Trustmark Corporation Q4 2008 Earnings Call Transcript

Jan.28.09 | About: Trustmark Corporation (TRMK)

Trustmark Corporation (NASDAQ:TRMK)

Q4 2008 Earnings Call Transcript

January 28, 2009 11:00 am ET

Executives

Joey Rein – Director, IR

Richard Hickson – Chairman, President and CEO

Buddy Wood – Chief Risk Officer

Barry Harvey – SVP, Chief Credit Administrator

Bob Hardison – Chief Commercial Credit Officer

Jerry Host – COO

Louis Greer – Treasurer and Principal Financial Officer

Analysts

Kevin Fitzsimmons – Sandler O'Neill

Brian Klock – KBW Investment

Pauline Sandville [ph] – JPMorgan

Andy Stapp – B. Riley & Company

Operator

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation’s fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, there will be a question-and-answer session. 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, Please go ahead, sir.

Joey Rein

Thank you, and good morning. I would like to remind everyone that a copy of our fourth quarter earnings release and supporting financial information is available on the Investor Relations section of our web site at trustmark.com by clicking on the ‘News Releases’ tab.

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

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

Richard Hickson

Good morning. Thank you for joining us. I know we have almost all of the analysts that cover us on board. I know you are busy this week and we appreciate you taking the time as well as our shareholders.

I have with me this morning, Louis Greer, our Chief Financial Officer; Buddy Wood, our Chief Risk Officer, and the managers of our various credit areas.

I characterize the quarter as a good quarter particularly in this environment. It’s our second quarter in a row with absolutely what I would call no noise in it to detract you from the core earnings of the company. We earned $24 million or $0.42 a share, return on tangible equity of approximately 15%, ROA 1.07%.

Year-over-year, for the year, Trustmark earned $91 million, over 1% ROA and at a 15% return on tangible equity. It doesn’t feel like that thinking about last year, but looking at it holistically I would say in light of the environment we can't be immune to the economy. A very good year for our Company. The results in characterizing last quarter, I would call it relatively stable in the credit quality area particularly in light of the environment and we will be very granular and thorough in our comments and transparent.

Increased capital strength both from earnings and as you know our acceptance of the Preferred stock with the TARP; very disciplined expense management. Our expenses have been have been flat for multiple quarters.

Bottom line, profitable, well capitalized, strong and adequate liquidity, a very diversified business mix and financial flexibility to succeed in this challenging environment.

I would like to take you to our stat sheets behind our news release to Page Three and I would like to talk about credit quality. You will note that we give you this information by market.

Nonaccrual loans increased $8.8 million in the quarter. There were really no large loans moving in the quarter. Florida increased $4 million. I can tie that back to about five loans between $1 million and $3 million. These were lot loans, a couple of pieces of commercial property, which are very good lots. A few houses and one storage unit company.

Mississippi increased $6 million. There was one $3 million loan on the Gulf Coast very near the casinos in Biloxi consisting of 12 condo units. It is very well secures. We are carrying these units on the books between $200,000 and $250,000 each. We have appraisals. We do not see any loss in this credit.

Tennessee was down $0.5 million and Texas down about $1 million. Looking at it holistically the rest of Mississippi was either (inaudible) or consumer credits or mortgages making up between $3 million and $4 million. Essentially all of our increases in nonaccrual loans as we are tying to be very consistent in following appraisals were impaired and written down to what we think it is (inaudible) valued.

Other real estate increased $6 million. Three of it was in Florida. We foreclosed on one property that was $1.8 million with a deed in lieu, and received a $400,000 cash payment, wrote it down further to $1.4 million, well covered by appraisal. It consists of around six lots, two of which are beach fronts, very near Sandestin. We are not expecting any additional loss.

In Texas, you see that other real estate went from $200,000 to $2.3 million. We foreclosed on a piece of land down in League City. It is a very nice piece of property. We have offer on it. Our original appraisal was approximately $3 million. We are carrying it on the books at $2 million. We are waiting for an updated appraisal so that we are sure we get proper value for the piece of land. We expect no loss from it.

Let me take you back up to nonperformings for a moment to Texas. Texas is essentially still the Sim Crude credit at $10 million. We are still expecting some asset sales in the first and second quarter. We are well secured. It’s been nonperforming. We are carrying it as sub-standard. We have seen nothing that would give us an indication that we will be reserving more for our Sim Crude exposure. You will recall, we are in the smaller, fully-secured facility. It’s possible we could have a recovery there during the year.

