Joey Rein - Director, IR
Richard Hickson - Chairman, President and CEO
Mitch Bleske - SVP & CIO, Trustmark National Bank
Bob Hardison - CCCO
Jerry Host - CEO Designee
Steven Alexopoulos - JPMorgan
Adam Barkstrom - Sterne Agee
Kevin Fitzsimmons - Sandler O'Neill
Elena Kim - UBS
Brian Klock - KBW
Trustmark Corporation (TRMK) Q3 2010 Earnings Call October 27, 2010 11:00 AM ET
Good morning ladies and gentlemen and welcome to the Trustmark Corporation third quarter earnings conference call. At this time all participants are in a listen-only-mode. Following the presentation this morning there will be an opportunity to ask question. (Operators Instructions). As a reminder this call is being recorded, it is now my pleasure to introduce Joey Rein, Director of Investor relations at Trustmark.
Good morning. I would like to remind everyone that a copy of our third quarter earning release as well as supporting financial information is available on the Investor Relation 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 risks and uncertainties which are outlined in our earnings release and our other filings with the Securities and Exchange Commission.
At this time, I’d like to introduce Richard Hickson, Chairman and CEO of Trustmark.
Good morning. Thank you Joey and thank all of you for joining us today. I have with me this morning Jerry Host, our CEO Designee and Chief Operating Officer; Louis Greer, our Chief Financial Officer; Barry Harvey, our Chief Credit Officer and other executives who will be available to make comments or answer any questions that you might have after my comments.
Trustmark had a very solid quarter. We are in a fully offensive mode. This weekend, we are having an all-site strategic planning for our top 30 executives as we work and refine our plans for next year and our three-year strategic plan. We fully recognize that the economy is slowly coming out of a great recession. We hear there is no significant loan demand around the country. We are expecting slow growth. Our management team intends to manage through that. We are accustomed to non-high growth markets. We know how to control expenses. We are in a fully offensive mode with our capital and looking for good loan growth.
Mississippi is sluggish, but we do not feel it is seeing the continued downturn in real estate as a number of other states. Net income available to common shareholders this quarter was approximately $26 million, earnings per share $0.40, a return on average tangible equity of approximately 12.4%. Our board comfortably declared a cash dividend of $0.23 per share which is the same rate we’ve had for the last couple of years.
Payout ratio at a very comfortable level based on the level of equity in pre-tax, free provision earnings. Solid financial results, still a robust net interest income, very diversified non-interest income and continued discipline expense management. Our solid capital base has positioned to us to take advantage of opportunities in the market place that we assure you would build shareholder value.
As I talk about credit quality, I think you would best follow me on page six of our stats sheet which has a five quarter running average. The provision for loan losses was $12.3 million a quarter, less than net charge-offs of $18.5 million or 1.18% of loans. There are three or four reasons that our provisioning was less than charge-offs, but principally we experienced a $21 million reduction in classified loans of which 15 million was in Florida.
We also experienced a slower migration in two new classified loans. Let me peel it back a level further than out press release. Sub standard are classified sub standard loans dropped $10 million. Those that related to charge-offs had been previously reserved for and that released approximately $4 million in reserves. In addition, Trustmark has traditionally impaired and immediately written off all impaired loans which are principally real estate, down to market at the $1 million level.
We made a decision to lower our impairment level as we were seeing a build up of smaller credits where we feel they will be resolution, but we are building and not clearing as quickly. So we have lowered our impairment level from $1 million to $500,000. This resulted in the classification of doubtful dropping from approximately $13 million down to $4 million. This is was all previously reserved for resulting in the principal increase of charge-offs above reserving.
Our allowance for loan loss is approximately $95 million, 1.97% of our commercial loans and 0.81% of our consumer and home loans or 1.57% of total loans. We are seeing and feeling an improvement in credit quality. If you take a look at the five quarter moving averages on page six, you will notice that non-performing loans appear to have peaked in the end of the first quarter that Florida's bond performing is down significantly from approximately $80 million to $66 million. You will see that even with a drop in non-performing other real estate has begun to fall. Florida down significantly from $46 million at the end of the year to $31 million.
