Trustmark Corporation Inc. Q2 2010 Earnings Call Transcript

Jul.28.10 | About: Trustmark Corporation (TRMK)

Trustmark Corporation Inc. (NASDAQ:TRMK)

Q2 2010 Earnings Call

July 28, 2010; 11:00 am ET

Executives

Richard Hickson - Chairman, President & Chief Executive Officer

Jerry Host - Chief Operating Officer

Louis Greer - Chief Financial Officer

Joey Rein - Director of Investor Relations

Analysts

Steven Alexopoulos - JPMorgan

Kevin Fitzsimmons - Sandler O'Neill

Andy Stapp - B. Riley & Company

Caron Jacobson - KBW

Al Savastano - Macquarie

Operator

Good morning ladies and gentlemen and welcome to the Trustmark Corporation second quarter earnings conference call. At this time all participants are in a listen-only mode. Following the presentation this morning there will be a question-and-answer session. (Operator Instructions)

It is now my pleasure to introduce Joey Rein, Director of Investor Relations at Trustmark.

Joey Rein

[Audio Gap] Our earnings release as well as supporting financial information is available on the Investor Relations section of our website at trustmark.com.

During the course of our call this morning, we may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We would like to caution you that these forward-looking statements may differ materially from actual results due to a number of risk 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 Richard Hickson, Chairman and CEO of Trustmark.

Richard Hickson

Good morning. Thank you for joining us this morning. I have with me Jerry Host, our Chief Operating Officer; Louis Greer, our Chief Financial Officer and other Executives representing our investment department and credit administration to answer any questions that you might have this morning.

Let me begin by saying I feel it was a good quarter, from some perspectives a very good quarter. There were no really significant surprises. We remain cautious about the further; however, I would say that Trustmark has turned its ship and moved to the [authentic].

Someone said at our Board meeting yesterday as we were looking where we are and where others are, we are fully cognizant that we are seeing a number of institutions still incurring problems in our market. We are aware of that, we are very cautions of that and we are concerned of that.

Someone told me yesterday that today’s peacock is always tomorrow’s feather duster. So we know we had a very good quarter, but we surely don’t think we are at the end of anything, maybe it dropped down to a new level, but we’ll talk about that and you can form your own opinions.

Net income available to common shareholders was approximately $26 million, $0.41 a share. Our return on tangible common equity which we key towards was approximately 13% up from about 12% on the length quarter.

Our Board did declare its usual cash dividend of $0.43, which we had a good converge ration on. Pretax, pre-prevision earnings were all steady at approximately $49 million.

We saw some revenue growth compared to a year ago, some improved credit quality and we continue with a very disciplined expense management, which will be more granular later in our call.

We have two items which you might consider non-core; one was 2.3 million positive after tax as we hedge our MSR. Buddy Wood will have some comments about why, and our expectations later on that.

Our security gains now are approaching $70 million, $65 million to $70 million. We took about $1.1 million in after tax gains. That was credits that we felt that caused with any move would take away the income.

In my mind, as we take very small profits in the bond portfolio, it is contracting from the future margin, maybe over a three or four year period, so margin would be even better if we had not been taking these small profits. We will address that issues and what is the best opinion of our investment department as they know our portfolio very well.

Tangible common equity contingent to grow is now about $833 million or about 9.3%, risk based capital continues to grow principally with the types of loans that are leaving our balance sheet and loans leaving as we are de-risking. I can comment on the whole portfolio for a moment at this time, last quarter it was down about $150 million.

Looking at it, land and land development was down $67 million. Consumer auto was down $50 million, that gives you your $115 million. Everything else was essentially flat. We are seeing some renewed activity which we’ll discuss more in depth on the C&I front. There is not going to be much loan growth until the economy turns, but we are seeing the loans move off that we wish to move off.

The construction land development was principally about $40 million in Texas and $15 in Mississippi and about $10 in Florida. So, that many of us would view as positive when a construction loan pays off or migrates, it’s a big help. We no longer have any kind of concentration when it comes to construction or total CRE and Barry Harvey will cover those numbers later if you have a question about.

I’m going to go ahead into credit quality. It was the best quarter we have had in quite awhile. I would say the major reason that we have seen this peaking and I might take you to page six of our stat sheet so you can see five quarters across with assets, provisions, charge-offs, etcetera.

