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Trustmark Corporation (NASDAQ:TRMK)

Q4 2007 Earnings Call

January 23, 2008 11:00 am ET

Executives

Joey Rein - Director of IR

Richard Hickson - Chairman and CEO

Jerry Host - President of General Bank

Bob Hardison - Chief Commercial Credit Officer

Analysts

Brian Klock - KBW Investment Bank

Gary Tenner - Suntrust Robinson

Peyton Green - FTN Midwest Securities

Charlie Ernst - Sandler O'Neill

Operator

Good morning, ladies and gentlemen, and welcome to the Trustmark Corporation's Fourth 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) As a reminder, today's call is being recorded. And now it is my pleasure to introduce Mr. Joey Rein, Director of Investor Relations at Trustmark. Please go ahead, sir.

Joey Rein

Good morning, and thank you, operator. I would like to remind everyone that a copy of our fourth quarter earnings release and supporting financial information is available on the Investor Relations section of our website at trustmark.com by clicking on the News Release's tab.

During the course of our call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We want 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 will turn the call over to Richard Hickson, Chairman and CEO of Trustmark.

Richard Hickson

Good morning, Joey. Good morning. Thank you for joining us this morning. I have with me Jerry Host, President of our General Bank, Louis Greer, our Chief Financial Officer; Bob Hardison, our Chief Commercial Credit Officer and we look forward to visiting with you this morning.

Let me begin by saying that Trustmark had a very respectable quarter despite proactive reserving related to our loan portfolio for the Panhandle of Florida. We reported net income of $23.8 million earnings per share of $0.42. Our return on tangible equity was above 16%. Our net interest margin expanded to 3.95% and our efficiency ratio improved to a little under 57%. Trustmark is a profitable, well capitalized company with a lot of financial flexibility with a very strong earnings stream, diversified both by the line of business and geographically.

I know you are all interested in the Florida situation. We will spend a significant amount of time talking about it, giving you the clarity that we have on it, and as much transparency as we can see in the marketplace at this time. But first, let me tell you about a number of other things at Trustmark.

Number one, you noticed early in our press release that we had taken accrual, as you have seen a number of financial institutions do related to the Visa litigation it was about $500,000 after-tax for us. We also discovered through our SOX work, and under accrual of interest income for prior period related to loan fees.

This dates back to FASB91 which we implemented back in 1998. We were too conservative with some of our revenue and cost for recognitions. Most of that took place in the last three or four years, and we decided to go ahead and the KPMG with others about it and we decided to go ahead and clear the matter this quarter and it amounted to approximately $2 million. That gave us a $0.02 a share positive impact from those two items for the quarter. If you will go to page 5 in our stat sheet, I think, you are probably most interested in our linked-quarter results, and I will go through that with you.

Linked-quarter net interest income, excluding the previous under accrual of interest income, actually expanded $1.7 million or 4 basis points to $3.95%. This is being caused by the continued replacement of low yielding securities with quality lows. Also, we have been doing a very good job of lowering our interest-bearing cost relative to the three drops about a Fed last year. We've been expecting our margin to continue like this. We expect that we'll see the same process continue in the future, and we expect margin to stay in this area or a small expansion during the year. We do not feel at this time that these rate cuts are going to do anything significant to our margin.

Dropping down the provision for loan losses, we provisioned $17 million in the quarter; proactively addressing what we saw was a further weakening principally related to the residential side of the Florida market. We increased our non-performing assets by $22 million. This is attributable to all of our loans in Florida two of which we talked with you about before and two others, which are quality home builders that are having simple problems to the extent that no product is moving.

We'll talk about them more thoroughly later. Net charge-offs to average loans were 53 basis points. If we take a look at that, our charge-offs were about $9.5 million, about $3.7 million of it actually related to Florida. We charged-off a little over $1 million on a homebuilder and Memphis; we feel our Memphis portfolio is clean at this point. We had about $4 million charge-offs and this is certainly not related to the real estate markets. Some were credits that we have been working on for a long time, and it just became time to charge them off. One was an auto dealer.