When we take a look at our loan loss reserve our auto book is now down under $250 million. We have reserves there at a level that we were experiencing charge-offs earlier and therefore, as we are seeing pay downs in the order book which was approximately $50 million this quarter. Reserves are being released that approximated $500,000 this quarter and as you know we do not intend to rebuild that auto portfolio.
So we would expect continuing reserve release as that pays down, its down from approximately $800 million and our loss level, net losses in that book was $700,000 this quarter, so it's actually not getting worse as it get smaller.
In addition, our home mortgage whole portfolio at 875 million is essentially flat with no significant signs of deterioration foreclosures are very small, the rates are holding on it the rig finance rate on our whole portfolio has not been significant and it requires very little reserving by some of our loss history. I think repairing it now at about 50 basis points, which is entirely sufficient and we charge them all on at (Audio Difficulty).
Our non-performing loans are 140% of our non-impaired, non-performing. I think we've proven over the last few quarters that our reserving methodology particularly for losses is accurate. We feel our ability to grade loans as a national bank and a federal reserve bank is very accurate, we have few disagreements with our regulators when they come in behind our lending teams and loan review teams.
Other real estate decline $6.7 million which was a positive and I'll discuss that more thoroughly later. As to Florida, we had continued progress on the resolution of Florida construction and land development. Last 12 months was down by 31%, most interesting last quarter Florida construction and the lands in loss was down 28 million, 23 million of which was criticized. You will note that in Florida even with that reduction there was no increase in ORE in Florida. So that tells you that we are working them now and we are moving the Florida real estate without any significant loss at this time, with that we are moving. And I am expecting some more movement in Florida ORE during this quarter that should be significant to the Florida number 31 million based on closings that are anticipated.
Our non-impaired construction and land development in Florida is now down to $116 million from a very elevated figure two years ago with an associated reserve of 13 million or 11%. The Florida bucket has gotten much smaller we have also seen a couple of positive things happen to a couple of major credits in Florida, which we feel will be very positive against their future migration towards the negative category.
Those are the comments that I’ll make at this moment on our credit quality, I will emphasize our tangible equity at 850 million at 9.34% of tangible assets gives us tremendous flexibility. Our total risk based capital continues to be high as to do our pretax, pre-provision earnings.
As to the balance sheet, average loans totaled 6.2 billion, a decline of 70 million in the linked quarter of which 50 million was order.
Our condition still point to reduced loan demand, but our C&I lending is holding in there. We are seeing some growth, some good opportunities in Texas and Mississippi is sluggish but we are seeing some activity. I can relate that in that, we manage our total Mississippi bank outside of our headquarter Jackson CRE department and our corporate department as a community bank in Mississippi. It is a significant portion of our loan portfolio. It is actually up year-to-date a marginal amount, that means we are very competitive and defending and any opportunity that comes up in our state. We have a shot at it and we feel very good about that. We are beginning to see our situation in Texas so that we are comfortable. We have the capital and the staff on ground there to move ahead with lending opportunities there.
Our average investment portfolio is holding steady, it was up $45 million having average earning assets remain steady at 8.2 billion. We are still pricing out of any non-relationship deposit, particularly anything that is expensive. We had a nice average increase in non-interest bearing deposits of $93 million, we have looked thoroughly at that its not concentrated. A number of companies are up 1, 2 or $3 million. My assumption is that they are profitability and they are building earnings. And they are leading for the time being in their DDA.
We did have seen a decline in CD and public money, as we manage through our needs or deposits, we feel we have the ability to accelerate deposit growth at anytime particularly in Houston and public or CD in State of Mississippi. We have significant liquidity and we are taking advantage of some of that liquidity.
Our net interest income at approximately at 91 million, resulted in net interest margin still at a very robust 4.39%.
On the non-interest income side, we have a very solid low risk high volume mortgage company that’s been in business for years, relative to our markets, extremely well managed competitive with branding.
Trustmark has experience no significant repurchase activity, essentially $1 million year-to-date. We have not been engaged in global signing or participating in private level securitization. We were on the service charge side very successful with Opt-In. In addition it gave us an opportunity to have conversations with a vast majority of our customer base. We expect that we will still see some revenue decline from NFS as we make all of our final adjustments that we said in the past. This should run somewhat over $5 million on an annual basis. Insurance revenues had a good quarter, about up 863,000. It was a seasonal event with us as we have some renewals on some significant public entity.