Looking at past due loans, no real change in loans past due 90 days from $3.6 million to $5 million. There seems to be a little confusion and I would like to clarify again. Those loans held-for-sale guaranteed by Ginnie Mae, the $18 million that is not on our books. We have no requirement to repurchase it. We have the ability to repurchase it and resell it, if we wish to, and we chose to carry these loans in this category, even though they are not on our balance sheet as a matter of conservatism and transparency to you. Therefore loans past due has not increased.

Net charge-offs were $12 million for the quarter. That was principally seven loans in Florida although there might have been 23 different small loans. None of the charge-offs – one was about $900,000 on some lots we’ve written down, the others were relatively small, under $0.5 million totaling $7 million in Florida. About $4 million in our auto portfolio; about $0.5 million loan in Tennessee and not much else for the quarter.

Our loan review group was in Texas, did a very thorough review during the quarter. Our special assets group is in Florida, which is fiver very seasoned professionals. We reworked the Florida portfolio very thoroughly during the quarter. Our management team here is reviewing a couple of times a quarter all loans in Florida over $250,000. Very granular, we are working a number of credits and I’ll cover it a little more thoroughly for you.

Let me talk about the provision for loan losses for the quarter; it was $16.7 million. I know you look at that cautiously and so do we. If I go into the quarter, our substandard loans quarter-over-quarter were up $3 million. Doubtful loans were flat, actually down $0.5 million especially mentioned [ph] loans were up around $7 million. That is very stable for a loan portfolio of this size.

Bob Hardison, our Chief Commercial Credit Officer has indicated to me that we did not see downgrading in Mississippi during the fourth quarter that it was isolated in the third quarter to a couple of credits, a I’ve mentioned, related to the housing industry. We are not seeing anymore significant downgrading in Tennessee or Texas at this time.

We did impair around eight or 10 loans principally in Florida. They had been reserved for. Holistically there were no significant movements beyond the reserving. They were appraised on current appraisals. We are taking a process where we can to go ahead and impair a loan and move it into that category where we have it written to a level that we feel it could be liquidated.

On the consumer side, our branch originated consumer purpose loans did not see much change during the quarter. Our auto loans were down $57 million from $712 million to $654 million. Of that $750 million consumer portfolio and $650 million auto portfolio nonaccruals moved from $6 million to $8 million, up $2 million. Our residential home mortgage portfolio not held-for-sale, we let it run off right at $30 million. Total nonperforming of that $750 million was $7 million up from $5 million or up $2 million. So when you move out of Florida, the remainder of the nonperforming was really consumer. If we look at the reserve it is 1.41% of total loans, 1.79% of our $4.3 billion commercial portfolio. It has moved up to about 68 basis points on our consumer portfolio because of the $4 million increase of nonaccrual being pooled, overall, moving from 1.35 to 1.41. We feel that under the established methods that we are well reserved.

A couple of you have reflected in your overnight write-ups about our nonperforming coverage ratios. One thing that I will suggest you reflect on and think about doing is take our nonperforming loans, the $114 million, recall that we have specifically impaired $57 million appraised and written down. If you back out that $57 million impaired you get nonperforming loans of about $57 million. And you take a look at that on a consolidated basis, that coverage ratio moves from 83% to 166%. It moves in Florida from around 28% to 88%.

On Florida credit quality you will see that Florida loans – I think the best for you to go for that would be Page Eight in your stat sheet. Construction loans were down about $7 million, commercial loans were up about $7 million holistically. The Florida portfolio year-over-year is down about $90 million all of it in the construction section.

If I take a look at the individual categories, lot loans at $76 million. This is really made up of $350 loans, the vast majority of these in the last year have been reworked with the owners, put on amortization schedules, no real deterioration quarter-over-quarter. As I look at the lot loans and I look at all of those over $250,000 most anything of any else if all has been recognized, worked through and properly graded.

As I look at the development loans, the $35 million that actually consists of 36 loans. Anything of any size if all that we feel that there are any issues with have been criticized, classified, and impaired.

As we look at unimproved land, it’s really 63 loans. There are two loans of any size from your perspective in that unimproved land. Both of them have either a very high appraised value recently, strong owners with other assets and other cash flows. We have conservatively criticized both of them as if we see a change in a piece in a piece of land we will go ahead and criticize it even though we have a strong guarantor, but they have other cash flow.

1-4 family is really made up of 18 loans, and I would make the same comments about that.