Houston had about $600,000 in losses. Houston is doing very well, and we do not foresee anything on the credit horizon, there will be of any significant took this time. Trustmark's is not a sub-prime lender; however we are not immune to the impact of a slowdown in the residential industry.

We have conducted a number of targeted reviews in the Florida Panhandle, and across our company. We are monitoring and proactively managing what many are describing as the homebuilder credit deterioration in the Florida Panhandle. Jerry Host and Bob Hardison will comment on that after my comments, and give you more clarity into our exposure and compartmentalize it from you. I think you will feel that we're positive about it once you have had a chance to hear what they have to say in their comments.

Loan portfolios and our other geographic areas and other lines of business, which makeup 90% of the exposure of this company, are not experiencing any significant credit issues. We feel Trustmark is very adequately reserved. As you know, our commercial and real estate loan portfolio is approximately $4 billion. We have now reserved 1.48% of that. The Trustmark is a very balanced and diversified company with its loan portfolio, and we have about an $800 million home mortgage portfolio, principally for Mississippi customers, and we are experiencing no issues with that.

We also have been in the auto business for many years and we are experiencing nothing significant relatively to that business. We are seeing no significant deterioration in our home equity lending. We have reserved against our $1.8 billion in consumer, and our $800 million in home mortgage, approximately 59 basis points. That would be over by year's losses, yet we take those losses at 1,900, 2,080 days based on various loss. Well, there is no question when you look at us, if you need to segment our exposures; we are not totally a commercial bank.

Let me take you to non-interest income. Non-interest income increased $700,000 or 1.7% for the linked-quarter. You will notice a decline in insurance premiums. This relates to the seasonality of our business. One of our major businesses is insurance for the public school system and that take place in the third quarter.

We are seeing some softening in rate in the Panhandle Florida that's very good for our loan portfolio. It's like when the Fed lowered interest rate 75 basis points yesterday; I said well that can't be interest bill down there about 10% for this year. I think that's very important. Our mortgage, and it won't have a problem with it but it will surely help the credit quality of the portfolio.

Fisher-Brown has just finished its three year earn out. It did very well. They are moving forward. They have strong market share and we're not expecting the softening market to have any material impact on them this year.

Wealth management had a very good quarter up around 7% linked-quarter, and up around 11% on an annual basis. We're having good success moving assets under management to our company, and very good success with our Performance Fund Family. Our Mid Cap Fund was recently named in the Category King by The Wall Street Journal, as one of the top 10 funds last year. We're very pleased with that and we're taking advantage of that in the marketplace.

Very positive for us was our net Mortgage Banking for the quarter. It increased $2.5 million linked-quarter. Our mortgage originations were actually up for the year. We feel very positive. We're probably being helped because of our long-term reputation in the marketplace against those with whom we're competing, that are having more issues and more plans.

Our hedging program at the end of the second year turned out to be one of the most positive decisions we've made it in many years in the company. We actually had a hedging profit pretax in the range of $2 million. This came about due to an expansion widening of spread. Our interest rate hedge worked very well. We are on top of the hedge. We're comparable with where we are and we think it came at a very good time. If there are any other questions about the hedge later, Buddy Wood, our Chief Risk Officer will answer that.

Now on interest expense control continues to be a hallmark of our company at $69 million. This included the $800,000 contingency for Visa. In addition, we put approximately another $800,000 in the fourth quarter, building our health insurance reserve, which we carry and share the cost with our associate. We have had a couple of medical issues that have come up in the third and fourth quarter, and we decided to go and build that reserve to a level that we feel it should be.

Salaries and benefits maintained very well controlled, excluding our medical plan expenses. Salary and benefit expenses declined 1.4% from the prior quarter. The situation improved to a little under, 57%. Let me take you to our balance sheet on page 4 of the stat sheet. We continue our repositioning strategy. We had very strong loan growth in the fourth quarter a $179 million or 2.6%.