Wealth management is holding solid at 5.2 million. Bankcard and other fees remained very stable. On the non-interest expense side, our non-interest expenses are still well controlled. Foreclosure expense only decreased 550,000 which was a disappointment to us at 8.7 million. I can tell you that we have substantially completed at least the 2010 reappraisal process for Florida and other markets. We did 59 appraisals during the third quarter bringing to 130 in this portfolio. It's very up to date. The $8.7 million was principally made up of pre loans. One was the large condominium project and methods that we had talked about where it was one of Trustmark’s customers but we participate in a credit that's now been written down $4 million to what we feel as a fairly reasonable value, $2 million of it was this quarter. There is no expectation of another credit causing that level of write down with our ORE. We had one project in Florida that is in litigation and as a matter of proper due diligence, we wrote it down to $1 million.
ORE in Florida now at $31 million is relatively small and related to our company. It has been written down approximately 50% from government, from customer view. ORE in Trustmark’s Mississippi, Kansas City and Texas market which represents approximately 63% in the total has not experienced a significant increase in real estate prices during the current economic cycle as did Florida. So we are of the opinion that the bulk of our ORE write down is behind us.
Other than ORE expenses Trustmark are a non-issue. They were up less than 1% in the prior quarter. We are accustomed to expense control always working, re-negotiating vendor contracts looking for ways to operate in a better environment. We are anticipating now that ARGO, our retail system are fully rolled out in our call centers and all of our branches.
On our sales and service in our branches that over the next year we will see efficiencies from having state of the art operations in place there. Overall, on strategic directions, we continue to manage credit with a very able, trained, qualified, experienced staff. We continue to manage our balance sheet, our bond portfolio, our liquidity and our interest rate risk with a very normal balance. We are aggressively pursuing a logical revenue generation, prudent expense management and we seek opportunities to build shareholder value where it is accretive.
Anticipating your comments, I would like to make a couple of comments about our failed acquisition of Cadence Corporation. It was obviously a difficult decision on the part of Trustmark management not to raise our bid to match. It required a lot of discipline which obviously only human side can disappointment. There are three comments I would like to make of out Trustmark’s perspective. I am going to tell you what we told you before is that first Trustmark did a very thorough, deep and accurate due diligence, involving a significant number of people, a significant amount of time.
We know the major markets. We have spent a considerable amount of time actually looking at all the real estate from our perspective of over a $1 million. We have obviously talked about it and we have come to the conclusion that we marked the loans portfolio properly. That there was a high level of construction, land and lots, and CRE that would be a long, difficult workout process.
Second, we have said we are and plan to continue to be disciplined with the extremely valuable capital that Trustmark has at 9.34% tangent, plus our human capital which is extremely and equally valuable in working from problems situations.
Third, with our model even with the significant, I believe, we said approximately 29% expense cuts, at the higher rate it was not accreted to our earnings per share, our tangible book value, the reasonable near term and we felt there would be other opportunities for our capital which could more strategically impact our company over the next six to 24 months.
Thank you for hearing my comments and we will be happy to turn to the questions.
(Operator Instructions) And our first question comes from Steven Alexopoulos of JPMorgan.
Steven Alexopoulos - JPMorgan
Maybe I will start, Richard given your comments on credit overall should we expect the reserve balance to continue to fall in coming quarters? I'm not sure how you think about this in terms of matching charge-offs and provision, reserve to loan ratio?
Yeah, its a good question. You will notice that Mississippi had an up tick of $10 to $12 million in non-performing. It was one loan. It is not a real estate loan. It is a manufacturing company that supplies product to the construction industry. We went through a, what we call the old days, the good scorched earth look at this company, and we've gone ahead and reserved 25% against this credit. We are not sure we will anticipate any loss. We are probably doing some additional appraisals but this is reserving inventory and receivables down to fairly low liquidation levels. So we are looking ahead as much as we can. We do not wish for our reserves to go down, we will do a lot of qualitative work on this level.
