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Trustmark Corporation (NASDAQ:TRMK)

Q3 2009 Earnings Call

October 28, 2009 11:00 am ET

Executives

Richard Hickson – Chairman & Chief Executive Officer

Buddy Wood – Chief Risk Officer

Barry Harvey – Senior Vice President, Chief Credit Administrator

Bob Hardison – Chief Commercial Credit Officer

Louis Greer – Chief Financial Officer

Joey Rein – Director of Investor Relations

Analysts

Kevin Fitzsimmons – Sandler O'Neill & Partners

Steven Alexopoulos – JP Morgan

Jennifer Demba – Suntrust Robinson Humphrey

Adam Barkstrom – Sterne, Agee & Leach

Michael Rose – Raymond James

Andy Stapp – B. Riley & Company

Jeff Davis – FTN Equity Capital Markets

Brian Klock – Keefe, Bruyette & Woods

Albert Savastano – Fox-Pitt Kelton

Operator

Welcome to the Trustmark Corporation's Third Quarter Earnings conference call. (Operator Instructions) It is now my pleasure to introduce Joey Rein, Director of Investor Relations at Trustmark.

Joey Rein

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 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'd like to turn the call over to Richard Hickson, Chairman and CEO of Trustmark.

Richard Hickson

I have with me this morning Buddy Wood our Chief Risk Officer, Barry Harvey and Bob Hardison, representing Credit Administration, and Louis Greer our CFO. Jerry Host is not with us this morning. He had a groundbreaking over at Jackson State University for a major real estate project for financing on campus.

I'm delighted to go through our third quarter financial highlights. Net income available common shareholders total $22.4 million or $0.39 a share. Return on tangible common equity of 13%. We have announced a quarterly cash dividend, which is the same as in the past few quarters, $0.23. We saw a diversified revenue growth, good growth across general banking, mortgage, insurance and wealth management. I'll discuss those in detail.

We had a robust net interest income of $91.3 million expanding the margin out to 4.28%. Most pleasing to us, our pre-tax pre-provision earnings were right at $54 million in line with our forecast and holding up and slightly increasing over the last few quarters, and we have continued disciplined non-interest expense management. We're focused on revenue generation, credit quality and expense management.

Covering capital, tangible common equity totaled a little over $700 million and reached 7.76%, an increase over last quarter. Total risk based capital with our senior preferred was 16%, without the senior preferred of $215 million. We are at an estimated 12.8%.

Trustmark has undergone a significant amount of stress testing, both with our forecast over the next three years, a mid stress level and what we would call a depression stress level. We have also stressed revenues and expenses and in all categories we remain above well capitalized. Relative to TARP repayment, we are still giving it very serious consideration and are looking at a point where we know the economy has moderated.

I'd like to talk about loans both volume and type and I think it would best followed by you if you go to Page 7 Note 2 of our stat sheet. Quarter-over-quarter averages loans were down about $240 million. What we would call our commercial portfolio of a little over $4 billion was down about $95 million, 60 of that was residential real estate and income producing real estate, 50 of that was normal C&I with line usage and some permanent real estate pay downs.

If you look at the line usage, and we have a quarter-over-quarter report that does that, it was principally larger companies, say in the poultry industry, taking down their inventories. Our consumer portfolio was down $75 million, as we expected, and intend our auto in that 75 was down $60 million. And we saw a small amount of pay down in home equity lines.

Our mortgage company one to four was down $70 million, and that was principally volume differentials and originations between the second and third quarter. You will recall that we did about $600 million in the second quarter and a little over $300 million in the third.

Relative to loan types, I would like you to focus under Note 2 at secured by non-farm, non-residential properties or what we would call commercial real estate, and that would be broken into two pieces. About $740 million would be income producing commercial real estate and about $730 million would be what we call owner occupied real estate.

I'm going to give you a flavor of the CRE portfolio, $400 of that $740 is in Mississippi. There are no skyscrapers. There has been very, except for one center in Madison County, there have been very little new shopping center building. This is principally real estate that did not appreciate in value and we're very pleased with the cash flows that we see.

