Trustmark Corp (TRMK) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's 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 and thank you, Operator. I would like to remind everyone that a copy of our third quarter earnings release and 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. In this regard 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 Jerry Host, President and CEO of Trustmark.

Thank you, Joey. And good morning, everyone, and thank you for joining us this morning. In addition to Joey Rein, we have with us this morning Louis Greer, our Chief Financial Officer, Barry Harvey, our Chief Credit Officer, Mitch Bleske, our Treasurer, and Buddy Wood, our Chief Risk Officer.

I'd like to start by highlighting a few issues for the third quarter, and then touch briefly on a few specific areas, and then follow-up with any questions that you might have.

Third quarter continued to produce strong financial results for Trustmark. Our traditional banking business experienced very solid returns due primarily to improvements in credit quality, including reductions in nonperforming loans and net chargeoffs. We experienced expanded profitability in areas, such as our mortgage banking group, wealth management, and the insurance businesses.

A couple items of note. In terms of expansion we opened a new branch office in Starkville, Mississippi, which is where Mississippi State University is headquartered, with over 20,000 students now enrolled. In addition, we opened a new mortgage banking loan production office in Birmingham, Alabama and staffed it with an individual from Birmingham that we've been doing business with for about the last 15 years. So we're very excited about those two new expansion opportunities.

Net income available to common shareholders for third quarter was $27 million. Our basic and diluted EPS was $0.42, return on average tangible common equity just over 12%, and our return on average assets was 1.12%. Year-to-date net income is now $82.6 million, and that represents basic and diluted EPS of $1.29. Our Board of Directors in its meeting yesterday declared a quarterly cash dividend of $0.23 a share.

Turning to credit quality and some highlights there. Our nonperforming loans decreased $21.4 million or almost 18% on a linked quarter basis, and now are just under $100 million. This makes six consecutive quarters of improvements in the nonperforming loans. We experienced improvement in all geographic markets relative to the credit quality.

Other real estate decreased just over $400,000 on a linked quarter basis to total just under $90 million now. ORE sales during the quarter were $12 million. It resulted, those sales resulted in about $135,000 worth of loss. We feel that that's evidence that the valuations were performing are very close to actual values.

Nonperforming assets decreased $21.8 million or just over 10% during the last 12 months, and nonperforming asset balances decreased $54.9 million or about 22.5% . This includes about a $40 million reduction in the Florida market.

Net chargeoffs during the second quarter totaled, excuse me, during the third quarter totaled $55.4 million to represent 0.36% of average loans.

Our allowance for loan losses of $89.5 million represents just under 2%, commercial loans about 0.75%, consumer and home mortgages are 1.55% of total loans. That's 248.82 of nonperforming loans excluding impaired loans.

Now looking at the balance sheet, linked quarter basis average earning assets remain flat at $8.5 billion. Our end of period loans including loans held for investment and covered loans totaled just under $6 billion, a decrease of about $132 million for the quarter. Many of those were planned reductions. In the construction and land development area our loans were down $33.5 million. Indirect auto, which we've told you we have been reducing steadily since 2008, is down about $28 million for the quarter. In addition, you'll recall we did a transaction, an FDIC transaction with the Heritage Banking Group, and those FDIC loans from that transaction are down about $12 million. If you look at it on a collective basis the planned reductions total $73 million or about 55% of the decline for the quarter.

I will tell you that we're not immune to current economic conditions, and that has constrained credit demands. Many of our customers continue to use excess liquidity to fund existing needs and to pay-down credit lines. We continue to experience broad based competition for very good credits. However, we will continue to maintain our discipline, both in terms of credit and pricing. We will focus on retaining customer relations, as well as targeting quality customers, quality new customers.

Average deposits during the quarter decreased about $118 million or 1.5%, the total $7.6 billion. But if you look at that decrease you'll see that the mix change was actually positive. Our average noninterest bearing deposits grew 5.5%, while our average interest bearing deposits decreased 3.6%. Most of that is due to a seasonal reduction in public funds. Our year-over-year average deposits, however, have increased approximately $500 million or 7%.