For a number of years, when I first came with the company when reserves were very high, higher I guess is the well above 2.5, we reserved charge-offs for a number of years. We do not have any intent or fall of releasing a significant number of reserves, but we used the methodology that’s required and we’ve proven to be fairly accurate in our reserving. So we understand the portfolio. I would assume that you will not see this kind of release 4, 5, $6 million as a lot of it was drawn about by moving that impairment level down to a very low level for company our size and clearing out a buildup of doubtful credit that were already reserved for.
Steven Alexopoulos - JPMorgan
Given that comments on the ORE cost maybe now being behind you, what's a good rate for us to assume there for that ORE line? It’s like 9 million of expense or so this quarter?
Yes. I think you got to need to look at it and maybe assume, we’ve 30 million of ORE in Florida, put a number on it, 12%, 15%, 20% over the winter. If you think it would fall, then that doesn’t put a significant number out there for 2011 before. I would say to pay the taxes and carry this real estate, you are probably talking about $3 million or so. One of the issues that we have had this year particularly in Texas which we are not anticipating next year is that we had some residential properties that were significant that we brought in, that the taxes were two and three years in arrears and we had to pay those taxes. And we’ve done a very, very granular thorough look if that issue in our impaired portfolio. So I would hope that next year we would cut our ORE carry generally in half.
And I would expect the fourth quarter unless something that we overlooked jumps off to look more in line with the first quarter because we substantially finished the year’s appraisal process.
Steven Alexopoulos - JPMorgan
Maybe I could just jump for a second to the securities portfolio, just looking at the taxable yield. It came in around 4.1. Can you, one, just remind us what's in there that's giving you such a high yield at this point? And an offset is it’s coming down very sharply. Maybe you could comment on that and how we'll think about that continued compression here in the securities yields?
Well first as we’ve shown by our history with our securities portfolio, we will manage it and if paying needs to be taken, we will take it, you recall that from ‘05 to ‘08 we brought that portfolio down significantly and what's in there with the yield, it’s excellent quality, it was the timing of when it was purchased in April and October of ‘08 and it still has a $70 million plus profit in it. But I will ask Mitch Bleske and Buddy Wood if they want to make any comments of their opinion of the buying market today and their stand.
The investment portfolio as you know is almost all agency securities, either direct agencies or its in the form of mortgage related agency securities. As Richard points out, we had excellent results due to some timing as to the structure of the portfolio and we maintained between a 3.5, 4.5 year average life. We in this most recent quarter purchased approximately $300 million worth of government-related securities, agency call-ables, CMOs and mortgage-backed securities. And the four-year average life target is and remains to be what we are very interested in doing with good structure that has a tight couple of years extension in a worse case structure and approximately 285 yield that we were able to obtain during this past quarter. We do have a forecast that shows we run about $60 million a month of that portfolio and as you saw the net effective debt was also the share growth of about 158 million there in the quarter and about 45 million net.
Very high quality, very strong base to compliment the asset liability mix which we carry a significant amount of variable assets so to have a three-year average maturity in the investment portfolio nets us a slight liability sensitive position that is only about 1.5% in a 200 basis point of shock. So, we need that structure, it works well with the overall balance sheet management, so it is a compliment to the overall cash flow of the company.
The next question comes from Adam Barkstrom at Sterne Agee.
Adam Barkstrom - Sterne Agee
I was kind of just looking through the credit numbers and curious specifically with the Tennessee markets, what you guys are seeing in I guess the Nashville and the Memphis markets? Just anecdotally, hearing from some others that Memphis is pretty tough. And then, I guess along those lines, looking at the -- just curious looking at the provision, how you guys break that out on a per-market basis. You actually took a negative provision for Tennessee, but the charge-offs basically tripled. So I wonder if that was kind of a cleanup there and again some color on Nashville and Memphis?
We had two customers who came in our acquisition of Barret Bancorp 10 years ago. Customers who struggled for 10 years in Memphis with land. And I think we have three shopping centers in Memphis, small ones and they were all with the other customers. We essentially foreclosed on the land finally after 10 years it already reserved, fully eroded down and wrote off the three small shopping centers by $3 million.