Florida CRE income producing is $126 million. We make that available to you. We [dart] up having nothing above expectations there. Texas, $121 million and Tennessee, $89 million. As we drill down further into that CRE, retail is $170 million, office is about the same size at about $170 million, multifamily at about $100 million. Now, nursing homes and assisted living homes are considered income producing CRE and that's about $120 million number for us with substantially 95% of it in Mississippi.

Our retail in Texas is $27 million. Our retail in Florida is $34 million. Our retail in Mississippi is $80 million. So we do not see any significant concern in our CRE. Bob Hardison is underway with a project looking at all CRE over $1 million, updated operating statements are in on the vast majority of it, the cash flows seem at a level that is satisfactory to us.

Looking up at the construction land development line, at the top $872 million, which is down $200 million from a year ago, $321 million of that is in Mississippi. We're down to $212 million in Florida, Texas about $275 million. Here as well in order, you can see our consumer loans moving down as we expected.

To talk about credit quality, you might be best to follow me to go to page 3 in the stat sheet. During the quarter, net charge-offs were $14.5 million. This was driven by two credits which totaled 52% of our total charge-offs. This was related to the SemCrude credit and the credit that we had mentioned before that we had put on non-accrual, which was the condominium project in downtown Memphis, and we carry it as a Mississippi credit because that's where it was booked.

And we followed a long time successful real estate developer from Jackson there and as we mentioned, they encountered some construction problems. So we think both of those credits were unique with the SemCrude having gone through quite a lot of discussion about their hedging and River Bluffs being a construction issue. We do not believe we have identified any other credits as unique as these two.

The provision was at 15.8 million, 38% of our provision or $6 million was for these two companies. Subsequent to quarter end, we have entered into an agreement to sell our SemCrude note with no loss and actually a rather substantial recovery out of reserves once it is completed. We view that as a very positive and will reduce our nonperforming assets, a little over $7.5 million.

Relative to Florida, unique we had a negative provision of $3 million, let me explain to you why. First, there was a limited amount of new credit problems that surfaced during the quarter resulted in limited risk rating downgrades. This is logical since the majority of updated financial statements are obtained during the second quarter and we made a number of risk rate changes that were needed at that time.

Also approximately $1.8 million was recovered from the settlement of three active debts in excess of where the bank had marked the assets. Florida net charge-offs for the quarter were only $131,000. Also we had the natural progression of credits moving into impaired ORE after obtaining updated values resulting in the release of reserves.

The majority of this was with one residential real estate project in Destin with a small number of very high quality oceanfront lots have been through a number of appraisals. We're very pleased that it was quiet in Florida. We spent a great deal of time with our special assets group and the lending officers. If I could characterize it any way, we're seeing a breakup and a move through to ORE with a number of properties that had been tied up in the courts and working with borrowers.

In looking at Texas, Texas required a provision of about $6.9 million, 43% of that was SemCrude, which I've said we've subsequently sold. There were a few credit downgrades and increases in credits. The provision was driven by that one SemCrude and then downgrades on a few residential credits.

We had one mid-size Texas homebuilder, a good homebuilder, who ran into significant difficulties after the FDIC took the two larger S&Ls. They were not able to continue with construction or get draws on a number of houses, that's caused problems with this one credit. We anticipate likely it moving into foreclosure. We do not have any unfinished houses of any significance and we expect to move through that without any additional reserving or loss beyond what we have reserved.

In Mississippi, we provisioned $12 million from charge-offs, credit risk rate changes and increased in [criticized]. Of that $12 million, approximately $2 million was providing for our $850 million home mortgage portfolio, which still is in very good shape. Indirect Auto required about $2 million in provisioning to match our charge-offs and increase our reserve marginally, and the Memphis condo project was $3 million.

We've looked very closely at everything else and it was small, nothing large in there, in the additional $5 million, lower end product is selling. New subdivisions are opening believe it or not in Madison County and the lots in the $20,000 to $40,000 range are selling.

As far as nonperforming loans, they were up $5 million for the quarter and $138 million in line with our internal – matter of fact, dead on top of our internal projections. New nonperforming loans continue to be primarily the result of downturn in residential real estate. Our companies such as lumber mills, brick mills, companies that are directly tied to residential. Although Florida's flat year-over-year, they've trended down somewhat in the last two quarters.