We had about $35 million migrate into non-accrual in the quarter. In the previous three quarters, it had run between $50 million and $60 million, the four quarters before that $40 million to $45 million and we have to go back to the first quarter of ’08, which would be 10 quarters back to find the number lower which was $30 million. We are hopeful and optimistic that we are seeing a new level, we can ever be positive but we do feel pretty good about the migration at this time.

A couple of loans that migrated during the quarter have same significant things happen to the positive since then. For example, there was one $7 million loan in Mississippi, we had from income producing property where the borrower had other properties took everything into bankruptcy and the judge turned our properties around, because they both have cash flows, they cover reasonable debt services.

Whether we’ll upgrade or not this quarter, but it’s not what we were expecting brought in. We had a similar situation in Texas where we downgraded a significant credit and had some major changes on it that are positive with payments, reserves, interest called off whatever, so I guess if I looked at this number, we still had our loans going on non-performing for the first time I’ll hit them in a minute we saw more that one or two upgrades of credit inflow. So, they are beginning to move both directions which I think is helping this.

On the provision, you can see that there was very little provisioning in Florida, the situation in Mississippi was a couple of loans, one of which we had about a $2 million credit that had some issues in it related to borrowing basis being correct and we charged that credit off and know that – $1 million to know that we are in good shape at this time with it, I don’t see any significant potential losses on it.

In Tennessee, we provisioned about $3.6 million, which picked up and it was essentially three loans, one was $6 million or $7 million loan, its two shopping centers that have tenants at it, but our cash flow slowly and we wrote those down a million. We had an apartment building that we wrote down a million dollars and the third shopping center didn’t fully cash flow and we wrote down another $800,000.

So, it was three specific credits, its not raw land or something. Memphis has been a very tough market. The good news I have about Memphis is we have very little luck there that is not classified and been written down, so we are answering other questions you have about the provision later.

The allowance, we did end up releasing $1 million or so in reserves, our commercial reserve is now at 2.1%, consumer at 0.82%, 1.66% of total loans. If you pull out our impaired loans, our nonperforming have 149% coverage that is excluding the loans with no specific reserves.

To talk about ORE for a moment, ORE remained generally flat. If I look at migration, we had approximately $35 million go into nonperforming. We foreclosed on about $18 million. There were four credits above the million dollars, one was a residential builder at Jackson for $1 million, one was a piece of land that we acquired through the acquisition of the Dallas Bank in about 2001 that sold out quite a bit as a piece of commercial property and time just took care of the borrowers.

One was a house for a couple of million dollars about a half-mile from Rice University in Houston from a builder, this was a loan that had been with us for quite awhile. The builder was using it, build for a primary residence for himself, we expect that to move away in this quarter and the owner was six beach lots about 75 yards in the beach in Florida that we value all six in a million too. So you can see the write-down there.

When we look at ORE, it’s still at $91 million. The amount of ORE in Florida has dropped significantly to about $32 million now from about $46 million at year end and it has been written down very significantly.

If we look at the ORE in Texas, it’s principally three properties, we have reserved, we do not see any significant losses in these properties like you might have had in Tennessee or Florida. Actually, ORE is down quite a bit, if I take a look at all ORE of the $91 million in excess of $500,000. There are about 42 properties, they were on our books at impairment at $134 million and now they are $66 million, they’ve been written down 41%.

Now, when you go more granular, Florida was $75 million and now it’s $24 million and those properties had been written down everything, I’m looking at the list from 52% to 73%, so there is really not a lot remaining in that $24 million of the $31 million in Florida, there is over $500,000. There are two $3 million credits and the rest gets down to below the million or million and a half.

If we look at Mississippi, there are about a dozen credits totaling $16 million and they were $25 million, and that’s principally that condo in Memphis that we have written down 41%, the one that we are to participate in that was built on the blocks there, just a little south of downtown, and we took the opportunity and wrote off a little over 30% of the only condos we have on the Mississippi Gulf Coast. We have been selling them, we started out with probably 15 or 16 down to eight or nine and we think they are priced to move. It’s the only condo project there in the [Inaudible] area and address that.