Our net interest income totaled $89.3 million, a decrease of just over $2 million from the prior quarter. That decline was attributable to two factors. The first, the repricing of fixed rate assets to lower yields. And, secondly, an accelerated premium amortization within the investment portfolio. The net interest margin contracted 12 basis points to 4.17%. Approximately 5 basis points of the contraction was due to accelerated premium amortization.

The Fed's twist provides an extended low rate environment that we will diligently manage through. We've shown our ability to do that in the past, and this is no exception. We'll maintain our prudent asset liability management, including loan and deposit pricing, in an effort to manage our net interest margin.

Turning to noninterest income, noninterest income totaled $44.3 million for the quarter. That makes up approximately a third of our total revenue and represents very solid performance in that area.

Service charges on deposit accounts totaled $13.7 million, which is an increase of $829,000 on a linked quarter basis.

Bank cards and other fees totaled $7 million during the third quarter, it's an increase of $179,000 on a linked quarter basis and almost $800,000 year-over-year, and is due to increased debit card usage.

Mortgage banking income totaled almost $10 million at $9.8 million. That's an increase of $3.5 million or 56% on a linked quarter basis. This was a reflection of the stable mortgage servicing income, solid secondary marketing gains, and a very successful hedging program.

Insurance revenues totaled $7.5 million, an increase of 9.5% on a linked quarter basis. Now this was a reflection of seasonal increases in commercial property and casualty income.

Wealth management income remained relatively stable at $6 million, an increase of 4% during the third quarter.

Other income totaled $234,000, in line with prior quarter when we adjusted for the bargain purchase gain associated with the FDIC Heritage transaction.

Now looking at noninterest expense, it totaled $85.5 million, up $4.1 million on a linked quarter basis. We had several notable expenses during the quarter. First was a resolution of a longstanding lawsuit, that was approximately a million dollar expense. A realignment of certain business units that we have been working on now within the Company for the last year that totaled approximately $800,000. And then, as many of you are aware, there have been a number of banks that have received compensatory fees relative to mortgage foreclosure activity from previous quarters that are now just being sent out by Fannie Mae, that totaled about $700,000 in Trustmark's case.

If we adjust for notable expenses totaling about $2.5 million, noninterest expense increased about $1.7 million or 2% linked quarter. ORE foreclosure expense totaled $5.6 million. Salary and employee benefits were contained at a growth rate of 1.1% on a linked quarter basis.

Finally, capital, and that's something we're extremely proud of, a very strong capital position. Our tangible common equity increased to $915 million and represents 9.74 of tangible assets. Total risk based capital increased to almost 17% at 16.78%, and significantly exceeds the 10% regulatory requirement to be classified as well capitalized.

We have because of this strong capital position significant flexibility in the Company. Flexibility to grow organically as the economy recovers and as loan demand increases, but also the ability to grow through acquisitions as opportunities arise and present themselves to us.

So, with that, those are the highlights and some specific details relative to the quarter. At this time, I would like to open it up for questions.

(Operator Instructions)

Our first question comes from Bill Young at Macquirie.

Hey, good morning, guys.

Good morning, Bill.

Hi. Could you just give us a little bit more color in terms of kind of balance sheet management in terms of the margin? You've previously indicated that you're kind of managing to a quarterly net interest income of $90 million. Obviously, it came down a little bit this quarter, but is that still kind of the target? And if loan growth is still soft in the near term are you willing to kind of continue to add-on securities to help maintain spread revenues?

Thanks, Bill. What I'm going to do is maybe ask Mitch Bleske -- I'll address questions relative to loan growth. But relative to the margin, itself, we've been saying that our margin is extremely high relative to the rest of the industry, that we expected some contraction in the margin. The Fed's twist, of course, had the additional affect in not only lower rates to which we invest in, but also some prepayments that resulted in some premium pay-down.

And from a loan growth standpoint we continue to remain disciplined and stay focused on existing relationships. When people are not wanting to borrow money, you can't force them to. So what you do is you go out and you offer other products and services, the insurance products, the treasury management products. Those kind of things are where our folks are focused given the fact that loan demand is not there.

As far as the net interest margin and maybe what we're seeing, I'd like Mitch Bleske, our Treasurer, to talk a little bit about that. Mitch?