Relative to our other real estate at $71.6 million, ORE increased about $16 million during the quarter, one well situated piece of land in Houston for a little under $3 million, one apartment complex in Florida about 60 units for approximately $3 million, one residential development in Florida for about 80 lots for about $1.5 million.

I'm giving you these numbers so you can see how well these are written down and two pieces of land in Florida for a couple of million each that are through their third or fourth appraisal process with us. We are seeing some of this Florida property that's five properties in Florida that we've been anxious to get a hold of so we can get about disposing of it.

Existing ORE balances, we had write downs of $4.4 million. There was four credits represented about 60% of this write down. We obtained appraisals on about 40 properties, principally the Florida real estate. If we pull out a couple one, which was an easement problem and the other which we believed to be a fraud, the remainder of those properties averaged about a 21% write down, right in line with where we were with our impaired loans.

We have about 30 properties overall in the $71 million that are over $500,000. The original loan balance was $82 million, the carrying balance is $47 million and that's down 42%. Now when you take a look at our ORE I want to stress $34 million out of $71 million is in Florida and has been severely written down.

Mississippi has $21 million, Texas $8.5 million and Tennessee, $8 million. We have seen no real run up in the value of the Mississippi or Texas real estate. So we feel comfortable with those value levels today. We continue to appraise and value our ORE quarterly and that concludes my remarks on credit quality. Other questions that you might have we will attempt.

On the net interest income, I'll talk for a moment about deposits. Our deposits were down about $277 million, $179 million of that was public money, which we considered seasonal. Our CDs were down, and that is us pricing our CD rates down and not picking up, letting hot money move where there's no relationship.

Again, we feel good about where our net interest margin is, and the 428 continues to move up. I would say a lot of that has to do with the fact that Jerry Host and his group have really been disciplined in putting minimum loan forwards under a very significant amount of our portfolio, and we've moved through that process now one time with renewals on all of our lines this year and we view that substantially complete.

On non-interest income, was $43 million, excluding our $1 million security gain. Mortgaged banking had another great quarter totaling $8.9 million up significantly from the prior quarter. The hedging was positive pre-tax $2 million compared to a negative $4 million last quarter. Buddy Wood is here to comment on that.

We had another great quarter and gain on sale of mortgage loans of a little over $4 million. Most of the mortgage brokers aren't in the market. We are getting more business because of that, and with the strength and diversity of our mortgage operations being able to sell service relief or keep the servicing, we are able to take advantage of the marketplace.

We saw an increase in service charges. We also had a good month in insurance and wealth management is holding in very well. I'll comment on wealth management, as you know in our mutual fund complex there are two money market funds with a little over $1 billion in them. The charges that we're passing through to customers in those funds is essentially zero. That's down well over $2 million on an annual basis. We expect those revenues to come back when interest rates start back up. It'll be a positive for wealth management.

The security gain was about $30 million of longer duration mortgages that our investment department did not want to hang on to. I believe at quarter end we had about a $60 million gain in our mortgage portfolio still yielding very well and we're very pleased with it. The cash flow is better than expected. We're not seeing that much prepayment.

We worked diligently on our expenses. On the salary side, we're down about 75 FTE from a year ago. Non-interest expense overall was essentially flat. Salaries were flat to down, excluding the second quarter benefit from freezing our corporation's [inaudible] benefit plan. Other expense totals $17.5 million, $4.2 million was FDIC expense and higher real estate foreclosure of $3 million.

We're getting enough issues behind us. We're looking forward. We're managing credit and balance sheet risk. We're focusing on revenue generation. We have essentially finished the rollout of our new branch sales and service platform, which was an ARGO system, which is a fantastic improvement for our company. We have received a major positive reception from all of our branches.

I'm told by the 15th of November the remaining 20 or so that haven't been converted will. It's worked very well at our call center. We continue to develop [metafuse]. We're vigorously defending Mississippi. We're prudently managing our equity, and relative to TARP if we do repay it, we will do it in a shareholder-friendly manner.