When you take a look at Tennessee, it has been written down from 11 to 7 and in Texas it has been written down from 24 to 18. There has been a couple of projects that went into heavier write down in Texas, but generally they are holding up well. I will tell you that when I look in a granular way at Texas, which I think you will be interested in, the two larger residential properties that were fixed at $8 million each, we have sold about $5 million worth of lots and houses year to date, we made a profit of $300,000 on all the houses and lost $300,000 on all of the lots, so about breakeven.

We got another $2 million under contract and that just leaves $2 million or $3 million, so this is essentially moving on through. So when we look at credit compared to shorthand history, it looks very good, we saw a small decrease in nonperforming assets. I am expecting ORE to continue to move down. If you do a math on ORE, it says that we sold about $12 million worth of ORE at no significant loss.

One was about a $3.5 million property in Florida that we were able to clear and there was no additional loss or gain on it. I’m going to leave credit and talk about a couple of other issues and we can come back in any way that you would like to. I know you will want to look at our Florida chart, but you will see this Florida number is getting much smaller, a very handy reserve against our non-impaired loans that are in the construction category is down in the 130s and is just something that we believe is very manageable for Trustmark at this time.

Moving on to the balance sheet, the net interest income was very solid, approximately $92 million. The margin expanded somewhat at 5 basis points. We continue to have success lowering our deposit cost about 11 basis points, principally CDs and Mr. Host and team are doing a great job on holding the rates, home loans.

Loans averaged about $6.3 billion, I have covered that. The investment portfolio was essentially flat to $1.9 billion. We are working at this stage to try to keep these earning assets at 8.2 or 8.3. We are buying the least number of securities that we must. We are staying in a very solid no-risk thought from the bonds that we are buying. There is opportunity there if we wish to because of our equity and Buddy Wood or [Ms. Felisky] can comment on that. Deposits relatively flat, except where we are pricing them, a little kick-up in non-interest there.

Non-interest income was just very solid. The mortgage company had an approximately $600 million quarter, up from year-ago $300 million and up from $225 in the first quarter. We can comment on that as principally refinancing and gain on sale and some gain. I think we would have been impaired about $8 million if we were not hedging.

Our hedging has turned out over the last three years, it used to be a very positive situation for us and I think we have released, we actually sold about $1 billion to $1.2 billion in servicing more or less at par. It was loans that we had originated principally in Alabama and we sold them since we don’t have a retail-marketing base in that state. It helped us in a number of ways.

The card fees increased about 500,000, we’ll comment on that later. Insurance remained fairly stable at 6.9 as did wealth management. Our non-interest expenses were 1.2% if you pulled out foreclosed property cost and the FDIC. We appraised a very significant amount of our impaired loans and a very significant amount of our ORE about the same amount that we did last year. I would say that we appraised, approximately two-thirds of everything that will be appraised this year.

We were as aggressive as we could be on the ORE and principally it was smaller, like $3 million, which we had a couple of properties, two or three in Florida, all beach land and it dropped precipitously down to a level that you think must be a bottom that was nearly 4 million of the 7 write-off.

We continue to appraise, we continue to be on top of our properties. We have heard the phone ringing more since the wealth has been caped, I’ll make one comment on the wealth. We did a significant amount of work over the last month in looking at our low portfolios. We did not see anything at this time that we believe would require us to create a specific reserve.

We have negligible exposure in Louisiana, very little relative to our balance sheet along the Gulf Coast of Mississippi that would in any way we think be impacted and I believe so far we’ve dodged a bullet over in the panhandle. Gulf Shores was hit a little bit, but we just haven’t seen it just in Panama City, South Walton.

We have had extended visits. One of our major customers is number two Condo Management company, they manage and lease 700 condo units between Pensacola and Panama City. They have managed it well. Their revenues through July 15 were down about 8% that’s pretty representative of the bland across the panhandle. They did a great job in managing their overhead and were generally flat.

They were expecting the last month to be slower than last year, they are getting payments from BP and they were encouraged that people who had canceled this year had said, hey keep my place in the condo, I like for next year and so their bookings for 11 were up significantly compared to the year.