As Jerry communicated, we have discussed in past calls the anticipation of decline on net interest margin given the economic environment and the current level of interest rates. Obviously, recent actions by the Fed to drive long-term interest rates lower has resulted in faster than expected decline, which we experienced the 12-basis point decline in our margin linked quarter.

Approximately 5 basis points of that decline is due to the accelerated premium amortization related to our investment portfolio. The other 7 basis points is driven mostly by a general repricing of our fixed rate assets within our balance sheet. Deposit costs continued to decline but only on a partial basis relative to our assets.

Going forward we do expect to see modest declines in our net interest margin as our fixed rate portfolios continue to reprice lower. There is, again, some additional opportunity to bring deposit rates lower but not at the same pace. We continue to see, as Jerry touched on, competition for good loans, and the use of floors and spreads are becoming tighter which is also contributing to some of this margin decline. We do remain disciplined, though, in our loan pricing.

When we talk about future margins, depending on where loan growth takes us we do intend to use the investment portfolio to manage our level of earning assets, although we do not feel it is appropriate at this time to really grow the portfolio in a significant way and take undue interest rate risk given this current low level of interest rates.

Great, that's very helpful. So I mean it sounds a little bit like maybe kind of that $90 million quarterly target is not the right number, you know, kind of a go-forward basis given kind of the current [extreme] environment?

Well, I will tell you that the $90 million, obviously, if the economy -- it all depends on what happens in the economy. If the economy improves, and we feel very confident that that loan demand picks up, those relationships and those borrowing needs are there. And we'll do absolutely fine, as well as if we see a pick-up in the economy we will anticipate slightly higher rates, helping our reinvestment yield in the portfolio. And probably not experiencing significant increases in the funding side.

However, if the economy remains flat, you're exactly right, there's going to be challenges to that $90 million level. We have the capacity to grow the investment portfolio some. We'll do that when it's opportunistic. And Mitch and his folks watch that every day, and when they see opportunities they'll step-in and take advantage of it.

Great. Thanks. And then could you, on a separate topic could you just talk a little bit about maybe if any M&A opportunities don't arise kind of the appetite for other means of capital deployment?

Yes, if you -- one of the positive things about us right now is that we've got, obviously, a very good dividend yield and the consistency there. Whether or not the Board will decide if that's something that we want to look at increasing if we don't have M&A opportunities to slow-down the growth of capital is something we'd consider.

The other opportunity, of course, if it arises and we would look at the potential for a buyback as many other companies have done. We would like, though, to remain focused on being able to grow the Company organically, as well as looking at those M&A opportunities that are out there. There are still a flow of FDIC transactions in the Southeast that we continue to look at.

The other thing, I think you've got to look at if there are some opportunities -- there's also with the changes in the industry as a whole, the tightened net interest margin in many banks, the increased regulatory scrutiny and activity, and costs associated with that, there are going to be some banks that may be read to partner with a healthy bank with a strong stock.

So we will -- we're going to continue to look at all the opportunities related to managing our capital and keep those options open.

Great. Thanks a lot, guys.

The next question comes from Brian Klock at KBW.

Good morning, Brian.

Good morning, guys, and thanks for taking my questions. Jerry, maybe just to follow-up on the margin question, I know that probably a year ago we were all talking about asset quality, and now we're all talking about the margin. I guess maybe thinking about the 12 basis points you were impacted by, obviously, the drop in the lower long bond rates. I mean I guess how much should we expect going forward? I guess how much more repricing do we have? Maybe you can kind of give us some indication of where you are in the duration of that securities portfolio and how much cash flow is coming off that securities portfolio quarterly?

First of all, let me say that it is a joy not to be talking so much about credit problems.

Right, right.

Although we stay very focused on managing the problems that we have and working those down and getting this ORE out here.

As far as the net interest margin we stay -- you know, that's something that we are very experienced at and have cycled through a number of economic cycles and have performed very well.

As far as this particular cycle and where we are, we've been saying for the last three, maybe four quarters now that we're going to see some tightening. I firmly believe we will continue -- our net interest margin will continue to perform better than other organizations out there. However, until we see some economic recovery that creates some loan demand it's going to be a challenge.