Appreciate you listening in today, we'll be happy to try to answer your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Kevin Fitzsimmons – Sandler O'Neill.

Kevin Fitzsimmons – Sandler O'Neill & Partners

Richard, I was wondering given your comments that it seems like the movement into OREO is kind of freed up in Florida and you've been able to kind of break that log jam and move some things in there. And the fact that criticized loans in Florida were down I think 8% in the quarter.

Are we at a point where we'd – I mean are you at a point where you think non-accrual balances in Florida could actually decline next quarter, whereas the stuff you're getting out is outpacing the new stuff that's coming in?

Richard Hickson

Kevin, sure. If you take a look at our Florida charge, there's not much they isn't classify in the construction side. Bob Hardison and Barry Harvey – and Barry oversees a lot of this analytical work. And, I'm going to let Barry take a shot at that, and then Bob chime in with color, since Bob has actually worked in these credits.

Barry Harvey

Kevin, I would say that it's a possibility that we would begin to – the increase in ORE would begin to outpace the increase in our accruals. I think, as Richard indicated, a large percentage of the credits are already criticized [inaudible], and some of which are currently accruing, of course.

So there is some more potential for substandard credits to still become non-accrual, but I think that the majority of the non-accruals that we're going to see, we felt at this point it's just a matter if the legal process continues to be extremely slow. While we are seeing some stuff move into ORE, it's still at a snail's pace just from a portfolio standpoint. Bob.

Bob Hardison

Yes, it has always been difficult to try to predict in [tomorrow] because as we said early on when started this about two years ago, we were seeing borrowers who were paying and keeping current and then one month they would come in and basically say they were throwing in the towel.

So I think the basics are there to see some decline, but again we have to emphasize that it is still a little bit of a moving target. And while we dealt, we think, with that majority of the larger credits down there, we still have a way to go and we're still very diligently working the credits down there.

Kevin Fitzsimmons – Sandler O'Neill & Partners

Just one quick follow-up, Richard. Is there any update or any subsequent event regarding that fraud lawsuit related to Stanford? Is there anything to report there?

Richard Hickson

No, nothing to report there and as we said before, there was a cash letter from Antigua to Republic and nothing suspicious at all about the cash letter. It was a regular cash letter, and those likely were investor checks that went to the bank in Antigua at a normal clearing operation by us.

And we performed the whole regulatory duties on it, and vigorously defending the fact that we were involved or would have known nothing about what Stanford's accused of, based on the small part of our handling collection of items.

Operator

Your next question comes from question from Steven Alexopoulos – JP Morgan.

Steven Alexopoulos – JP Morgan

I know that 90-day past due loans were flat. Can you talk to what you're seeing in the 30 to 89 bucket is that flat as well? Are you seeing any improvement there?

Richard Hickson

If you have to look at it by category, let me turn to that just a second for you. Direct, indirect, small business they're all up versus a year ago on the 30-day but essentially nothing above the 3% level. Direct consumer to indirect is about a little over 3% and that portfolio is down very significantly maybe by 50% being off about 20 million a month. Barry Harvey overseas our special assets area. Is there any comments you want to make on your feelings about any portfolio? There's nothing here that's jumping out at us.

Barry Harvey

A couple things, Richard, one is in the indirect situation the ratios are much less meaningful since we exited that line of business and we have a strengthening denominator that's dropping off about 32 million, 24 million a month. So we focus there really on the dollars past due 30 days or more and they've remained – they're dropping but not at a very fast pace so obviously the ratio itself is going up.

One thing I would like to mention regarding the delinquencies as a whole whether you're talking about the consumer or commercial etc., I think it's important to think about it from the standpoint of 40% of our delinquency numbers relate to Florida.

And when you take those out in any one portfolio when you start looking at the overall number and then on a portfolio basis the numbers aren't alarming if you can separate out Florida and think about it from that standpoint because we really don't see a systemic issue relating to delinquencies with our other part of our franchise. And I think no more than you would expect to see probably even less than you might expect to see in the kind of economic environment we are once you carve out the Florida portfolio.