Same way, we have a client who has a major hotel room well over a thousand units. They had been discounting, they are principally on the eastern end of the panhandle and they had hired let’s say 800 people for the season instead of a 1000. So, what we are seeing and they were pretty well breakeven with the year before, everyone was expecting a significant increase.

There is discounting going on, there is cancellation going on, but for the major players that we talked to, they are managing the process. We also talked with another customer who is in charge of the clean up. They have hired about 1200 people for the beach clean up, they are being paid by BP, it is creating significant number of jobs, about 1200. They are paying these people well over $12 an hour and time-and-a-half overtime.

Their comments are we have been lucky. They have the manpower to address tar balls or whatever else comes ashore. There is still a lot of uncertainty as to what’s on top of the water and what any storms might do, no one is relaxing. As you know, it has been breaking up significantly and degrading. So, we are hopeful but cautious.

As far as strategic direction for us, we continue to manage credit aggressively. We are working on our balance sheet, we are still de-risking, we are looking for loans and we are making some loans. We are doing anything we can on our investment side that will generate revenues. We are still controlling expenses keeping our headcount flat.

We are looking at FDIC transactions, but we haven’t found one that interests us strategically at this point. We are looking at them in a very granular way. We don’t know what the future holds for another of our other institutions, but if anything is available that we think will make a strategic difference for Trustmark, we will be in the study room aggressively.

On legislation, Mr. Host can answer any of those questions he presented to our board yesterday. Principally, he said there are a lot of studies to be done and a lot of it is a great deal away. He has some very good news for you on opt-in and opt-out, I’m going to ask him to comment.

Jerry Host

Thank you, Richard. As Richard mentioned, there is a lot ahead of us for all of us in the financial services industry relative to the new financial reform regulation and we are studying it very carefully and we are in the early stages of putting together projections in terms of the impact, on our balance sheet and income statement.

More specifically though is it relates to the Reg E change, opt-in and opt-out. I will tell you that today we have approximately 90% response rate from all of the accounts that we have contacted. Of that response, approximately 88% have opted in and even a higher percentage, approximately 92% have opted in on those users that are more frequent users of the overdraft projection product.

So based on some indications we had given you a quarter earlier, we feel better about where we will actually end up. You all recall that for existing customers, the change takes place on Augustus 15, though it will be approximately 4.5 to 5 month advantage for us for the remainder of this year. Richard.

Richard Hickson

Thanks Jerry. That will end our comment. We appreciate you going through it with us. We try to go through it a very granular way to answer as many as your questions as we can in advance. We’ll open it for questions.

Question-And-Answer Session

Operator

Thank you. (Operator Instructions) Our first question will come from Steven Alexopoulos from JPMorgan, please go ahead.

Steven Alexopoulos – JPMorgan

Hey, good morning Richard.

Richard Hickson

Good morning Steven, how are you?

Steven Alexopoulos – JPMorgan

Okay, great. Maybe we can start given the review of the coastal risk that you did in the quarter, can you break out the total dollars of loans that you have in coastal MSAs and maybe a little bit more direct risk in those MSAs?

Richard Hickson

Yes, it is not significant in Mississippi, what we have there is not likely to be impacted based on what we are seeing today. I think you can look in our stat sheet and you can see Florida, show me what page in our stat sheet -- look at see if the [Inaudible] page 8 of the financial supplements. So, at the bottom, you can see in Florida we have in hotel, motel $13 million, that’s two adjoining properties, they are same distance, they are cash flowing and have strong owners.

I was there a week before last, stayed there, I couldn’t park. Our Chief of Credit Administration was there last weekend and had trouble parking, it’s just a busy place. We are not expecting - its some big blobs cover the beach, things are going to happen, but it does in the determinable pass that hopefully at this point in time.

We don’t really have any restaurants to mount anything anywhere relative to our size and we just don’t think it at this time. When we looked and when we saw it Steven, we said okay if we have these loans, we don’t really know what’s going to happen to them. If they migrate one grade or two grades or three grades, the cost of that migration which did well into our budget.

So remember we came in immediately after Katrina which was very impacted to Mississippi and set up a $10 million reserve. After two or three years we didn’t use any of it, I think we used a couple of hundred thousand dollars and brought it back and released it. We are not a coast bank, our bank is off the coast, if this is a positive right now, because a lot of jobs are created a lot of money.