That was what went on non-accrual at about 8, it was written down to about 4. They are not vacant, but we are moving aggressively anywhere we can and writing down and it was previously reserved for. Now the bad news in Memphis is we hadn’t been able to grow our loan portfolios. The good news in Memphis is we haven’t been able to grow our loan portfolio. And its down about $100 million at all of the areas up there and its an enigma, that place is just, you know its a big town, but we know Jackson, but we just Northern Mississippi, that DeSoto area is just planned for a lot of growth which has just not happened yet.
Maybe it was a little bit like on a much smaller scale part of it like Atlanta, where you have a number of smaller banks that just did not have the underwriting processes in place that a national bank might have. And maybe it just caused an over heating and over abundance of money, on the available but there was a significant development, and I don’t think t is any bank just took massive share I just think the market was just way overbuilt for anticipated growth it turned out hindsight that a number of a major builders in Memphis. We are the first to go down because it was a big sub prime market. And it was a big surprise. It caught out all the banks. Our situation is now it won’t be significant to us as far as real estate is on the books going forward.
Adam Barkstrom - Sterne Agee
Okay and then, as a follow-up, remind us. TDRs, I guess you guys don't really utilize the TDR structure. Kind of talk about that for a minute I mean kind of remind us of your stance on that?
Yeah, nonetheless Bob Hardison say that and cover that, but you know we have taken a hard land in grading loans, and if we have a land loan who continued to pass it, we've been moving towards a seven or eight years straight line annual, because we are looking not only with our guarantors of having the ability to amortize, but also a willingness. Bob you want to talk about this TDR issue and what it is.
What we do is here to all of the regulations skill required by our regulators and the accounts with regards to TDRs and we do recognize TDRs and we have a process in place that identifies TDR. All of our impaired loans would fall into that category.
In addition, we evaluate individual credits in a normal process of our asset review that it would fall under that category with that discussion with our regulators about our methodology and so forth and I think we're in agreement with them on how we treat it. So we do follow all the prescribed regulations and we do record TDRs as we account them and according to the way we think this should be done.
And we probably have about six TDRs in total and which is not many, we are very careful about making concessions which is what the definition of TDRs is about making concession outside of you would normally do in your underwriting process and we've run into, especially as it relates to where our problems have been historically which is Florida a concession down there really didn't buy us anything.
Those loans were such that the borrower was in enough financial stress that by lowering an interest rate below market or extending a term beyond what you would normally do or moving them from AM to interest-only for a period of time that wasn’t going to resolve the situation and the borrower knew that there was no reason to make those concessions when it wasn’t going to resolve the issue. So we've not had maybe the need that may be some of our peers that you maybe look at the call report and seeing the TDR information now. We just haven't had the need or desire to create any TDRs unnecessarily.
Adam Barkstrom - Sterne Agee
Did you say six TDRs and then for whatever number you said, if you could repeat that? And then what is the accruing portion of your TDR book?
Well, none of our TDRs or I mean, the six TDRs that we report, none are more accruing, they're all non-accruals and it's fixed credit in total which such as insignificant as it relates to any of our financial data.
The short term I guess.
And another part of that is that when a loan and good, bad are very different but our workout strategy has been when the loan goes to non-accrual which is almost not quite almost synonymous with TDR. We move pretty aggressively when it rolls to non-accrual and our workout strategy is not particularly flexible once it hits that non-accrual side as we move pretty aggressively to do, what we need to do legally or otherwise to move that loan for the systems. So, we really have not and one or two grant a lot of concessions when we don't see any light at the end of the tunnel as far as the credit is concerned
I know that’s particularly on tenure and you don’t take some real estate loan and put it on a five year work down. It’s six months or one year renewal. And with so many of our non-performance at least historically related to Florida and related to some of real estate projects, there again the concession its not going to resolve anything, whether it be interest rate, whether it be [return], the projects the sold the borrowers no longer has the financial resources to even cover the entrance. So there is nothing you are going to salvage there.
Our next question comes from Kevin Fitzsimmons at Sandler O'Neill.
