part overall, these floors that were mentioned a few moments ago actually work into our favor when it comes to the margin trend. So there is a -- we were operating with a little bit of a gap for a short period of time if interest rates were to rise and that has been reduced. So the dead center point of that margin somewhere in the 415 to 420 is probably where we have the greatest expectations of where it would land, that 410 to 425, probably a little bit on the outlying edges.

Okay so really so if that's I guess assuming again that the traction you've been getting on the funding side has been pretty good if that kind of stops and I guess you have more into the securities portfolio just--

Yes and the other piece, Brian, is that we've mentioned loan pricing has become extremely competitive so that would be the other thing that would bring us closer to the 410.

Okay but again it's again you're trying to hit that what did you say, $91 million a quarter in NII?

We are.

Okay. All right thanks for taking my questions, guys, appreciate it.

Michael Rose, Raymond James.

Just had a question on the non-performing assets in Mississippi and Tennessee, it looks like they both kind of ticked up a little bit. I am sorry if I missed any explanation there but is there any color there?

Let me look here for you, Michael. On Tennessee we had one large residential development that actually moved into the non-performing category and we're well secured on this particular credit. As a matter of fact, we have recently been able to release the guarantors on this particular loan with settlement for that release of a substantial amount of money, which we've used to reduce the principal balance. We've since moved the property this quarter into ORE and do not expect any potential write downs in the future as the property needs to be revalued so we feel very good about that particular instance.

And then the other market you had mentioned, in Mississippi we did have one, I guess two residential developments that moved into ORE of size. One was on the Mississippi Gulf coast and we did get an updated value there and we have written it down to value. As you know, the residential market, one to four family market, on the Gulf Coast has been slow due for several factors, insurance being one challenge as well as just the return of the population following Katrina just has not met expectations so that was one of our residential developments.

And we also have a residential development here in the Jackson market, a very good development that has been slowed due to the economy but very appealing and we do -- we feel like that's going to be one that's just going to be a matter of time before it just works on through. But, as the economy picks up, both of these developments will pick back up as well in terms of lot sales.

Okay and then just as follow-up, when I look at your ORE portfolio do you have a sense for the average age of ORE by market, meaning now that you've kind of worked through the worst in Florida, is the average age of ORE declining but because ORE is maybe trending a little bit higher in some other markets, I mean can we expect slow resolution there and quicker resolution in Florida?

I think the resolution is still going to be much better in our non-Florida markets than Florida, strictly because the properties we have in the Texas market we have those priced, as we do all of our ORE priced, to move and there's a good solid market there and we feel like that's just a matter of time before those properties move out. We have a lot of interest. I think the same is true within our -- for the most part, within our Mississippi market and what we have up in the Memphis market.

I think down in Florida you've still got predominantly land and lots and some vertical but that's limited at this stage. We've moved out most all of our vertical down there so you're dealing with lots and land and that's still going to be something that's in the back of people's mind as they begin to want to make investments down there. They're still looking to buy the income producing property that's very reasonably priced in today's market and therefore it's going to be a while till that existing vertical gets absorbed where people begin to look and think about the need to build more of it to satisfy the demand.

Okay that's helpful. Thanks, guys.

Peyton Green, Sterne Agee.

In reference to that you have begun to assess the effect of Reg Q and I was wondering if you could maybe talk about that in terms of a down the road kind of perspective, up 300 basis points or 400 basis points back to more normal interest rate perspective.

Peyton, thank you for the question. I would ask Barry Planch. I have Barry Planch in here. Barry overseas product management for the Company. I'll preface allowing Barry to comment there and Buddy as well by saying we think that we're at a period where we will see low interest rates for some time.

We have introduced a new product for the corporate interest checking. We would anticipate that it would take some time to see some migration into this product once interest rates begin to rise so it's one of those that's a question that has a lot to do with behavior, as rates rise, people's use of their own money and fees associated with checking accounts, so Barry or Buddy, either one of you want to add to that, please do.

Yes, Jerry, I'd be glad to make a comment. We've taken a look at excess balances that exist in our commercial regular account, the account that pays an earnings credit rate, and right now it's about $125 million so that would be the most obvious dollars that over time may try to migrate. At this low rate environment we're in now of about 10 basis points, it's $125,000 a year. As you say, as rates go up, then certainly more belief that's more dollars would migrate but what I would tell you is the way that we price these new products there are some fees that are higher in those interest bearing products so some of that loss in revenue would be offset with additional fees within that product type.

Okay maybe I'll try and ask it a different way. Do you think this makes your Bank more competitive in an environment where there's deposit disintermediation or is it a non issue? Or you just don't know?