Now we have owner board some big construction companies, big heavy equipment dealers and others who have operations along the coast. We have quite length discussions about the cash flow that both owners are receiving, other people and right now if anything is a positive and we just don’t see it at this time, that doesn’t mean something didn’t going to change, but we look at very close. We’ve also discussed it with our regulators and accountant.

Steven Alexopoulos – JPMorgan

Could you be [Inaudible] just follow up, even though you are not necessarily a coast bank give the impact just for that region from what’s going on. Does this force you to keep reserve levels generally higher that you would be keeping them at the stage?

Richard Hickson

No. our loan loss reserving, we did not lower our qualitative in anyway. If conditions were to worsen we would increase our qualitative, but we haven’t seen it and with our total exposure dropping significantly in Florida once it down in the last 12 months 30% or so. We haven’t seen the need to increase our qualitative, but remainder is of our reserve it just absolute loan after loan after loan which are independently graded looked at on the loan review and looked at by the control of the currency on a very regular basis.

I guess that’s the best way to answer it. We have reserves are very significant loan we have particularly you looked at the point they were rolling off all of this, all loan paper and all of these construction loans, and if you good this plus tangible equity at 9.3% of stronger margin and never have we fallen below this $50 million pretax point provision we have held it.

Steven Alexopoulos – JPMorgan

Thanks. Thanks for answering my questions.

Operator

Our next question will come from Kevin Fitzsimmons from Sandler O'Neill; please go ahead.

Kevin Fitzsimmons – Sandler O'Neill

Good morning everyone.

Richard Hickson

Hi Kevin.

Kevin Fitzsimmons – Sandler O'Neill

Richard, just two quick questions. Number one, if you can just address the margin. I know it expanded again this quarter. Just wondering what you have on top for further ability to reduce your funding costs. Can the margin really keep going up or I know we alluded to it going down for several quarters and keeps going up. Just wanting your feeling there.

And then secondly, you did address it briefly at the outset, that some of your peers have had credit issues and I think the comment threat on some of these has been kind of late stage credit deterioration, credits that banks thought were solid a few quarters ago and are just getting -- losing liquidity due to the duration of the downturn, you know so not so much focus on Florida, because you guys have been very focused there.

But Mississippi, Texas, Memphis, just wondering is this something that you are seeing, but it’s just being overshadowed by the improvement in Florida or have you seen it, but you have taken care of it already because you had pretty extensive credit reviews because of the situation in Florida? Thanks.

Richard Hickson

Sure. Let me answer your last question first. Our significant in size loan portfolios are concentrated in two places, the Jackson MSA and the Houston MSA. I am not aware that our peers are having any problem of any significance in the Jackson MSA.

It had just not suffered as much, and because we are headquartered in Jackson and have the good fortune of having been here since the beginning, I would say that if there are any good credits, we have been banking on them for a long time and they are holding together and houses are selling, plots are being developed, not in any real rapid rate, but it’s just not come to a standstill here, because properties just never really appreciated here.

I would say Memphis has been a real negative surprise for us all the way through. I don’t know why Memphis has been different than Jackson. When you look at it, maybe there was just over aggressive builders and more banks in that market from out of market like us, although in the market a lot of branches just got there.

We have had our officers, our loan review teams and our regulators, almost in every nook and cranny of this company since December. We have received compliments from our loan review and our regulators on the consistency of loan grading by our officers.

As a precaution, a year ago we sent every person who had the possibility of lending commercial money in this company back through loan grade school one by one, and had to pass exams and we understand the OCCs rates on what the sub standard is or especially mentioned and I will knock on wood, we just don’t miss very often, because we are very cognizant of it.

We had some popup in Texas. We are making some bigger loans for us; say $10 million. Texas took a hit. Texas is in a policy period right now, Huston with this oil leak, I think residential has slowed a little bit, but it’s still selling. I think it’s yet to be seeing what the drilling moratorium will do to Huston, but our exposure there is not big relative to the energy industry.

So I just feel that we are fortunate, we have very little turn over in our company and lending personnel. We were fortunate to have sent a number of people from Jackson to lay off in Huston, who understand us and our credit culture and has been much easier for those hiring people. We hired there to assimilate in, because of the people that moved there from here. That’s about all we can say. I am somewhat optimistic that this migration number should not exceed this and could possibly start trending down more.