Other construction, most everything in there has been criticized or classified. The things that not are things like a YMCA or a large church loans, which seems to be doing fine.

So, I am cautious, skeptical, and optimistic about where we are now in Florida. We know we are in a dark period in the panhandle. It’s winter time. Nothing in selling. We are expecting into the spring once there are some comps to incur another full appraisal process like we did last year, but these loans have been written down significantly. And I am not expecting the dollar amount to be in the same range as this year.

There are a lot of speculation about – every thing is down 10%. Well, we can handle that just fine. Everything is down 15%. We don’t really know. And a lot of properties selling down there. We have been able to liquidate the subdivision that we foreclosed on in Panama City with 17 houses in 54 lots. We are down in the last houses in the last lots. And we expect all of that to clear out from contracts in the first quarter and there would be no additional losses from where we had it written down.

We are still in a very serious situation in the panhandle of Florida, though we are at least three years into the downturn. I don’t expect it to end. I expect that it will recover after we see recoveries beginning in Atlanta and Birmingham and other areas where people drive to. But we have spent a great deal of time on this portfolio. And we believe we understand it. There is still downside in it. I am sure we will see more nonaccrual come off. We are working aggressively to get resolution to these impaired loans. We professionals working on selling our properties. We are not, with our level of properties, looking at some bulk sales. And there are no bulk sale buyers that we see. The people that we are talking to and selling things to are end users or strategic buyers that plan to develop and use the land a lot after the economy recovers, whenever that is.

Let me move away from credit quality, talk for a second about our capital strength. Tangible common equity has increased $58 million year-over-year from earnings after (inaudible). We paid out about 58% to 59% of earnings in dividend. That’s a very good coverage ratio in this market. We declared a dividend yesterday, $0.23. We feel good about the sustainability of the dividend this year based on our budget and projections and where we see.

As you know, we issued some Senior Preferred stock, $215 million.

Our tangible common equity dropped a few basis points to 6.95% from 7.22%. That was from some releveraging on our balance sheet with mortgage-backed securities and I will talk about. Tier 1 risk based capital has expanded up to the 13% level and total risk based capital to the 15% level.

I don’t think there is any questions that Trustmark has plenty of capital, generating capital from earnings, has a lot of dry powder in the corner and can handle about anything that would come from what we see relative to our portfolio.

We are moving mentally from a defensive to an offensive position. Taking a look at the balance sheet, I think your best look would be on Page Seven on the stat sheet. I would like to talk about loans.

Loans are essentially flat for the quarter, continuing to see the movement down in our indirect auto business that you recall we began moving out of October a year ago, home mortgage and then some growth in our commercial business. If we look year-over-year, our loans are down about $227 million. Florida was down $90 million, auto $200 million, home mortgage $90 million. The assets that we wanted to move away from and our other loans were up about $200 million.

On the deposit side, you’d be best to look, I believe at Page Four of the stat sheet. Year-over-year, as you can see in the five quarter moving averages December ’07, December ‘08, we held our total deposits generally flat. During the fourth quarter you will see that our deposits were down a little over $200 million. Principally this was public funds where we didn’t feel that we wanted to compete with some of our local brethren for the rates, and we allowed some CDs to run off. Principally we were battling a large regional bank who was willing to pay 100 basis points over market for deposits because of our strength. We moved into some wholesale funding through the Federal Reserves program, using our ample collateral and a little bit in the Federal Home Loan Bank, but principally open, unsecured Fed funds at extremely attractive rates.

If you take a look at our net interest margin uniquely it expanded about 19 basis points in the quarter. This is attributable to two things. We went ahead and releveraged our balance sheet, bringing our bond portfolio to about 18%, which is still, I think, below the medium of our 20-bank peer group. We did this at a (inaudible) in October and November. During that time about $650 million at a yield a little over 5.5% it’s obvious when we turned around and funded that at today’s interest rates, we saw a significant margin expansion.

We had purchased about 1.5 billion bonds this year principally in March and April when rates were positive and then again now when the yield curve steepened. Buddy Wood would be able to comment on that. These are not bonds with risk. They are all guaranteed, Fannie Mae, many of them we bought as they came on the market from distressed sellers, many of them on seasoned portfolios. The risk that we would see would be that of prepayment since we already have a very significant comprehensive profit in these bonds that we’ve bought since then.