Mitch, you have any other thoughts you would add?

Yes, you asked a question about the portfolio cash flow, and the duration of our portfolio is right around three years, three, three-and-a-half years, depending on where interest rate is at any given time. We've focused on purchasing pretty well structured securities that have some, they have some [convexity], to try to limit the amount of convexity. In terms of cash flow, you know, you're talking anywhere between about $50 million a month, although the last couple months with the recent turn-down in the long-term interest rates we did see some faster cash flows throughout the last couple months of this quarter and expect to see maybe some faster cash flows, at least this first month of the fourth quarter.

Okay, and maybe just a follow-up question. Jerry, I guess on the loan portfolio you guys have been talking about the plan reductions for awhile now. Obviously, the construction in Florida, the indirect auto. I guess looking at the different regions, when you look at the Mississippi market that had the biggest decline. Obviously, a lot of that related to the indirect auto. Consumer, though, was down almost another $30 million in Mississippi. And even in Texas you had about an $18 million drop in Texas, some coming out of the C&I portfolio, but mostly coming out of construction. So maybe you can talk about what you're seeing in the consumer side in Mississippi? Is that something that's just going to be down to the indirect runoff? And then on the Texas side maybe just talk about the C&I and C&D outlook?

Some of the consumer I think you're going to see, Brian, is a function. Mississippi is a function of some of the equity line, you're getting with this low rate environments, and refinancing and consolidation there. Demand from the consumer, not just here but in all our markets, continues to be soft given the fact that many consumers are deleveraging.

As far as Texas I will tell you that that is a result of a significant pay-down in a real estate loan, two pay-downs, and we actually had gross growth relative to the amortization, that was very nice in Texas. However, it was offset by two very large loans. One real estate, the other C&I, that one of which was part of a participation. We're seeing some of the very large banks that are reining in some of the participations and taking the entire amount. We're seeing a lot of competition with the very large banks on the hundred plus million dollar transactions where one large bank will come in and take out, take a complete deal from another large bank that we may have a participation with. And that was the case in Texas this last quarter.

So Texas continues to still be a very bright spot for us and believe that we're going to see growth there. It's just -- it seems like every month there's -- or every quarter there's something relative to either a nonperforming moving into ORE, which we want to happen, significant pay-down in C&I, which we'd like to reduce the exposure there, and then, of course, the indirect.

Okay, just -- and I'll get back into queue -- but on the C&I in Texas, was that an energy related syndicated credit? And would you have had positive loan growth if you didn't have those two big pay-offs?

It was an industrial credit. It was not energy related, but it was more commodity related. But we also, Brian, had -- in addition to what Jerry mentioned, you know, within our Heritage portfolio we've got a certain portion of that portfolio that has a pretty heavy mark on it, and is also deemed to be nonperforming. So we're working through that, and it's -- we fully anticipate working those credits out of the bank, and it's very profitable for us to work those credits out of the bank from the standpoint of the mark on those loans.

And so that's not something that we -- we're not -- we're fairly excited about the progress we're making there, as well as the other credit out in Houston. As Jerry mentioned, there's about a $4.6 million nonperforming loan that we were able to work out of the Bank with no loss. So in some cases some of the reduction that you're seeing is by design and then other pieces of it are very desirable when it happens.

The other thing that we've seen this year and we don't want to forget about is that we've completely sold-off our entire student loan portfolio. We did that in the second quarter, and that was about $33 million.

All right. Great. Hey, thanks, guys, for taking my questions.

The next question comes from Jennifer Demba at SunTrust Robinson Humphrey.

Thank you. Good morning. Just curious as to what you're estimating your future tax rate will be in the next few quarters? And, also, just wanted to get your thoughts on what you're seeing in the live bank M&A market? Are sellers willing to get off the fence yet? And what are you seeing in the pipeline there?

Let me take your second question first, Jennifer, if we could? And good morning. As far as live sellers, I think basically what we're seeing is what you are seeing and hearing about on the rest of the market, and that is there continues to be a difference between seller expectation and buyer expectations. And although from our perspective there's some indications that those are becoming more realistic on both ends, the economic uncertainty and the shadow of credit issues still plays a major factor in whether or not you see combinations of companies. So there's clearly interest on both parts that exists. I think there's still just some differences in perceived valuation.