Steven Alexopoulos – JP Morgan

I want to talk about your deposits for a second because it seems if we X out the public money and CDs core deposits still didn't see much of an increase and the non-interest bearing are actually still down quarter-over-quarter, and most banks are seeing very strong core deposit growth. Can you talk to why those balances seem to be pretty flat on a core deposit X some of these items?

Richard Hickson

It could be that we had last fall a few major customers who decided to take very significant dollars out of money market funds and put them into checking accounts since they weren't earning any money in order to be insured. We had a couple of those that were fairly large one in about the $50 million range. We are diligently managing our retail core cost. We feel fine with it.

Steven Alexopoulos – JP Morgan

Maybe just one final one. Can you just remind me what's the balance of the shared national credits in terms of dollars beyond maybe the SemCrude one an did you see any meaningful downgrades from the exam results?

Richard Hickson

There were seven or eight loans that were either criticized or classified total reserving cost to us I believe was approximately $1.5 billion, wasn't significant. We did not share our total exposure but our total outstanding under shared credit a couple of which we agent would probably be around $250 million to $275 million.

Operator

Your next question comes from Jennifer Demba – Suntrust Robinson

Jennifer Demba - Suntrust Robinson Humphrey

Richard, just wanted your thoughts on potential acquisition opportunities over the next several months to a couple of years. A couple of your geographic peers have raised some proactive capitals, just wanted to get your thoughts there.

Richard Hickson

With our core earnings where they are and our capital levels where they are even post TARP we are in good shape. If you look at our total risk base the amount of 100% risk weighted assets we could add to our balance sheet and still be above 11.5%, 12% or say 11.5% sort of astounded me, it might approach $1 billion or so. So we're figuring out we have a lot of capital. There is no question we could raise capital if we wanted to. Our preference would be to weigh that very carefully and be as shareholder-friendly as we can.

We, like everyone else, are looking at most of these FDIC transactions. We haven't seen anything that interested us from a core basis. We will continue to look. We would look closely at anything in market and we would be very interested in expanding our Houston franchise. We are not interested in taking on Atlanta, that's too far in the other direction. We could look at other parts of East Texas. We're looking at everything that relates to Northern Florida.

We're not sure that there will be that many opportunities or assisted transactions in the next few months. We think that depending on commercial real estate and whether some of these companies can reestablish their core earnings that were principally real estate lenders would be the questions out there. And we agree with you, Jennifer, it could be a year or two from now. We are interested but we aren't jumping up and down about it.

Operator

Your next question comes from Adam Barkstrom – Sterne, Agee.

Adam Barkstrom - Sterne, Agee & Leach

Richard, I wonder if you could go through I didn't catch all the details on the two credits that you highlighted that made up 52% of the net charge-offs this quarter. If you wouldn't mind talking about those briefly again.

Richard Hickson

One was an energy related credit out of Oklahoma, a large syndicated credit. There's an oil and gas transportation company. They were in all in the headlines a year and half ago because of major losses in hedging, which most of the marketplace considered fraud. That credit is scheduled for delivery our note within the next 30 days and we're actually should pickup some reserves because of that.

The second one was a downtown Memphis shared national credit, which we were not the agent. Significant condominium project it had construction problems I believe the foundation, therefore there were delays and lost buyers. That credit has been addressed in the shared national credit exam and it's a small bank group, I think three or four banks. And our total exposure left on our books is $7 million, which is reserved.

Adam Barkstrom - Sterne, Agee & Leach

Then as a follow-up, the subjects of TDRs, trouble debt restructurings, do you guys do that and if so what level do you have?

Richard Hickson

Let me let Bob and Barry tackle that.

Barry Harvey

Well, as it relates to trouble debt restructures, we really haven't had the opportunities to accumulate those type of credits for a few reasons. One is on the consumer side, we've been pretty diligent in our approach to any type of adjustments we've made to credit have been of a temporary nature and they've been also a situation where we've not had to lower rates or extended terms and make true modifications, so we really haven't had the situation where we've bumped up against the need to generate a quit TDRs on the consumers side.