We got out a hand of the government’s announcement of a buyback. Therefore rates dropped significantly right after we bought them. We feel very fortunate with our timing. We viewed it since we would we would take the TARP that we went out and bought those securities early, reflecting on leveraging our TARP money immediately. And now we have a very reasonable cash flow from this to fund loan growth that we might have this year.

The net interest margin also expanded because of the unusual relationship between the LIBOR and our cost of funds during October and part November that is probably half the increase and it has sine dissipated.

However thoughts that our margin in ’09 will end the year at least in the range of where we were for the full year ’08, we may see the margin higher than that for the first couple of quarters of the year, but none of us can see transparency as to what prepayments will actually be in our mortgage-backed security portfolio. As you know, Fannie Mae and others have tightened their standards. Our models say we’ll see large prepayments, but we haven’t yet. We are not quite sure what that would do and that could impact the margin.

It will also depend – we have pushed and have been very diligent in our deposit pricing and we’ve pushed what was around 3% a year ago to right at 1.5% for our total cost of interest-bearing funds. So we feel we’ve done a very good job of managing our margin. We have put (inaudible) on a lot of our lending. A lot of our local competitors have not. We have moved out of some LIBOR funding where when you look at a 30-day LIBOR rate of 0.5% and a couple of hundred over we are not interested in lending money at CD rate. And so we’ll pull back and make those loans that are credit-worthy and profitable with a very serious business development effort going on.

Noninterest income, service charges were up a little bit, about 1% linked quarter. Our insurance commissions were flat seasonally with this quarter a year ago. Well managed (inaudible) is holding up very well, flat, down a couple of hundred thousand, linked quarter and with a margin across the board down where it is, they are holding in fairly well. They brought in a lot of new business this year and we expect them to be able to hold their own in ’09 versus ’08.

We have a very diligent expenses management. Salary and benefit actually decreased in the quarter about 2%. Occupancy declined about $0.5 million. Other expenses were up about $400,000 due to franchise taxes.

So, if you look overall, a very stable quarter. Return on assets above 1%, not where we like it. If I look for a moment at the year holistically, a number of very good things happened in this Company. We reduced the credit exposures that we should be reducing. We took advantage of the steeper yield curve and increased our security portfolio. We maintained a very stable deposit base despite higher interest rates driven by the liquidity needs of larger banking institutions around our markets. We held firm (inaudible) in terms of our market share. We managed interest rate volatility extremely well.

Our hedging preference for our mortgage type line and mortgage servicing asset worked extremely well. Our MSR hedging was positive $300,000. Our MSR dropped about $35 million. We are very pleased. We did hedging for two years now. We feel positive about the hedging prospects with a steeper yield curve. We’ve reserved $15 million more than we charged off. We charged off about $42 million in Florida and about $8 million in our auto portfolio. Beyond that we have not had anything above what you would expect in normal.

We finished our total excess of dealer [ph] services and we expect that to run off. We do not expect at this time the nominal amount of our charge-offs there to increase. We expect as it goes down the good ones will leave. Some of the bad ones will stay. And the percentage of charge-off might go up, but the number looks fairly good to us.

Our fraud and asset group is in place functioning, knows the credits and contacts when the customers getting financials, getting appraisals and working through it.

We generate $58 million of new tangible equity. Tangible book value per share increased almost 10% during the year to $11.49. Risk based capital is not an issue with us. We opened six new branches, two in Houston, one in Memphis, one in Florida, one on the Gulf Coast, and one here in Jackson, that replicates ’07. I do not see over maybe one or two branches opening this year. We closed a couple of branches last year. We’ll probably close a couple this year. We have less people than we had a year ago and we opened six new branches. We have a same number of people we had 2.5 years ago at the time we bought republic. We run lean, our efficiency ratio is pushing the mid-50s again. However, we invested $7 million in a new deposit system. We are finishing it up. It’s been installed for a quarter in our contact center.

We have converted four screens to one point and click system. We’ve reduced training time from weeks to days. We’ve reduced headcount through productivity. It will be moving out to our financial services and branch managers during this quarter. The teller system will go out in the second quarter. We are very pleased with what the ARGO system will do within Trustmark.

We continue to lead in image technology. We’ve converted essentially everything that can convert to inbound held back bound imaging with the Fed with our correspondents. The only checks we are handling in our Company are the checks for our correspondent banks who are behind in their technology and still forcing us to handle their checks. We will have finished remote capture in all of Trustmark branches by the end of this quarter. It’s everywhere now except Jackson. Couriers have gone away. Airplanes have gone away. Direct sends have gone from 50 down to a couple. We are putting in merchant capture deployment. It’s been well received. We are doing it with large customers at this time and we are being sure that we educate small customers.