Going back to your first question relative to tax. You've seen a reduction in our tax rate that is primarily due to planned activity around both state and federal tax programs that we have been engaged in, primarily in Mississippi but some in some of our outer markets.

Mitch Bleske oversees that program for us. The tax credits we've been involved in this year, about -- correct me if I'm wrong, Mitch -- but about two-thirds of those also qualify for CRA credit. They're good programs, doing some great things in the communities that we're in. There's a great benefit to us, as you see on the tax line. We think it's something we know very well, and would anticipate that we'll remain involved in those programs.

Mitch, you want to comment any further?

Well, in terms of the direction of our tax plan or tax rate, I'd probably give that over to Louis, but there's a lot of moving parts in there and timing of these tax credits really drives it. For the quarter we had one particular tax credit that we closed and I think drove that tax rate down temporarily. While we continue to utilize tax credits to manage that rate I wouldn't necessarily call a lock on where the current tax rate is going forward.

Yes, Mitch, I'll comment on the tax credit going forward. Certainly, last year I think our effective tax rate was a little over 30%. As you look at the current quarter we were at 29%. So certainly additional investments in those tax credits [follow right down] for the quarter.

I think for the fourth quarter I think we'd see a continuation around that 29%. We're continuing to try to drive that permanent tax rate below 30%. So somewhere -- 29%, 30 would be a solid run rate for the future.

Thank you very much.

Thank you, Jennifer.

Your next question comes from Ebrahim Poonawala at Morgan Keegan.

Good morning, guys.

Good morning, Ebrahim.

Jerry, you talked about M&A earlier, and I was wondering in terms of the non-Bank, on the fee income side if you're seeing any opportunities be it in the insurance business or on the wealth management side? And if you're spending any time focusing on trying to do M&A on the fee income side?

Thank you, good question. We stay, as you would imagine, broad focused relative to M&A. Activity on the insurance side, obviously, has picked up somewhat. Valuations, multiples have increased over the last nine months or so. We, obviously, there are some markets that we have a banking franchise in that we do not have an actual insurance operation, although we are covering those markets with people from our existing markets. [Botrel] being based here in Jackson, and [Fisher Brown] out of the Panhandle of Florida, are covering with our lending officers opportunities that come-up with customers.

So our focus relative to that line of business certainly will be, if there are any opportunities that complement those areas where they have a banking operation but not an insurance operation or something, we're constantly evaluating.

On the wealth management side, you know, that's something a little more challenging. It's also something that we feel (inaudible) with an existing banking footprint. We can hire individuals. We don't necessarily have to buy businesses, and in many ways it can be cheaper to grow that way than through acquisitions.

Got you. And I guess one more question, if I may? In terms of you've talked about the impact from Durbin, now I guess you guys wouldn't be over $10 billion at the end of the year. Do you expect any sort of impact from Durbin next year or is it a 2013 event assuming you get to $10 billion at the end of next year?

You asked the $7 million question.

Well, that's what the guidance was, yes.

Yes, so, no, it's a good question. Yes, that's the question we ask our self. Certainly, it behooves us if we stay under $10 billion, once we've crossed yearend. And, obviously, at $9.7 million we're right there. I think you would -- a rational person would think that unless there's some significant opportunity between now and yearend and with what we've talked about so far relative to loan growth, that we would anticipate ending up below that number.

Now, that being said, as I understand right now the calculation to be impacted by Durbin is a calendar yearend calculation, so if we're not there at 12-31-11 my understanding is that we'll be grandfathered for another 12 months.

Understood. Thanks for taking my questions.

Thank you.

Our next question comes from Andy Stapp at B. Riley & Company.

Good morning, Andy.

Good morning. What was driving the reserve build given the pretty significant improvement in asset quality that you had during the quarter?

I'll let Barry answer that.