On the commercial side, as you know, the great, great majority of our issues are down in Florida and in many, many cases virtually all the cases, the borrower either can pay or can't pay and the adjusting of the rate or the extending of the terms really doesn't solve the situation.

So, because of so much of what we have being collateral dependent, then the ability to generate a lot of TDRs just has not surfaced at this stage and we've been really diligent not to modify or basically capitalize a loss just by leaving something on the books that really can't pay. We've really just kind of gone ahead and taken our medicine as it's occurred. Bob?

Bob Hardison

I think that's an accurate explanation. We have the opportunities in Florida to do TDRs or just limited like Barry said, either they can pay or they can't and in most cases we'll go ahead and write it down and it will go into the non-accrual impaired category.

Adam Barkstrom – Sterne, Agee & Leach

If I could ask a follow-up. Then what you have in other real estate now. Do you have a sense of, if I were to ask you what is the total markdown on average of that group of assets, what that mark would be.

Richard Hickson

42% I said earlier on everything 500,000 and that's the vast majority of it.

Adam Barkstrom – Sterne, Agee & Leach

Everything over 500,000 is marked down 42%?

Richard Hickson

Yes, on average. And probably you could look down and look in Florida and it might be more because some of those properties over 500,000 the 30 properties would be in Texas or Mississippi where there's been no write down.

Some of the land loans have been written down 70%. Not unusual at all in the panhandle and we've seen lots where the developer might have had close to 300,000 a lot in them and we would have had 230 or 40 and we have appraisals in hand for 30. I mean, essentially it's written down to nothing.

Operator

Your next question comes from Michael Rose – Raymond James.

Michael Rose - Raymond James

Could you guys touch a little bit on your Texas portfolio and kind of some trends that you're seeing there? I noticed the NPLs have kind of picked up a little bit out of the Texas banks. I think people are a little surprised at the rate of deterioration in this past quarter. So any color you could give there would be very helpful.

Richard Hickson

I read the Sunday edition, which was the quarterly update on the use of economy. I would say cautiously optimistic residential sales by real estate [take it] is up three or four months in a row. I think the price of oil is back up. If it stays there a while, it should have some affect on the rig count, which is still about a thousand in Texas. It's down, principally in the Gulf.

Major issues we've seen is companies related to natural gas. We have been through this portfolio, I can tell you, very, very closely. I've spent nearly half a day myself with the two credit deputies flying up here last week and we went through essentially the entire portfolio and that was a week after Bob Hardison went down there and did it. And our credit review people were down there last quarter and went through the whole portfolio.

We were really pleased with the process and quality of work that our Houston team is doing. Our chief credit officer there a fellow named [Reed Cook] teamed with us a few years ago. Before that he finished his career with PNC and actually ran one of their large corporate workout units the last two years he was there and ironically spent eight or ten years in Australia working on some problems for them. So, he has a good sense of credit.

Our second credit officer is well experienced and our real estate people down there, principally were sent from here and had a lot of experience with us. Our energy group is a unique group, two out of the three actually worked in industry as CFOs or officers. So we're not heading off into a bunch of shopping centers way out on the outskirts or any production lending or any really sensitive energy lending. We haven't been there long enough and we're assessing our strategies now.

Michael Rose - Raymond James

Can you just remind us how big your total energy portfolio is?

Richard Hickson

Bob will cover that.

Bob Hardison

Yes, our total energy commitments are 125 million with 56 million outstanding and the outstanding split about 50/50 between services and midstream operations.

Operator

Your next question comes from Andy Stapp – B. Riley & Company.

Andy Stapp – B. Riley & Company

What was driving the nice lean quarter growth you had in deposit service charges?

Richard Hickson

Nothing in particular. Seasonal, I don't believe NSF we're up or anything.

Andy Stapp – B. Riley & Company

So there's no pricing adjustment or?

Richard Hickson

We always have tweaking of things, but I don't think there's any new matrix or anything that went in. But Jerry's not here, but I'm getting nods that there wasn't – Louis wants to comment on it.

Louis Greer

Seasonally, if you look at for the nine months are basically flat and I think the third quarter is when seasonal when people get back to school etc., so I think that would be attributable to most of the increase for the length quarter. Debit card was down somewhat, right?