We have repopulated Houston with a very high-caliber personnel. We’ve opened six new banking centers since did our last acquisition two and a half years ago. In ’09, we are going to manage credit, manage our real estate exposure, manage our balance sheet. We are enhancing and expanding our corporate banking business development with our larger customers. We’ll continue to develop and add quality personnel in Houston. We will vigorously defend our leadership position in these equity – legacy markets. We will continue to preserve equity and we’ll very selectively seek failed bank acquisition opportunities to increase our deposits.

Thank you for hearing me out. I know it was lengthy, but I wanted to be granular and have as much transparency as possible. We’ll be happy to answer questions.\

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, our question-and-answer session will be conducted electronically. (Operator instructions) And for our first question we go to Kevin Fitzsimmons with Sandler O'Neill.

Kevin Fitzsimmons – Sandler O'Neill

Good morning everyone.

Richard Hickson

Good morning, Kevin. Thank you for calling in.

Kevin Fitzsimmons – Sandler O'Neill

I just had a couple of questions, Richard. First, I just wanted your clarify your margin guidance. You said – I think you said it was going to end the year 2009 somewhere around where you ended it year-end 2007, which I think first quarter 2007 margin was 3.93 or where you talking about a full year margin.

Richard Hickson

I believe it will be a little higher than that. What I don’t want to leave you with is an expectation that its’ going to stay at 4.20. We have remodeled our margin numerous times since the historic rate cut in mid-December. We were a little bit positive gapped. However, we’ve been able to take deposit rates down. And looking forward, I would say it will drop 10 basis points or so in the first or second quarter, but it could drop another 10 or 15 basis points in the third quarter. However, these things are manageable six months out, but we are not looking for anything precipitous in the margin compared to generally where it was throughout ’08. Buddy Wood, do you want to add anything to that?

Buddy Wood

I think the point that you made earlier regarding that our asset sensitivity was enhanced as we purchased these investment securities and we are able to fund them where we needed some funding on a short-term basis had created a very neutral position. We’ve run both the interest rate risk and our earnings value of equity in a variety of different shock scenarios and are able to achieve what Richard has described in all but the most extreme conditions.

Kevin Fitzsimmons – Sandler O'Neill

So, would we – is the way to kind of think of it that the securities might be leveled to even increasing from her but that funding is going to change over time to be more in deposits, which is going to be a higher cost relative to the source you were able to use?

Richard Hickson

Our deposit and our lending changes almost mirror one another. We have enough variable priced assets and enough long-term liabilities that when we use the short-term borrow mix in that position, we end up with a near neutral adjustment. We have not had to go after any expensive funding, which would have been an impact to this margin conversation. Fortunately, we find that our competitors are now coming in to us after having been much wider and much more costly. So, it is – with a good degree of comfort that unless we have something and it may fall into what we might call political, and therefore unknown category will be the only stress level of the margin that is unknown to us. Otherwise we feel we can manage it on a very stable basis.

Kevin Fitzsimmons – Sandler O'Neill

Okay. And additionally, you mentioned Texas earlier in the call, Richard. Obviously there is more concern about energy these days with what the price of oil has done. Can you talk about what you are seeing there and if you are seeing any early signs of stress and how you are dealing with that. Thanks.

Richard Hickson

Sure. Obviously everyone in Texas is cautious of some slowdown in – that we’ve seen all year in the number of housing starts. We hear that there are some issues with the number of strip shopping centers that saw the stuff out on the branches. We don’t have any significant amount of that. We are not heavily exposed directly to the energy industry through a large portfolio there. As you know, well over half of our portfolio is just small business lending there. So, I think you would find better people to give you more accurate information that are more directly involved in that market, Kevin.

Kevin Fitzsimmons – Sandler O'Neill

Well, I am not asking so much about the energy per se, just I am asking about your perceived exposure to energy. So it sounds like you are characterizing this more as indirect. If energy slows down, obviously that market slows down, but I mean housing and through small business and things like that.

Richard Hickson

Exactly. Our own review team was in there. Deterioration we are seeing, other than that Sim Crude credit is – small loans we haven’t seen it. We didn’t have a significant number of downgrades. And let me just say our Texas unit was thoroughly review by all constituencies who would want to look at it during the fourth quarter. We don’t ever comment on regulatory exams.