I don't think it is a significant issue to us. We've got a very active treasury management team who have put together sweep accounts in other corporate product mix for a long time. The shift between on balance sheet and off balance sheet from a competitive point of view is not going to be a problem. That's just going to be a question of whether or not we want to keep it on balance sheet. We've got three different alternatives for them to use their idle funds today and going forward that's going to be you'll add a fourth.

Okay. All right and then an unrelated question, Jerry, if you could talk a little bit about you all's appetite for M&A opportunities, be they FDIC assisted or live bank.

Great I'd be happy to and, as we mentioned, the Heritage transaction went very well. It also positioned us because of the fact that we had to bring in purchase accounting software to account for the loans associated with the transaction really sets us up well to do additional FDIC transactions. Those will be focused primarily in the southeast. We look at and see the list that comes out every Friday or any new transactions that are outside of that regular reporting and look for opportunities there.

In addition, I would tell you that we remain focused on any banks that are not yet FDIC targets but are certainly have been weakened because of certain credit issues and may be looking to partner with a strong bank.

And then the third category I would tell you is there are some strategic mergers out there that make sense. We certainly would be very interested in those. We feel like we have the capacity to do up to about a $3 billion transaction without having to go to the market. We feel though because we have really focused on cleaning up assets, or problem assets in the Company, that should we need to go to the capital market, we would be well received.

Peyton, you didn't go all the way in this direction but you may be also thinking about it as it relates to Reg Q. One of the things that we did in modeling was to try to indicate what the interest rate exposure that we would have. We currently have a very successful Euro Cayman branch sweep that is interest on our balance sheet and keeps in the same general range as a Reg Q commercial deposit would so it's over $100 million at this point and, as Barry pointed out, where we think that it's about $125 million or so that is acceptable to this new Reg Q alternative so just it's a fairly neutral impact on interest rate risk point of view based on our modeling as well.

Okay great, thank you very much.

(Operator Instructions). Ebrahim Poonawala, Morgan Keegan.

Just one question I guess regarding income following upon Peyton's question on M&A, I guess given a very tough organic growth outlook from what it appears on the loan growth side and doesn't look like you're going to be the most competitive bank out there from a pricing standpoint, could you talk about in terms of your capital deployments priorities and is M&A or growth the only thing? Would you consider share buybacks? We talked about special dividends previously so if you could just kind of rank that that would be helpful.

Okay good. I think that clearly M&A would be our top priority. If I had to rank them, M&A would be first. We probably would then focus on some sort of share buyback in the event that we couldn't find opportunities that worked for us, then look at potential of increasing the dividend although the payout ratio at this point is historically high, starting to come back in as seeing improved earnings.

And then finally, a special dividend could be something considered but I don't think are real well accepted by the market so that would probably be our last alternative.

Okay it makes sense and then looking at M&A and the three categories of potential M&A opportunities you mentioned, what is the most likely based on everything that you are seeing? Is it the FDIC or is it going to be most likely a strategic bank, which is probably healthy and just looking to merge from a strategic standpoint with a bigger bank?

I think that we would run those paths as hard as we could in both directions. I don't know that you could put one over the other. I think in the world of M&A you have to constantly be out there being aware of opportunities that are available. You have to be visiting with other CEOs as their priorities changed and their situations changed and I think you have to be opportunistic so I don't think you could -- to categorize or prioritize, I think you have to be constantly looking at all opportunities available and when it's there be prepared to take advantage of it.

All right thank you, guys.

It appears that we have no further questions at this point and I am sorry, sir. We'll go ahead and hand the conference over to Mr. Host.

All right thank you very much, operator. And thank you all for listening today. Just as a recap, we feel like our quarterly performance was very solid from an earnings' perspective.

Other things that we've mentioned, we completed the Heritage acquisition so we would say that we're reloaded and ready to do something else when that opportunity arises. Barry has mentioned we stay focused on the credit issues. We can't let those become a problem for us and we feel like they're very, very well controlled and, as we work through the ORE, I think -- and you'll see our numbers continue to improve, we didn't spend a lot of time on preparations for the new regulatory environment but Buddy Wood, our Chief Risk Officer, has been very involved and very focused in preparing the Bank for what may come out of this new environment.

And, although I would love to report to you significant organic growth, it is as I mentioned a very competitive market. Nonetheless, our people stay out in the market, stay very focused on finding new opportunities not taking on problems from others or unprofitable loans and it just remains a very tough and competitive environment but we are focused on growing.

And so, in conclusion, I would say that we appreciate your interest in Trustmark and look forward to visiting with you again on the third quarter conference call.

And we thank you, gentlemen, for your time. The conference is now concluded. We thank you all for attending today's presentation. At this time you may disconnect your lines. Thank you.