Operator

Your next question comes from Jeff Davis – FTN Equity Capital Markets.

Jeff Davis – FTN Equity Capital Markets

Richard, not to put words in your mouth, but in effect can we say the Florida issues for Trustmark have peaked or bottomed or however we want to style it which direction. And as it relates to northern Florida, generally X whatever Trustmark may have is that market has bottomed too, or still trying to find a bottom?

Richard Hickson

We have a non-lending professional who is a real estate professional that handles ORE for us. We are seeing buyer's bottom feeding interest in any lit property of any significance in any number of lookers. We obviously have not met on many properties yet, but we're close. I think it's just going to depend on how the appraisers view time to liquidate properties when they're doing new appraisals next spring. A number of properties are moving. A number of vertical properties have moved for us.

We're selling a number of number of individual lots and we are looking closely at two or three significant properties. I hope it's bottomed because they say the number of appraisals I've looked at on beachfront lots, say they're down 44% over 48 months. I think the size of people's exposure will not feel as much damage. But anything can happen there. My thought would be broadly is that you need to get well at home in Atlanta or St. Louis or wherever before you think about it.

But let me take you to, one thing that I think could potentially help over a period of time. And that as you know the St. Joe company and Southwest Airlines made an announcement last week that the new Panama City airport, which I have visited, looks to me like it's ready to go will probably be ready to go prior to May. And they've announced four or five flights a day on Southwest out of there.

We can assume would be Houston, Orlando, Nashville, Baltimore, Washington. It's going to be a lot easier to go to the beach. I don't think anyone knows the answer to your question.

Jeff Davis – FTN Equity Capital Markets

Well, maybe just a couple years of bottoming but maybe the worst is over. Second question is from an asset liability standpoint, if you said it I completely missed it, is any inclination to start to term out the short-term borrowings? You've got a great margin and I guess it would involve giving a little of that up.

Richard Hickson

We watch those things closely. We have at least one management alcove a month, but Buddy Wood's looking closely at it. We haven't felt the need to do that yet because we've paid down so much debt in the last six or eight months. The number, once you pullout downstream pit funds, is not a significant number at all. Buddy, what is it about total wholesale's about $600 million?

Buddy Wood

It's about $600 million. If I could just add one thing, we were actually in a position where we had too much liability sensitivity and we were monitoring that. And when we started to add the investment portfolio, we also came in with some of the TARP money around the same time, which has a long-term liability structure to it. We've talked about the strategy in the event that we were to make any changes. We're only operating at about a 1% to 1.5% net interest income under a 2% shock.

So although we go through six or seven different margin analyses, we find that even if we were to repay $200 million plus worth of long-term preferred, we would look at approximately half of that going into some other term funding. And also maintain not anything more than about 2% volatility under worse case adverse conditions, which would be maybe $7 million.

And that's if we didn't take any of the types of actions you've seen us take in the past as interest rates change. So we've monitored very closely and we're very pleased with the core deposit structure and the fact that we, during this very difficult variety of changes in the market, have not had to chase a high premium depositor and still maintained a very strong core deposit base.

Operator

Your next question comes from Brian Klock – Keefe, Bruyette & Woods.

Brian Klock – Keefe, Bruyette & Woods

Obviously, with all of the detail in the release and most of my questions have been answered already and maybe Buddy, you can answer this question, too. There was a pretty significant re-pricing down in the interest bearing deposits in the quarter. Is there anything else that's coming up, any other deposits, timed deposits resetting that we might see a continued improvement in the pricing on deposits in the fourth quarter?

Buddy Wood

It's slowing. We have a certain amount of longer term higher cost deposits that continue to roll off, but it's not real material. The ability to maintain a competitive interest rate on our deposits without having to pay what we've seen some people are stretching to, gives us confidence that our customers can be very confident that we can remain competitive without pulling the rates down so rapidly, which has been our tradition and the reason why they've stayed with us through this.

But we still have some room and there'll be some gradual move down. It's obviously much less expensive to be in borrowed funds. We use them where we can, but we are not going to sacrifice our core deposit base in any kind of rapid or overly demonstrative manner.