I guess, Andy, there's really three pieces to it. From a pure net chargeoff standpoint and the provision required to cover those net chargeoffs we really only needed to provision probably about $1.4 million. We've got about a $4.8 million of our provision was specific reserves on impaired loans that will be revalued in the coming quarters. So I think we've done a pretty good job of anticipating what the market is going to do over time in terms of based upon other similar properties.

As we see them changing in value, we try to anticipate that and look at the other similar properties that we have, and set aside a specific reserve where we think it's appropriate, even if the property is scheduled to be revalued a quarter from now, or two quarters from one, even three quarters from now. So that was $4.8 million of our [OR] reserving. Obviously, as -- if the markets begin to stabilize farther, which we anticipate they will, then that reserving piece will no longer be necessary at some point in the future.

And then, also, as part of our -- we have a 12-quarter rolling historical chargeoff, which is our quantitative part of our reserve. And as we roll-off quarters and roll-on quarters there's always a possibility that based upon the historical losses rolling on or rolling off, and where they are, that obviously can affect to some extent our quantitative part of our reserve methodology. So that drove a little bit of our reserving, as well. But those are the key components.

Got you. And do you have early stage delinquencies at the end of the quarter?

Sure, let me give those to you. As far as the 30-days and more it's going to be 2.19%, and then the 30 to the 89 days is going to be 1.32%, and then the 90 plus is going to be 87 basis points.

Got you. And how much do you have in terms of CDs or borrowings repricing in coming quarters and at what rate?

Mitch?

Approximately in terms of the CD book you've got anywhere between 150 to 225 maturing each month with about an average maturity of our overall book about nine to 10 months. In terms of where that's coming on is right around -- it changes every week and we obviously watch, but you're talking right around 50 to 55 basis points but that, again, is some of the pieces we're trying to work on in terms of driving that margin down a little bit.

Okay, all right. Thank you.

Thank you.

(Operator Instructions)

And our next question comes from Peyton Green at Sterne Agee.

Good morning, Peyton.

Good morning. A couple questions. in terms of the CD book, I mean where would you expect it to bottom? I guess the portfolio shrunk about $130 million year-over-year. Do you see that starting to stabilize? And then, also, with regard to the participations what was the overall level of participations that you had at the end of the quarter, and how many more would you characterize as subject to this poaching by other large banks looking to grow?

Okay, on the CD -- and, Mitch, you jump-in here, too -- on the CD portfolio, that's something that we feel very good about. We have been I would characterize it as fairly aggressive in terms of managing the costs associated with that. We've seen the runoff. We're very comfortable that if interest rates were to pick back-up and we need that funding for loan growth that we could easily acquire those CDs.

Oh, hey, Jerry, I'm sorry, I meant construction and development loans, just to track them?

I'm sorry, I guess I meant -- I apologize. Okay, so I may have said it wrong.

So, Peyton, your question is dealing with construction and land development?

Yes, I mean just at what level do you think it stops shrinking? I mean is it going to continue to shrink at the same pace or do you think it's slowing? Is there opportunity to get another area, again, or?

Sure. And I think there will be opportunities to get back in that area, but I mean at this point in time we're not consciously trying to reduce our exposure. Our exposure from a regulatory standpoint on the measures that came out back in '06 in terms of construction and land development being 100% of tier one risk-based capital or overall CRE being 300%, we're at half those levels.

So we're not finding ourselves in a position to need to reduce our exposure in this area, it's really more a function of the market. I mean we don't see a lot of deals flowing in on the -- especially on the residential side of the equation. There's, you know, as in most markets, ours are no different, it's going to be the low end of the price point is where there's still some activity from a development standpoint and a construction standpoint, but it's fairly limited.

It's going to be a matter of the housing market really beginning to recover before we're going to see a lot of demand, and that's really what's driving it. On the commercial side we're seeing some demand, and on the income producing and the owner occupied, but there again they're like most borrowers, they're looking to take that excess cash flow and pay-down debt. They're also looking to make sure they can really see far enough in the future in terms of their demands of their own customers before they want to expand their business. So I think that's really driving our reductions is really demand in the marketplace.

Okay. Thank you.

And then on the participations, I think the one we had that paid-off is somewhat of an isolated event. We haven't seen a big move in that direction, and our levels of participations are relatively low. We were about $440 million, $450 million worth of outstandings and with exposures in that $700 million range. So for us it's not really anywhere where we have any form of concentrations as it relates to participations, purchase.