Linked-quarter loans including held for sale, increased to $137 million. Our commercial loans, principally commercial and income producing and owner occupied real estate, increased to $172 million. Consumer loans were relatively flat at a $1.8 billion portfolio, increasing by $13 million. We continued our very disciplined reduction of our home mortgage portfolio, where we are experiencing no problems. This is for rate issues and it declined about $62 million. Loans held for sale were up $14 million due to our increase in mortgage origination, which was sold.

Geographically, there are really two areas and two issues. Number one, we are seeing positive effects from Katrina. Our corporate area increased about $37 million. This is principally major customers in the Jackson area going down and doing business on the Gulf Coast. An example might be one of our longest-term customers and strongest, who builds apartments, building an apartment in Biloxi. This is the type of business we are doing – great business.

We have seen continued growth in Southern Mississippi. You recall the year before, that we had between $3 million and $400 million deposit growth in Southern Mississippi. Last year, we had approximately $100 million loan growth coming out of smaller cities and towns in Southern Mississippi, where our customer bases there are drawling lands, staging, and they are 50 to 100 miles above Mississippi Gulf Coast, and they're really benefiting from this rebuilding and we're seeing a real [dent] there.

Other loan growth is coming out of Huston. Huston is stable. Our loan portfolio is in the range of 825 million there it's quality. Our deposits are holding. We've had a number of good people. Huston is very stable and moving forward the loan growth there is diversified. A lot of small business lending, some real estate lending, and some energy related lending. Solid credits, we feel very good about Huston.

Our Florida portfolio is stable. We're making a few very good loans there. Our investment securities declined about $81 million, leading to the expansion of our margin. Linked-quarter deposits in the period declined about $33 million. We're still intentionally reducing higher cost deposits. Lastly, we no longer have anything that you would relate to as a brokerage CD, it's all direct customer driven.

We reduced that about $200 million last year. We're in a position that we're able to pick and choose our deposits. We ran our public deposit down on a linked-quarter at $70 million. We actually saw some increase probably seasonal in non-interest bearing. The deposit market is challenging, as customers are moving to the highest yield that they can find we're able to accommodate them. We have a very strong core deposit base. It has served us well for decade and it's serving us well at this time.

Our strategic direction is to continue to assess any problem asset that we might perceive on our balance sheet, and move them off of our balance sheet. Preserve and grow tangible equity. Our tangible equity is at 6.94% strong and well capitalized. We will continue our balance sheet de-leveraging both on the home mortgage, and the securities until we see opportune times to reinvest.

We are continuing our positioning for the future, as we have told you we opened five very attractive, very well placed banking centers in high growth markets last year, we will repeat that process this year and we'll open five or six new branches during the year. We recognized our thoughts from that. Let me let you know that we are reallocating our expenses to higher growth markets.

We actually reduced our headcount by 23 in the company on a linked-quarter basis, and 95 year-over-year with no layoffs. We actually closed some branches, restructured branches, when we open new ones, and we are very conscious of the expenses. We continue to maintain this very lower level of cash, and due to that we were able to takeout in the third quarter.

Our imaging process is moving ahead. We are continuing in all of our branches across the system of check imaging still continuing to cut career cost and we are very pleased that we are now doing our total cash letters with the Fed, both incoming and outgoing, and with other financial institutions. This is working well for us.

We are continuing this to challenge any status quo regarding expenses. Trustmark has a lot of positive things going on. We are looking forward to a good year in 2008. We are very profitable. We are very diversified in our income stream. We are very well capitalized. We are flexible. We have a liquid balance sheet. We have the financial flexibility to succeed very well in the changing marketplace.

I will make one or two comments about Florida and then I am going ask Jerry Host to make a couple of comments. I'm sure all of you have been to the Florida Panhandle. It's not a very large place. It’s a very beautiful place. It's blessed with what are probably the most beautiful beaches in the western hemisphere, if not the world.