Kevin Fitzsimmons – Sandler O'Neill

Okay. Just lastly, Richard, you mentioned right at the end there about being open to FDIC assistance deals. Can you just refresh us what’s your wish list in terms of market is. If you were to have deals brought to you what – where you would most like to expand?

Richard Hickson

Well, it’s been brought to us and we declined because we see no logic in a $300 million bank 200 miles outside of one of our markets. We see a number of institutions within our footprints in Florida that we think could have some issues. If they do, and they make sense for us where we have branches in that market we would be interested in it, but we are not interested in it to the extent of jumbo CDs, whatever. So we know to buy a failed bank if necessarily a good thing unless we can close most of the branches because it costs $400,000 or $500,000 a year to run a branch. We are not planning on taking on anybody’s assets. I don’t believe – there could be a unique small situation somewhere where there was no significant loan portfolio, but in general we aren’t going to step off in this environment and do anything. If they’re meaningful, $500 million to $2 billion-size company and our footprint gets in an assisted situation, we will give it strong consideration.

Kevin Fitzsimmons – Sandler O'Neill

Okay, thank you very much.

Operator

For our next question we go to Brian Klock with KBW Investment.

Brian Klock – KBW Investment

Good morning Richard.

Richard Hickson

Good morning, Brian. Thank you for joining us.

Brian Klock – KBW Investment

Thank you. I know that a lot of my questions have been answered, so I will just have a few. I guess when you look to Page Six of your financial information, good granular detail on all the NPAs. I just – what I was wondering was just looking at Florida the last two quarters as far as provisions versus charge-offs, you have provisioned less than charge-offs. I guess my first question is do you think then that the reserve coverage you have got there is – and maybe you can remind us on the impaired loans, how much of those impaired loan balances have been charged off that is the first question.

And the second question, when you look at Texas, we know that a good lion’s share of those NPLs is Sim Crude related, the extra provision – because you provisioned almost $3 million in the quarter in Texas – was that related to the ORE that you mentioned or are you seeing something that’s in commercial or something that you want to build a reserve for in Texas, maybe you can comment on those two things.

Richard Hickson

Yes, I am going to let Barry Harvey in our Risk Management Area address the first couple of questions.

Brian Klock – KBW Investment

Okay.

Richard Hickson

Brian and then Bob Hardison address – if Barry does not have all the information. Bob spent a significant time in Texas and I think he can comment about that. Barry, on the impaired loans and write-offs and what you are seeing in expectation.

Barry Harvey

Exactly. What we are doing on the impaired loans – excuse me, just back up to the provision base, the provision is driven by loan growth or reduction in loan balances, net charge-offs, risk rate changes within our commercial portfolio as well as the changes in our reserving factors for our consumer portfolio and we use a 20 quarter historical rolling average for losses. When looking at the –

Brian Klock – KBW Investment

On the consumer?

Barry Harvey

On the consumers. When looking at the provision for the fourth quarter it was $16.7 million and then net charge-offs was $12.7 million. When you are looking specifically at Florida, the net charge-offs, as you indicated, were $7.16 million and the provision was $6.5 million. What has to be taken into consideration is that approximately over $3 million of the charge-offs were actually provisioned in previous periods. So when taking that into consideration we actually provisioned approximately $2.5 million more than we actually charged off that had not previously been provisioned for. So oftentimes these credits manifest themselves over time and because of that the risk rate changes, the reserving occurs in previous quarters and actually results in the impairment and the write-off or the writedown of the value in later quarters. So for example, in the fourth quarter we are talking about – we actually provisioned more than $3 million more in Florida than we actually had in charge-offs. And – does that answer, does that kind of give you –

Bob Hardison

In other words, so with one $3 million payoff of a substandard loan to – yes.

Barry Harvey

Does that kind of give you the information you need there?

Brian Klock – KBW Investment

Yes and I am not sure if you have – I think in the last quarter you said that the impaired loans in Florida are written down by 42%, I don’t know if that’s still – what you are seeing at the end of the year is that still the same sort of –?

Bob Hardison

I think that is broadly a good number, some would be less, some would be more.

Barry Harvey

That is correct. It varies, that is what we said depending what type of collateral is involved obviously land more so than a wonderful family finished home. So but that is generally what we are seeing.

Richard Hickson

We made a couple of impaired loans that moved in that we did not need to write down further from our pooled levels. For example, the $3 million Mississippi one required no additional write-down. There were a couple of others in Florida where we were already there and not every property that the guarantor can’t service is that depreciated. Sometimes we might be fortunate enough to have had a good project but they releverage themselves with other institutions and we can no longer look to them.