Kevin Fitzsimmons - Sandler O'Neill
I was wondering Richard you made the comment earlier that you have more opportunities to use your strong capital in terms of expansion. Just wondering if you could just expand on that a little bit and where I am going with this is, if you were looking at the appetite for where to use that capital, where does it fall between FDIC assisted or lot of deals and if in lot of deals would you look for stressed opportunities like Cadence was or more healthy institutions. Do you think there are other larger in-market possibilities out there like a Cadence or is it going to be more of a coupling together smaller institutions? Thanks.
We have not seen FDIC transactions with franchises with any long term intermediate term value to us. We have not felt pressure at all from an earnings prospective to do financial transactions just to bring in current earnings or create this kind of equity.
We would much prefer to buy a stressed franchise where we can understand, work out the credit issues and buy some lasting franchise, even though we might end up being half the franchise that would be significant for us over time. We would obviously also entertain a somewhat healthy company. I don’t think we would move anything out but with the TARP and these banks is going to delay. We take a number of these institutions or even (inaudible) from being taken by the FDIC. The number of sales banks is up, but the number of assets taken by the FDCI is significantly down.
We deal the CRE problem is centered and thanks much smaller than us at the community bank level and its going to depend on what actually happens with CRE over the next year or two. We are constantly modeling in due diligence and I think the financial world is not flat, its curved and you can't really see how they are in about six months as to what's going to happen. We have seen some acceleration and it appears commercial real estate with a number of institutions in the mid south we are not certain how that is playing out in the privately held community banks but we would take a look at any community bank within our markets that is an older established franchise.
We would obviously continue to look at the surrounding states but we would not go out and tackle a couple of billion dollars of real estate in a market that we are not totally familiar with. We wouldn’t tackle a couple of billion dollars of real estate at any time but I think the next level of banks that are top up with problems will be those that are very, very hot real estate commercials. I really don’t have an absolute answer for you Kevin.
Kevin Fitzsimmons - Sandler O'Neill
No that’s fine. It's tough to pin that down, I understand. Just one follow up in terms of the situation on Cadence while obviously unfortunate for you guys. What is your takeaway just from that development in terms of do you walk away and say, "Well, this may be something we're going to face in future situations, where there's a lot of money out there chasing these stressed situations when they come up". When a bank realizes it has that limited options and has to sell, there's pools of this money, that is, needs to find an opportunity or it has to return the money to investors. Do you think that's going to be occurring or you have to deal with and compete against and maybe it has an effect on pricing? Or is it more of a one-off thing and there are ways to protect, walk your seller in, in a more secure way? Thanks.
In hindsight, it appears this was an obviously competitive situation even from the very beginning and I think it was. In other words the answer to your question logically would be yes, if there's a lot of money that doesn’t have the same accountability as Trustmark with its shareholders equity, then it is likely to be inflationary. However, it appears to me that Cadence was more of a unique situation than we have seen in the past and I think it's still unknown and we'll get the question answered with the next couple of banks like Cadence that moves to the situation Cadence was in. I know there is a lot of private equity, I keep referring to the human capital. I can say that Trustmark has the capacity to clear and manage a distressed loan portfolio up to a certain size.
I think that is going to be the issue and we will tell the story for the private equity investor, whether after a year or two they have made the headway or whether they have to offload and give up their future profitability by a bulk sale. I don’t think anyone knows the answer to that. Time will tell.
But we've got the capacity to do whatever we want to. We just believe that we are in a good position, that we are not going to give up today and we enjoy having all this capital and enjoy having these earnings. And I will tell you we enjoy more than you will ever know to have seen two quarters and see some break up and things moving within the problems. We are not going to jump back into it if we are not going to hide some money.
(Operator Instructions) and our next question comes from Elena Kim – UBS.
Elena Kim - UBS
I think most of my questions have actually been answered. I just have a couple of follow-up and just one question. I'll start off with loan growth. It looks like your resi real estate and your term commercial real estate balance have increased for the quarter. So could you kind of provide some color as to what's going on over there?
Well, there's no significant increase. We are trying to generate more home mortgages as the 15 year and 10 year and that we can put on our books. We have in-house product well underwritten to Fannie Mae standards. We haven't gotten enough volume to make any difference. We would like to see that grow a little bit because at 4.5% or so that’s a very good earning asset when you have a good professional, with a good income on the other end of it.