It's about 60 miles long and about 4 miles flat. The U.S. military and air force and navy had major facilities down there. There are many state parks, and the St. Joe paper company owns a very significant amount of land, and they have exited the homebuilding business and are holding that land.

Well, not in the Chamber of Commerce of the Panhandle Florida, but I’ll tell you it is not that large as an area. There are literally millions of Americans, who live within a 5 or 6 hour drive. They are overbuilt, and it's being compounded by the national and global situation. It won’t merely take time to move the inventories that is there.

What we have there is a very quality product. We feel it will move, and we'll address it. Our people there are solid. They are the same people we've had for years. We've a very strong Board of Directors down there. They are the major customers of ours. They have been in business down there for a lifetime. They understand that marketplace.

With that, I'm going to turn it to our President, Jerry Host, who has spent a very significant amount of time down there and he can talk with you about what he is seeing firsthand in the Panhandle today, and then Bob Hardison will make a few comments on our portfolio, Jerry.

Jerry Host

Thank you, Richard. And yes, I'd like to add a little color to what you've already said about the Florida Panhandle. I've picked the color, it would be emerald green for those of you that have not been down there. They are the most beautiful beaches in the world with white sand, and then the emerald of green water.

About Trustmark in the Florida Panhandle, let me say to you that we have as seasoned and experienced a staff of lending officers as any organization in that area. Our franchise there is one of both commercial small business and retail customers, and is not a loan production office. The President of our Florida region is John Sumrall. We own the franchise for four years now prior to that it was the Emerald Coast Bank and John had been with that bank since its inception 7 years prior to our acquisition.

He knows the market. He knows the people. He has put together a fabulous group of lenders and they have done what we believe is a very good job. The issue in Florida is the market period. As far as our board, Richard mentioned we have a 12 member advisory board. It's a cross section of business leaders and community leaders throughout the Panhandle.

We meet with them every two months in a regularly scheduled board meeting. I met with the board last Thursday night and asked for some input on what's going on in that market. And I will share with you some of their thoughts. As you all know, our franchise covers three markets Okaloosa-Walton and Bay County, from Fort Walton Beach east to Panama City. The Concentration of loans that we have within that market, are limited to those three counties. As we've always focused our attention on lending and we have done it with people that we have known for many years in that marketplace.

In terms of reflections from the Board that lives in that market all day, every day doing business, these are some of their thoughts. First of all, our positive note tourism was up 15% as measured by rental sales over '06 levels. They felt as though this was positive for not only the revenue within the three county market, but also retail sales, entertainment, and the restaurant business all benefited from this.

The commercial and commercial real estate as well as retail are characterized as being stable. We are seeing an increase because of the three military bases, and there are air bases as well. In that marketplace, they are seeing an increase in demand for military housing and for office space, and warehouse space from defense contracts. Yes, a little bit of a negative. Single family housing sales in the Panhandle area are down year-over-year, by between 25% and 35%.

New construction permits year-over-year are down somewhere in the same category 25%, 35%, and that's in the Florida Panhandle. If for those of you that have been dealing with banks that are working in the southern part of Florida, the central part of Florida are probably seeing some numbers that are worse than the numbers I have just described.

I have mentioned that our lending activity is limited geographically to the Panhandle area. Our real estate projects are with local developers that we have known for a long time, and we believe as Richard has mentioned that this is just a matter of time in working through this market improvement.

So, with that little color, and at last [I'll ask] Bob Hardison at this time to talk a little bit about the credit in general for the Florida Panhandle. Bob?

Bob Hardison

Okay. Like most banks with the Florida exposure, we are experiencing some credit headwinds in Florida in the Panhandle. As it is mentioned I think in the press release, about 10% of the bank's portfolio is in Florida. We have gone through a lengthy and comprehensive analysis and that's roughly $700 million, to determine what type of exposure or what type of a problem, we are dealing with and we've looked at in a numbers of different ways. We feel that based on a number of factors that the portfolio, we are really dealing with is conservatively less than that. For example, about a third of the portfolio is income producing property loans, including owner occupied real estate, and is performing very well.