Now we do have plenty of participations where we may be the lead bank and also selling down, but as far as participations, purchase, where we may get taken out, our exposure there is pretty limited. And we don't see any type of momentum change in terms of the larger banks stepping in and paying off a lot of deals. I mean there's some of that that always goes on, but we don't really see a big trend developing.

Okay, and then last question is I guess competitively would you expect there to be more pressure in Texas just because it's a more vibrant and maybe overly banked market versus your other regions?

Well, I think we're seeing competition everywhere. I think it depends on the sector. The sector we're focused on, that middle market, obviously, there's good competition there. But it may not be at the money center level competition, where they can afford to price to historically low levels. So where our focus is -- yes, it's competitive. Is it to the extreme? I don't think it -- it don't think so.

Okay, great. Thank you very much.

Thank you.

Our next question comes from Michael Rose at Raymond James.

Hey, good morning, everyone.

Good morning.

Is there any low-hanging fruit on the expense side to, you know, at least in the interim to maybe offset some of the perceived [NIM] pressure?

I'll let Louis answer that. I'll start out by saying that we have managed noninterest expense in this Company I think very prudently and aggressively for the last 15 years. And, obviously, you're going to find ways to change process, to introduce technology that helps you reduce other expenses. As far as any significant low-hanging fruit, Louis, do you have anything that you've come-up with in the last 24 hours?

You know, Jerry, a couple years ago we set an initiative to keep our total [management] expenses below $75 million, so on a quarterly basis. So we've captured a lot of the low-hanging fruit, and we work every day to control expenses. And I'll just say that our noninterest expense base, excluding ORE expenses and FDIC for the quarter are about $78 million, and we've been at $74 million. So I'd say we're continuing to try to keep that base below $75 million, but we work on it every day, and I think we do a pretty good job at that.

Okay, that's helpful. And then switching back to loans and the questions around loan growth, it sounds like you had some payoffs this quarter, at least in the Texas market, can you give any commentary on your C&I pipelines and utilization rates and any trends that have changed either quarter-to-quarter or year-over-year? Thanks.

Yes, as far as utilization pipeline, utilization of existing lines, we have not seen a significant increase really in any sector. And I think that's consistent with what we've been saying that many companies are deleveraging and using their own cash to provide liquidity to the business.

As far as pipeline, we continue to see a very healthy pipeline [of loans] in the Mississippi market, in the Texas market. It's just they're at levels that, when I say levels I mean volume levels, that like many other organizations they are struggling to keep pace with normal pay-off. And some of these other anomalies that we've talked about.

So I don't see -- what I like about what I see in our pipelines is that a lot of what's coming in in addition to some new opportunities, are existing customers that are renewing, sometimes they're renewing at lower amounts. And so we just hadn't seen the growth but we are keeping the relationships, we're actually working to tighten them. And as the economy improves I believe we're going to see improvement in our loan volumes.

All right. Thanks, guys.

Thank you.

Our last question comes from Kevin Fitzsimmons at Sandler O'Neill.

Good morning, guys.

Good morning, Kevin.

Good morning, Kevin.

Can you -- I know you gave the break-down of those elevated expenses that you pointed out. The longstanding litigation resolution I think is pretty obvious that's kind of a onetimer and that is probably not expected to reoccur. But as far as the realignment of business units and the foreclosure fees how do you view those? In other words, were there expenses embedded from those items last quarter and second quarter, and do you expect them to have expenses for those items in fourth quarter? Just trying to gauge whether we should totally pull these out of run rate or whether they're -- just got pointed out because they were elevated this quarter?

Good question. Louis, you go ahead?

Yes, Kevin, those were -- we use the word notable because we wanted to point those out. Specifically, I think those are all really nonrecurring type expenses. Certainly, the litigation matter, that was about a million dollars for the quarter. As Jerry mentioned, the compensatory fees, too, basically a catch-up charge for the quarter for three quarters was roughly around $700,000. And then professional and legal fees for this realignment, again, were a onetime for the quarter kind of a nonrecurring item. So that $2.5 million we see as nonrecurring.