We are finding a few commercial real estate loans. We just had great loans. A couple of weeks ago I was at the symphony with the owner Saturday night and I thanked him and he said, "You know we moved that loan to you from a national borrower because it was good for Trustmark and it was good for us.” Now this is two fellows that we have been banking for years and we sort of stepped down from the stage of struggling to the stage of being folks that are making the symphony keep going and other things and this was just a good amortizing apartment at about $10 million or so, the kind of loan we are looking for, we traditionally don’t have very much income producing real estate. It's only about $800 million.
We have absolutely no concentrations. Our construction is laying out, in this 600 compared to all the billion in Tier 1. So we are looking in Texas for great mature real estate. We are looking in Mississippi, we are taking every opportunity to reach in there and pick up a good loan out of a stressed community bank with a good borrower and they are having to step out of things where they can. A lot of this is going on, with growth in towns like Laurel and Hattiesburg, Mississippi and Columbus where there was no inflationary bubble, just a kind of rehab of Main Street.
Elena Kim - UBS
Could you give us an idea of what net charge-offs were this quarter by loan products, as opposed to geographically?
I don’t believe we had any charge-offs of any significance that were real estate. Principally, residential real estate. We did charge-off as I mentioned the $3 million which was the shopping centers three small centers, strategically around the parameter of Memphis, they are not vacant but they were fully leased up and we went ahead and wrote them down. We have essentially four non-performing loans in Houston that make up about 80% of our non-performance.
Let me say they are not dead real estate like we've experienced in Florida. I will tell you that all four credits are what I would call active. In other words there are things going on with them. They could be positive. We wrote one of the residential properties down by almost $2 million. I would say also on the ORE side, we are reaching final negotiations with one of the nation's largest home builders in a number of sub-divisions particularly in Florida where we will start this quarter seeing lot takedowns, so it's still with us. I would make a comment, if I look at our especially mentioned in sub-standard loans in particular outside of the state for Florida.
It is a lot of operating companies that were in the construction business are related to it are still revising small entities, where as the country moderates out of this recession and overtime as we see more employment, these management teams that are on board in these companies I believe will help us to take these problems down, but they are going to need revenue regeneration, but that's different. Then just land, lots of land, lots of land and that's what I would say has changed within our classified numbers over the last two years. I will be disappointed if we don't see continued steady improvement in those numbers.
Our last question comes from Brian Klock at KBW.
Brian Klock - KBW
Most of my questions have been answered already. On the margin Richard I guess you’ve continued to have a pretty strong margin here at about 4.4%. Looking at where the reinvestment opportunities are obviously it’s difficult yield curve environment. If the loan growth continues to lag, what do you think which we are thinking about is, where the margin may head to and is there any sort of funding, re-pricing that you can do to offset some of the margin compression? Or maybe just give us some guidance on the margins.
I think a reasonable expectation would be as rates remain low we are going to see the margin slowly progress back to a little over 4%. We have very significant flexibility to add assets. We can be extremely competitive in pricing because we’ve essentially this year built $50 million of tangible equity after dividend from earnings.
We are fortunate that we are carrying all of our ORE and a great deal of our non-performing loans from a tangible equity bill over the last two or three years. So as far as our peers we feel we are in good shape. We are not going to hit our head against the wall though trying to beat a low rate environment by taking a significant risk, that would be long-term. When you gets down to pure dollars we have a lot or flexibility within our balance sheet to add just some margin earnings, but we didn’t refraining, we will wait to see what Fed does, we’ll make some decisions about what we are expecting to happen over the next 12 months. Clearly without adding unreasonable risk, it is not going to be full force.
Brian Klock - KBW
Okay and I guess with the assumption that your deposit levels may remain sort of steady and you have the continuous runoff, you would look to kind of do the same sort of average duration investing on the securities portfolio?
Yes we have been very pleased with how our largest competitors are now managing there deposit cost and we have traditionally, been enable to fund our deposits at a lower level than they have.
So, we are not going to see what we have seen in the past, but its not absolutely over whelming. And then we may move into same store government monetary policy. Even a lower interest rate environment will appear to that.