Brian Klock – KBW Investment

Okay.

Richard Hickson

I will ask Bob Hardison to share about Florida, and what he did down there and what he sees and just generally and then –

Brian Klock – KBW Investment

I think I am actually okay on Florida, I guess maybe we can talk about Texas.

Richard Hickson

Sure.

Bob Hardison

Okay. The provision was about consistent with the prior quarter in Texas. In the fourth quarter it was really more attributable to the loan that Richard mentioned previously that it went nonaccrual, and we have since foreclosed the loan. We feel real good about that. The appraisal we’ve recently received was consistent with the appraisal we made when the loan was originated. There were a couple of other loans in the quarter that were downgraded out of caution the borrower was showing some stress, but nothing really out of the ordinary. I think Texas still performed well. Our energy portfolio you alluded to a minute ago is only $80 million and there is a big balance between midstream and downstream companies, so we don’t really have a big – we only have one production loan in that portfolio and Richard said a lot of small loans and small business loans. So we have not – although Texas and Houston is showing the effects of the national economy as a whole albeit I think they came to the party late. They are showing some stress and some slowdown certainly not the magnitude of other markets, but we are working closely looking at Houston and I know – as Richard said or I said with new books went out there and we have not seen any significant deterioration in our portfolio nor do we expect any in the near term.

Brian Klock – KBW Investment

Okay and I guess just may be, if you can refresh my memory, the loan in Texas that was provisioned for it looks like – that was taken into ORE was that a commercial real estate loan or the construction or the development, what was the type of property acquired?

Bob Hardison

It was a development loan that the borrower actually had problems unrelated to our project but was unable to keep our project (inaudible) due to problems in other areas and so we were really forced to take possession of that property.

Brian Klock – KBW Investment

Okay great and I don’t know – Bob I have got you another, do you have the early stage delinquencies at the end of fourth quarter versus third quarter, 30-89 days past due bucket?

Richard Hickson

Just a minute, in Texas?

Brian Klock – KBW Investment

No, overall.

Bob Hardison

Let me look at it, I am in front of that but I don’t want to read out 25 numbers to you. Yes, it is very hard to cover this.

Barry Harvey

Was there a specific portfolio or just in general terms?

Brian Klock – KBW Investment

I guess I really was kind of looking at commercial real estate and C&I, the small business C&I and commercial real estate. And again just and even Richard maybe you can comment after that on are you seeing any deterioration starting to show up in that small business or CRE (inaudible) that is the question.

Barry Harvey

Okay, just in terms of the entire portfolio we are going to be about 2.41% 30 days or more past due and then within the commercial portfolio that is going to be approximately about 2.7% 30 days or more past due.

Bob Hardison

That includes Florida.

Barry Harvey

It does, it includes everything. So Richard, do you want to be more granular?

Richard Hickson

No. A year ago 12/31/07 our direct consumer portfolio that 750 originated branch was 1.59%, then it was 1.55% at the end of ’08. It dipped down a little bit and came back up. Our auto portfolio went from 1.55% to 2.5%, small business, which is around $800 million was consistent 3.36% a year ago and 3.28% the end of this year. Our mortgage loans 0.8% to 1.4%. So when we look – add it there has been some deterioration, but not anything significant and as you can see that entire consumer portfolio has about $16 million between the indirect auto, the direct-to-consumer which will be HELOCs, HELOANs, direct car loans and our mortgage portfolio, and it was up about $4 million for the quarter. And the losses outside of auto have shown nothing of any significance. And the past due home mortgages that we are working that are in our portfolio we are still counting on a couple of hands. We do service for the G&Ps [ph] and we are well into all of that and modifications and whatever – modifications of our own portfolio have not been called for at this time.

Brian Klock – KBW Investment

Okay, great. Thanks for taking my questions.

Richard Hickson

Sure.

Operator

(Operator instructions) For our next question, we go to John Pancari with JPMorgan.

Richard Hickson

Hello John.

Pauline Sandville – JP Morgan

Hi, this is actually Pauline Sandville [ph] on behalf of John. I was just wondering if you could talk about your thoughts on continuing to add to the balance sheet leverage or whether 18% of assets is sort of the top of where you want to be or whether you are willing to continue to add to that?

Richard Hickson

I think that is a good place to be. That doesn’t mean it won’t go up or down $100 million but we are through leveraging plus we don’t like the rate situation at the moment.