Let me comment, though, on the compensatory fee. There is two things that could happen there. One, we think we've defined our total exposure at a million dollars or less with what may be coming at us. So that would be an additional 300, that's not another million.

Right.

Secondly, we are aggressively refuting those fees. Whether or not we'll have any luck recovering some of those settle fees, we don't know, but we do think that there is a limit to what those might be. So that's the only one out of those three items, that's the only one that may have any additional potential.

Okay, great. And then just one follow-on on credit. I know you gave the 30 to 89-day percentage before, but can you just -- I think it was 1.32%, can you tell us what it was in second quarter? I just want to know, you know, one of your local, or at least a state competitor had some leading credit indicators that appeared to reverse, to accelerate. And so there's a lot of concern about what are the early stage indicators saying about credit. And I know there was a question earlier about that you built reserves this quarter after -- I think you went six quarters in a row with releasing reserves modestly, and so just trying to really get comfortable that leading indicators are still going the right direction for you guys.

Sure, and on all of our pass-through measures we're actually making some progress quarter-over-quarter. The specific one you were interested in, Kevin, was which one?

The 30 to 89-day?

Yes, the 30 to 89-day, I'm not sure I've got the [6-30] number in front of me. I apologize. But we're at 1.32, but I can get that to you.

Okay. And then in terms of like NPL inflows and migration, you know, things going from the watch list into higher categories, you still feel good about the direction of those?

We do. As a matter of fact, on nonaccruals, which doesn't include the 90 pluses on the consumer side, but on nonaccruals we had our lowest inflow since the first quarter of 2008, about $19.3 million worth of new nonaccruals rolling in. So I think it's a combination of things there. It's the limited inflow, which is the driving factor, but also we had some nice reductions in nonperforming loans as a result of being able to return about $2.9 million back to accrual. We were able to decrease a couple million dollars worth of balances in nonperforming loans. We also had some nice payoffs of almost $11 million worth of nonperforming loans. So those all contributed to the reduction that you saw in the nonperforming loans of the $21 million.

Okay, okay. And just one last question. On the, you know, a lot of questions today about the margin and spread revenues -- I think what you've said in the past is you're not necessarily targeting the percentage margin, you're focused more on that dollar amount. So I mean the way we should think about it from your comments is the margin is likely to continue compressing, loan balances probably likely to keep shrinking just as payoffs are still outweighing any new loans coming in, but maybe not to the pace that we saw this quarter just because it seemed like you indicated some of the payoffs were kind of larger than you might expect going forward?

That is a good reflection.

Okay, all right. Thank you, guys.

Thank you.

Thank you, Kevin.

We do have a follow-up question from Brian Klock at KBW.

Hey, guys. One thing, unless you guys talked about it and I missed it, I apologize. It's been a long earnings season. But you had a good, solid mortgage banking quarter. Did you guys give us what the loan originations were for the quarter?

I don't think we did, but let's see if we can find it quickly.

And maybe I guess while you're thinking about that or you did talk about the new mortgage loan production office in Birmingham, I guess how much do you think new business you can close in the fourth quarter with that -- something you just announced within the last week? Is that something we should expect increased volumes here in the fourth quarter, as well?

It takes a little bit to get established. I believe that we'll be seeing production out of them clearly in November and December. You're going to figure that production-wise that we can pick-up $3 million to $5 million in production just getting cranked up. I think that would be something that is doable.

Let's see, back to your question about the production for third quarter -- we did about $341 million in production as a total. That would include retail and wholesale.

Got it. All right, thanks for taking my follow-up, guys. Appreciate it.

Thank you.

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

Thank you very much, Operator.

Again, we feel very solid financial performance. We, as you know, continue, as everyone else does, to operate in this challenging economic environment. We're going to stay very true to our disciplines from a pricing standpoint, from a credit quality standpoint, and opportunistic from a capital standpoint.

And I'd just like to say that we appreciate you being with us on the call today, and your continued interest in Trustmark, and we look forward to meeting with you again in January after yearend results. So thank you very much.

This concludes today's event. Thank you for attending. You may now disconnect.

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