Brian Klock - KBW
Well, yes. I mean, I think the outlook isn't all that great here from the level of interest rates going forward. I think we're going to be stuck with this for a while, but…
But I think you should look at our ability to maintain and work with our non-interest income and let our history be your guide and our wiliness to take expenses down when necessary.
This concludes our question and answer session. I would like to turn the conference back over to Richard Hickson, for any closing remarks.
Thank you for listening in, I am going ask Jerry Host our CEO Designee if he would like to make a few comment.
Richard thank you, I’d like to comment on two things, the first I want to assure those of you on the call, despite the fact that we are seeing a decrease in our outstanding loan as Richard has explained it has come from a conscious efforts to decrease the interact portfolio and real estate-related concentrations specifically in the land area.
Secondly, I think everyone is clearly aware of the fact that loan growth in general nationally, as well as internationally has been extremely slow most companies have de-leveraged the consumer has de-leveraged, they’ve looked for ways to operate more efficiently with less debt, with less people, which has in many ways kept us from moving towards a more robust economic recovery as we have seen in the past. However, we have not seized our calling efforts amongst customer and prospects. I remember the old airline commercial where that guy walks in, he has his management team sitting around the table and he threw airline tickets out and told people to get up and call on our customers that they had forgotten about that and he was going to call an old customer who he just said, "we are moving our business because we haven't heard from you".
We have not allowed that to happen in this company. We went out steady and I think as a result of having done that many of those called, stayed in touch, due to the fact that our loan levels have remained steady, our yields have remained very strong, on the lending side, on the deposit side, we grown non-public, low cost loans. We have been able to maintain those core deposits. And I think that’s because of the calling effort that’s in place.
So, although we spend a lot of time on these earnings calls looking at specific areas of focus, I wanted just to point out that in the line side of the bank there is still a great deal of excitement about going out, looking for opportunities, maintaining those relationships so when this economy recovers we'll have those relationships intact and be able to take advantage of that.
Secondly let me comment, Richard mentioned at the very beginning of the call that this weekend we will take the executive management team for an offsite conference. He and I both feel that it is very, very important that as we transition through this management change in this company that there is a continuity and a renewed focus on where this company is headed and how we keep it moving in the right direction. We are not, although we are a multi faceted organization, we try not be too complex and try not to allow ourselves to become confused. It's always good to back away from the day to day, I think you can see that the management team understands a great deal what's going on within the company and all of its businesses.
So its always good to back away to 300,00 feet and take a look at where we are headed and that's what we plan to do. There's going to be, I think a very, a very focused approach. First we will remind ourselves about controlling expenses, that's something we can’t allow ourselves to back off of. We've become very efficient.
However, there are still improvements that can be made. There are changes that could be made to improve process, to provide better service. We've got to talk about those things in the different business lines and understand how we can bring about change to improve efficiency and control expenses. Rest of the time though we are going to spend on what Richard refers to as the three Rs and I don’t mean reading, writing and arithmetic.
In our case we refer to it as regulation, reserves and revenue. We all know that the Dodd-Frank legislation has brought about or will bring about tremendous change in the financial services industry. You've got to focus on making sure we understand what impact that's going to have on our industry and on this organization specifically and ensure that we prepare for it. We know it may have some negative impact on revenues especially if it relates to consumer revenues. What are we going to do about making those revenues, we know that it can slow us down if we are not in compliance with the new regulation. We looked to focus on what is we have to do and how we prepare and how we deal with this new legislation.
On the reserve side, what we mean there is a focus on credit and credit process.
We have got to look to see if the existing credit processes that have helped us weather the most severe economic climates that I think any of us have seen in our work careers whether or not that same process will hold true. We began to work though this slow economic recovery. So what changes and adjustments do we have to make? And the third and the most important I think we all know is the revenue side, it is a variety of different ways. The organic revenue with existing lines of business. Business expansion in new areas it compliments what we do as a financial services company. And then finally, the acquisition side which Richard has touched on. All of those will be discussed as we come to this process.
So we wanted to share with a group that as we go through this management transition, we are getting the team together, we are refocusing our efforts and look forward to what we believe is a very positive future for this company. We’d like to thank you all for calling in this morning and being part of the call and your questions and we look forward to the next quarter.
This concludes today's conference, thank you attending today's presentation you may now disconnect.
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