For example, the retail shopping centers, warehouses, office warehouses, buildings leased to military contractors, and government entities, and as mentioned all are occupied. All are doing well. We don't have any delinquencies, and criticized assets in that category almost non-existent.

We also have some single-family residences in our portfolio that are performing well. So, when you segment it like that, we are probably dealing with half the portfolio that is not experiencing, but is susceptible to various levels of stress. Some positives, all the product that we have is benched. We don't have large development loans that are halfway completed, or corrective houses that are not completing.

So, we are dealing with product that's finished and on the market. We have only one condo development loan where that project has been completed, and is in the process of selling out now. The owners have come up with some very creative incentives to make sure that the project closes out as scheduled. And we expect those closings to begin later this month and continue through the month of February. Yes, our exposure is about $7 million.

Jerry Host

To a very strong borrower.

Bob Hardison

Yes, very strong borrower. We've a lot of experience in the market, and again it was a pre-sold project, and all our information at this point shows that we expect this project to close out as scheduled. But that we already developed condo development loan we have. I know there is some concern, I would imagine there would be that we mentioned in the press release, of our residential bill portfolio that represents about a quarter of our portfolio.

So, again is really not of the magnitude to be devastating. Well, we've got some issues there. There is no question about that. What we are dealing with is manageable. Our team of folks down there, we've got some peoples that have been working out this situation before, this is the third or fourth that I went through. I know Richard went through several, and the Senior Credit Officer in Florida has been through several.

So, I think, we understand how we need to attack this, and with hands [down] management and dealing with each situation as facts present themselves to make the maximum recovery, and reduce the expose for the bank. So, all-in-all, we feel like we are on top. We have spent a lot of time and energy on Florida, and looking at the portfolio and talking with borrowers to assess our situation. But as the chairman of the large competitor bank to the east of us commented, that he has some loans at 90 days, we were following everything was fine and then 90 days later, they will exhibit some problem.

So, we think these types will be minimal due to our analyses of the portfolio. We don't really know how long this will continue again, as Jerry said it's market driven, and when the market starts to improve, we think things will be on the upside. But in any event, we think it's very well that our exposure is contained, and it is going to be well managed.

Jerry Host

Well, let me add just to that little bit about our process. Since September, John Sumrall and his lending officers had been meeting no less than monthly, to review their entire portfolio each month, to determine whether or not there has been any deterioration in specific credits, to identify those, and to properly risk grade those.

In addition, Bob Hardison and I have been to Florida no less than 6 times, in working with those loan officers and with John, to clearly identify what we have, and to properly classify and deal with those issues. We've met with numerous borrowers to assess their individual situation as well as the market.

As, Bob mentioned it's a very fluid situation, things can change very quickly as sales are flowing off, and I want to assure you that we're doing everything we can to stay on top of it.

With that, Richard I'll turn it back over to you.

Richard Hickson

Thank you, Jerry, Bob. At this point, we would be happy to attempt to answer the questions that you might have.

Question-and-Answer Session

Question-and-Answer Session

Operator

Thank you Sir. (Operator Instructions). All right, we’ll take our first question from Brian Klock with KBW Investment Bank.

Brian Klock - KBW Investment Bank

Good morning.

Richard Hickson

Good morning. Brian, how are you?

Brian Klock - KBW Investment Bank

I am doing fine. Richard I guess I was wondering if you could give us a little bit more detail in those [forward] loans that we were at, at the end of the quarter?

Richard Hickson

Could you repeat that please?

Brian Klock - KBW Investment Bank

Can you give us little more color on the additions to NPL in the quarter, you mentioned that was for loan?

Richard Hickson

Yes, I am going to let Bob Hardison comment on that, but principally they related one way or the other to homebuilding.

Brian Klock - KBW Investment Bank

Okay,

Richard Hickson

Bob go ahead. .