Let me turn to the margin. We have quite a few layers of committees and about 30 Community Bank Presidents and I don’t know how many other people in branches, that are focused on deposit cost on a continuous basis.

Very minute decisions on deposit costs are elevated to a very high level, so that we have vision across the country and discussion of what we’ve done yesterday and last week. And we don’t have inconsistency of pricing and we are being as competitive as the two senior investment officers in the company and the COO want to be. We are maintaining the relationship, loosing some small amount of CDs.

As the earning assets go down, the dollar amount or the margin is going to go down. So we are focused not on the percent, on the dollar. We want to keep it where it is or grow it. We have not accelerated bond buying. There are some opportunities there. We have plenty of capital to do most anything, but we are watching trying not to waste our power. We are seeing some C&I loans coming in, that’s all holding plan.

Obviously the percent is going to go down as we add more bonds and more loans. Its been trending up, one of the reasons Kevin is this auto portfolio. We had capital wise dealer reserves and we are amortizing that in lot steps with this autotype going off and therefore on very really profitable business. So its not hurting us as much to see this auto run off as you might expect. We have a very solid cadre of lending officers in every market. We are comfortable with that level, so when there is growth we will get our share.

Kevin Fitzsimmons – Sandler O'Neill & Partners L.P

Okay. Thank you very much.

Operator

Our next question will come from Andy Stapp from B. Riley & Company; please go ahead.

Andy Stapp – B. Riley & Co.

Good morning and nice quarter.

Richard Hickson

Thank you Andy.

Andy Stapp – B. Riley & Co.

Do you have 30 to 80 day delinquencies at quarter end?

Richard Hickson

Yeah, not that there is any real change from the last quarter. I’ll let Barry Harvey touch on this.

Barry Harvey

Okay, the 30 days or more past dues as of quarter end from the corporation was 3.5%, and I think it’s worth mentioning that your back to Florida portfolio out of that equation, we are down to about 2.2%. So we are comfortable with that. Was there another question there Andy?

Andy Stapp – B. Riley & Co.

Talk about your auto?

Barry Harry

Okay. On the auto portfolio we reserve at about 1.3% and as the run off is occurring the second quarter we noticed a very positive trend as it relates to charge-offs. Charge-offs were probably down $1 million this quarter versus the first quarter of the year.

First quarter being about $1.4 million and this quarter being a little less than $400,000. That trend is a little bit seasonal due to the tax refund, and people being able to catch up on the past due payments, we see that routinely, but we do feel like that we have gone to turn down and while it may not be less than $400,000, the next quarter we do feel like we are in gradually continue to move down in terms of the net charge-off we are experiencing in our portfolio.

Richard Hickson

We are a small business lender, average loan I mean under $100,000. The past dues are always been higher in our small business portfolio and you don’t seem to have many losses there. Well I don’t know, I guess this number is not essentially high for us [Inaudible].

Barry Harry

No its been fairly stable throughout the last about six quarters.

Andy Stapp – B. Riley

Okay, and I believe you said that mortgage banking volume was up on a linked quarter. Just help me to reconcile why were the gains on loan sales down? If you could also talk about your mortgage banking issues?

Richard Hickson

Yeah, I’m going to let somebody. We have a lot of volatility in how the two or three largest players in the company price their business and we are a very pooled service mortgage company and have the strength to take advantage of their moods as the different spreads change and of course we probably hadn’t even sold a lot that’s in the pipeline than we did this quarter, actually move out next quarter. Jerry, you want to comment on that anymore?

Jerry Host

It’s more of a timing issue, although you are absolutely right. We’ve almost doubled the volume in the second quarter in mortgage company in terms of our production. Those loans are still forward and the gain on those will not be recognized until next quarter.

Andy Stapp – B. Riley

Okay. Also help me out on your average earning assets. With the run off in your construction and development and auto loans and interest rates coming down so far, how can you protect the earning assets?

Richard Hickson

One loan, one deposit at a time. Pricing, discipline, whatever happens to the industry, has to happen to Trustmark. We today have just been very fortunate, but look we may enjoy a very granular way and we are barely centralized and that there are constant discussions going on between Mr. Host and those Presidents all across our system and they are very focused in incentive to maintain their margin.