Brian Klock – Keefe, Bruyette & Woods

Richard, maybe just one last question for you. The good detail you gave us of the loan portfolio mixes and the ebbs and flows in each geography and type and you guys continue to do a good job working down the construction exposure in Florida and even in Mississippi. When you look across the geographies, Mississippi had the largest length quarter dollar decline in loan balances, Texas was down about $30 million, $31 million.

I guess from the general comments you made, when do you think we actually may see a turnaround so that we might start to see loan growth again? And do you think that it might be out of Mississippi first, or do you think Texas might start to kick back in before the other regions? Or what do you think about when can we get the positive loan growth again?

Richard Hickson

I think you need to first separate the Indirect Auto because that over the next couple of years will go to zero from around $450 million today. If you take a look at our CRE exposure, we're now below our non-TARP Tier 1 capital relative the interagency agreements on construction. With our other CRE at just above $700 we are picking and choosing some very good CRE income producing projects. We saw a very good fully leased warehouse in Houston a couple of weeks ago.

So there will be more of an opportunity, and if we do any CRE it will likely be in Houston. We are fortunate being in business as long as we have and being in the state capital. If there's a good size commercial company in Mississippi, they either have all or a good part of their relationship with us. And a number of these companies are headquartered in Mississippi, but do business all over the country, are for example, a poultry company or an egg company or a Caterpillar dealer, they're doing business outside of the state.

And once it moderates and begins to turn up, we'll see Mississippi lines of credit usage, which are particularly low. And we've been taking a good whack at our loan portfolio with charge-offs and move it ORE and as that slows. So I'm not seeing any growth in loan portfolios nor am I hearing other banks talk about growth in their loan portfolios until America decides to get up and start moving forward again. We have the ability to increase it in Houston and we're going through a planning and thought process as to what we will do there in the next year or two. But I'm not optimistic about loan growth.

Operator

Your next question comes from Albert Savastano – Fox-Pitt Kelton.

Albert Savastano – Fox-Pitt Kelton

First on TARP, Richard, are you changing your tune a little bit, and it sounds like you might be willing to repay that sooner rather than later?

Richard Hickson

We're giving it a lot of thoughtful discussion within our company.

Albert Savastano – Fox-Pitt Kelton

Have you talked about the regulators in terms of what the process is?

Richard Hickson

We're very aware of the process.

Albert Savastano – Fox-Pitt Kelton

So you wouldn't expect to have an issue, nothing being implied there but some of the larger banks are saying that they don't know what the process is. So I'm just trying to make sure that you wouldn't expect an issue if you were to repay TARP.

Richard Hickson

We understand the process for repaying TARP.

Albert Savastano – Fox-Pitt Kelton

Second part on an unrelated topic, you mentioned you're doing a commercial real estate review this quarter. Can you give us a little more details of what you plan to do and when you expect to have that review complete?

Richard Hickson

Bob Hardison will talk about that.

Bob Hardison

A couple months ago we started a project in the commercial real estate, primarily the income producing property loans and we selected all those over $1 million, and we're collecting updated operating statements and statements on primary guarantors on those credits.

It will be about, represented somewhere between 75% and 80% of the portfolio. We've gotten those statements in. Preliminary analysis looks pretty good. We've not uncovered any loans that we didn't already have appropriate risk rated. There are a couple that we're going to look at and do some more work on. But we've not finished a complete analysis but all the data is in.

Albert Savastano – Fox-Pitt Kelton

And you expect to finish that up in the fourth quarter?

Bob Hardison

Yes, we'll finish it up in the next couple of weeks.

Operator

With no more questions in the queue, I'd like to turn the conference back over to Mr. Richard Hickson for any additional or closing remarks.

Richard Hickson

Thank you for joining us today. We're very pleased with the direction we saw this quarter go on core pre-tax pre-provision earnings. Let's see if we can do this again in the fourth quarter. Thank you.

Operator

That does conclude today's presentation. We thank you for your participation.

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Source: Trustmark Corporation Q3 2009 Earnings Call Transcript

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