Pauline Sandville – JP Morgan

Okay. Can you remind us what your annual cash flows are from the bond portfolio and what the rolling off yields are about?

Richard Hickson

Well, we can surely do that. You will recall that we have deleveraged the Company down to about $400 million or $500 million in bonds totally from around $2 billion three years earlier. So we have bought $1.5 billion worth of bonds during the year. Buddy Wood is going to make a comment on that –

Buddy Wood

I would be glad to.

Richard Hickson

What the model says and what you really expect, yes.

Buddy Wood

The investment portfolio currently is at about $1.8 billion and a yield of around 5.27. We have got an average maturity of around two years on it. We structured it specifically to have cash flow balance in the first year recognizing that cash flow we wanted to move into lending, we still do. That number probably ranges from $500 million to $700 million in the first year. The yields that we will see come off during that time will be between 5 and 5.25. The rest of the average maturity is laid out on a declining principle basis going from two out to six years and is very tightly structured, mostly small discounts so that we would not be faced with premium write-offs with any accelerated payments which we now of course are experiencing. The tests that we ran when purchasing these securities over the last year included the four and half move in the third year although we felt that it would probably less likely than what we have all recognized is actually deferred now – is a combination of both rates and the political environment that we are in. But we see some stabilization in that and that keeps us from having just a sharp drop-off beyond the forecast that we have in cash flow.

Pauline Sandville – JP Morgan

Thank you, that is very helpful. That is all the questions I have.

Operator

And for our next question we go to Andy Stapp with B. Riley & Company.

Andy Stapp – B. Riley & Company

Good morning.

Richard Hickson

Good morning, Andy, thank you for joining.

Andy Stapp – B. Riley & Company

In Tennessee I noticed that your provision up yet NPAs and net charge-offs were down, could you just provide some color on that?

Richard Hickson

Yes, I am going to let Jerry Host start, the COO, he has been up there a couple of times this quarter looking at the asset situation in Memphis, I am going to ask Jerry if he will comment on that.

Jerry Host

Certainly. We recognized some issues with the Memphis real estate portfolio probably in the second and third quarter of last year. We addressed those issues very quickly. Our team on the ground in Memphis worked very aggressively to deal with those, and I think you are starting to see some of the positive results from those efforts that took place in the second, third, and fourth quarter of ’08.

Andy Stapp – B. Riley & Company

And do you have a good run rate for compensation expense going forward?

Richard Hickson

You mean are we getting raises, the answer is likely not.

Andy Stapp – B. Riley & Company

Okay. I mean is the fourth quarter a fairly good run rate or – a blend between the third and fourth quarter?

Richard Hickson

I don’t see any appreciable change in our compensation categories. We are doing a lot of re-engineering. We will continue to add some lending personnel in Texas. We are an extremely well regulated Company between the Fed, the OCC, and everyone else. So we have added about everything we think we would need in the compliance areas of DSA [ph]. We have added senior people into enterprise risk management in the last year, so I don’t see anything significant there. When we look at our expenses for next year, there are only one thing going up for sure that FDIC insurance for the errors of others, which we very – hate to see at this time and we hope that that does not go any higher than the present (inaudible), which had shown it going up to how much, Louis, for next year?

Louis Greer

For us, about seven.

Richard Hickson

Go up about $7 million to about $10 million or $11 million for the year and that it depends on what it costs to carry and liquidate ORE, pay the taxes, the appraisals, whatever, which we pretty well built into our budget and maybe marginally more than this year, but we are generally going to hold our compensation account and other expenses in the Company other than the FDIC as flat as they can be held and that means cutting in some areas and growing in others.

Andy Stapp – B. Riley & Company

Okay, thank you. That’s all I have.

Operator

And with that ladies and gentlemen we have no further questions on our roster. Therefore, Mr. Hickson, I will turn the conference back over to you for any closing remarks.

Richard Hickson

We want to thank you for joining us. This is two quarters in a row at this $24 millionish level. Earnings are at that level principally because of the level of provisioning. When we look at us, I think we have been extremely dependable in expense management, very predictable in fee income. We’ve talked extensively about the margin. No one knows whether the economy will perk up towards the end of this year. We are aggressively working on Florida and we are cautiously optimistic about our Mississippi portfolio. Thank you for joining us.

Operator

Ladies and gentlemen, this does conclude the Trustmark Corporation’s fourth quarter earnings conference call. We do appreciate your participation and you may disconnect at this time.

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