Jerry Host

I’d only add on comment to that Richard, and they are very much on target in terms of the incentives and the measurements we put in place of our bank Presidents relative to their margins. As Richard’s mentioned, most of the decrease or essentially all the decrease in the loan volume is a function run off and indirect and real estate related projects.

On the commercial side, we have maintained the base of customers we’ve always had. So many businesses have de-leveraged themselves, that we have worked to build new relationships just to keep ourselves flat. The pricing on existing relationships as well as new has been enhanced, because as we have renewed those loans, we have been able to negotiate flows on a very large number of those loans and that has helped to maintain our margin.

As the economy recovers and as businesses feel more comfortable about expanding, we would anticipate that that customer base we have, we utilize those lines and that in itself should help our loan growth going forward. So it’s a matter of the economic environment and when businesses feel more comfortable borrowing.

Richard Hickson

Thank you Jerry. I am going to ask Buddy Wood if he would comment on the margin from his perspective as it might relate to investments and other issues. Then Buddy, since it was there, you may want to comment on hedge.

Buddy Wood

Protecting the margin is probably the second most discussed subject in this company next to the credit work, that’s staying down. It’s not just because what we look at internally is, but we also have extensive discussions about what other peer banks are doing, whether opportunities are in the marketplace and we look at them very carefully at various levels, but it goes all the way to the top of the organization on a very proactive basis.

We recognize that with the amount of capital, the amount of liquidity and a very stable interest rate risk position that we got the company set up for at this point, that while we are going through what appears to be an extended recession period, we are going to have to use the investment portfolio at times which is very custom and ordinary in the low end of all of the recession like we are going through.

We’ve looked at a lot of alternatives. We are a conservative investment company. We will continue to be, at the same time we believe that there are some incremental opportunities for us, and it was strictly be around the edges, in order for us to maintain as less the margin as we want both in percentage and also in dollars. There is a lot of our peers who are using very short-term instruments for example, to add some incremental dollars. We look at that on a regular basis.

It’s not out of the question for us to pay attention to that and take advantage of the fact that we don’t use very much in the least cost part of our company’s liabilities, which is in our borrowings. We’ve had much higher levels of borrowings that you look in the past than we have today and there’s opportunities for us to do something there, as well as to look at a very small amount of some incremental alternative investments as well.

We model extensively what the margin looks like. We’ve got a lot of confidence in it, although we know the level that it’s at today is very difficult to view that as sustainable, but we also have a lot of confidence that it’s going to be very competitive.

Our investment portfolio is only in a 20% range, so you know that there are banks who are using the much more extensive and they are very high quality organizations and so there is plenty of rooms for us to do that, both from liquidity investments as a percentage, the borrowing capacity, the interest rate risk profile and of course the capital profile that we have.

So both from a dollar and a percentage point of view, we know that there is a lot of challenges. We meet very actively on it and we think there is some more alternatives that will how gets through the bottom of the session, till we see that loan growth come back.

Richard Hickson

Talk about the hedge.

Buddy Wood

The hedge is a very interesting hedging program that we use. As you know we are using a U.S. Treasury, which is a fixed income, non-convex hedging program, and at the same time if you look at the reason that we do that, is our MSR is not a single MSR product. It is a portfolio, therefore convexity is not the issue. We’ve managed it through these various periods of time.

If you look at the 130 basis point move that we’ve had in compression over past 17 months, we’ve got a positive set of results through that. So we have confidence in it, we still have a positive yield curve and we have a moderate level of volatility, since volatility is a positive because we are using options.

We have a high degree of confidence that our hedge will continue to perform very well in a positively slow yield curve, even though we will have some periods like we’ve had recently, where we’ll have a small narrowing versus the widening that we had due to the large move in treasuries during this past quarter.

Andy Stapp – B. Riley

Okay, thank you.

Buddy Wood

Thank you.

Richard Hickson

One more bit of data is I am going to let Barry Harvey and Bob Morrison give you a little more flavor on loan activity that we see.

Barry Harvey

Sure Richard. I guess before I turn it over to Bob on some of the types and the quality of the credits that we are seeing come to the committee. They are various single owned communities, where we are seeing our larger credits for decision.

During the quarter we had new request dollar of about $245 million, but 213 specific new requests that flow through, most of which as you can imagine is CNR related, but Bob you want to talk a little bit about some of the specific on some of the industries and some of the types of credits, in which markets they tend to be flowing from?

Bob Hardison

Yeah, we’ve generally seen as a little up tick in activity, especially in second quarter on the CNI side and really it runs pretty much across the Board. All types of industries really [Indiscernible] and it continues to be slow, but we’ve had a couple of nice credits come in through our corporate area. Companies in the mid-south, we’ve done a couple of club deals with banks in our area on larger credit, but we take a piece and then the other bank share, but overall we are seeing somewhat of a positive improvement.

Of course, when we approve the loans it takes sometime to release the fund out. Some of them for comparative reasons we may not get, so it takes a while for the funding to occur with some lag effect, but we are encouraged and I know our guys are out really aggressively calling and they’re doing follow-up calling the program. So as Richard earlier, if the business is there, I think for the most part we are going to look at it especially in the Mississippi and Houston markets.

Andy Stapp – B. Riley

Great. Appreciate it.

Richard Hickson

Do we have any questions?

Operator

Yes, we do. We have a question from Caron Jacobson from KBW; please go ahead.

Caron Jacobson - KBW

Good morning gentlemen. I was just wondering if – can you hear me?

Richard Hickson

Sure. Yes.

Caron Jacobson - KBW

Okay. Great. I was just wondering if you could give the size of the gross additions to non-performing loans. You had mentioned on the release that it was down, that’s when I guess I could get a level.

Richard Hickson

Could you repeat that question?

Caron Jacobson - KBW

The gross additions for the new and NPL loans.

Richard Hickson

Sure. Why don’t I give you anything over $1 million.

Caron Jacobson - KBW

Okay.

Richard Hickson

There was one finance related company in Mississippi, it was a couple of million. There was about $6 million in the credit that I mentioned that was a cash flowing shopping center and that we’ve seen the improvement in with the judge refusing to let it go into bankruptcy, and about a $3.5 million piece of developing land in Texas, and one house for $1.2 million in Florida. Below that, it was from 100,000 to 500, so two, eight, nine, 10, 11, 12. 14 of 35 million would hit your radar screen. Very low, half a mark ratio. No land in Florida whatever.

Caron Jacobson - KBW

Okay, great. Thank you, and then you had another quarter with a little reserve release. I was wondering if you could talk about your expectations there.

Richard Hickson

Depends on what happens this quarter. Just loan by loan by loan. Obviously, right now you can tell, most of what we charged off was reserved for previously, and I would say generally I expect charge offs as we move on through, could be equal to or a little more than the reserve.

We are not a company based on how the loan loss methodology works for us. If we are going to turn around and release a bunch of reserves, unless something happens in a very granular way in the loan portfolio, and on the other side, if nothing happens in the loan portfolio and we don’t see any significant qualitative issues in our qualitative committees, the executive management, that’s loan administration and they are long and very granular maybe and they just hadn’t seen it, where the other changes yet.

I am expecting it to maybe come to a new level and stay there a little while. We go back into a double dip, maybe a little perk up, but you know the pockets don’t have anywhere near as much as in them in Memphis and in Florida. Hope that helps you somewhat.

Caron Jacobson - KBW

That does help. Thank you very much.

Operator

(Operator Instructions) Our next question comes from Al Savastano from Macquarie; please go ahead.

Al Savastano - Macquarie

Good morning guys. How are you?

Richard Hickson

Hi Al. How are you? Thanks for calling.

Al Savastano - Macquarie

Actually answering my question, I was just wondering if you can give us an update on the CEO transition and the plans there please.

Richard Hickson

Sure. I recall our CEO at January 1 and is Chairman in our next shareholder meeting in the middle of May. We have been undergoing succession planning at the Board level all the way through and we’ll probably make an announcement and have a CEO designated in the fall.

Al Savastano - Macquarie

Great. Thank you.

Richard Hickson

If there are no other questions, I want to thank you very much for joining us. We have significantly entered the third quarter. So we will see you again sooner than we all might think. Thank you very much. Have a nice day.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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