Bob Hardison

Okay. The largest among those was a homebuilder. They were headquartered in Atlanta, then they had been in the Florida market for a number of years. In fact it was backed by our predecessor, the Emerald Coast Bank and we had very good success with him. And he built some spec houses, and then had one development loan with us, and we quite frankly were surprised, when he indicated to us that he would no longer or not going to face any of these banks interest since he has a large operation in Atlanta. We met with him, Richard was there. We met with him, and he outlined this reasons for doing what he did.

Richard Hickson

To protect his company, to save business.

Bob Hardison

Yes, it was in his view that it was in his best interest to stop paying the banks, and we didn’t maybe see it, but we didn’t particularly agree with him. But anyway, we felt at that point, that we had no choice but to put this loan on non-accrual. The company consolidated, it still has part of the equity. It made money for the first nine months, although the Florida operation lost money, he did make money in Atlanta. And we're formulating a workout strategy on this credit, and we don't know exactly, we will be aggressive, but there are number of factors we need to consider. The second loan--

Richard Hickson

We aggressively reserve for what you think any loss might occur.

Bob Hardison

We have reserved an adequate amount based on our premium factors.

Brian Klock - KBW Investment Bank

To get to the second one, how big is that loan and for what?

Richard Hickson

We don't know if we want to get that granular with you on it. It's broken into two or three projects, some of that is a little bit raw lands, some developed lots and some very attractive finished products. We think that finished product will move this spring, he's priced it to move.

Brian Klock - KBW Investment Bank

And I guess out of the two or three projects, how much is actually developed lots versus a finished product, and I guess if you would say you got landlocked loans?

Richard Hickson

You might break it in to halves.

Brian Klock - KBW Investment Bank

Okay.

Bob Hardison

The second larger loan, we put non-accrual, there was actually to an estate. A borrower who was a local real estate developer was killed on a plane crash about a year ago, and of course we filed a claim against the estate, and that process has moved very slowly. We expected it to have made more progress in resolving that issue with the estate. It has many experienced people in our judgment that are managing the affairs of that estate; it is causing that process to be protracted.

But we still believe that the assets, and we have financial statements of the estate which were reported. While we believe there is adequate asset protection for our loans, due to the length of time it is taking to resolve this issue, we are likely to put this loan on non-accrual at the end of the year. Feeling that this was a prudent thing to do, the loan is appropriately reserved, and again I think we will not only collect it, but given the timeframe we felt this was the appropriate action to take.

Richard Hickson

You will understand our stat sheet; that our loan passed due over 90 days, not on non- accrual, dropped about $5 million, that's the credit we referred to last quarter, and it's just moved from that category in to non-accrual Brian. The third loan is a much smaller loan that is a land carry loan to a professional athlete, and two other borrowers who are all local Florida Panhandle residents. This loan was originated a couple of years ago for lot development, and the market turned, and it was not developed, and they have since told us that they would be not able to keep up with the scheduled repayment plan. Although they offered some modified plan, we have not reached a resolution or an agreement at this point.

But, given the fact that they have indicated to us that they would modify their repayment plan, we elected to put this loan on non-accrual and we may have the credit to do. It is important to say we should have the credit [to work], but we are a long way from giving up on this. We made up an adequate reserve on this to protect, what we think the collateral value is worth even if the guarantors offer nothing. So, we think we are well protected on that. And the fourth loan is in the mix.

Bob Hardison

Now we are talking the Birmingham builder that we were having to --.

Richard Hickson

But we made a specific reserve about [perhaps] which we talked to you guys about last quarter. We did that reserve, we increased that reserve and in fact charged off part of that loan and that has moved towards resolution too.

Richard Hickson

That essentially is of any size, find there a few other loans like we had a house and [more colored] that's about $1 million that we've written down, any loss that might be in it, some other thing for $1 million or $1.5 million. So, when you look at it we are drilling through this thing. We are being very proactive in adjusting the one that we feel a worse case value is today on any of this developed lot problem that comes along. And it takes a lot of time to work through. Bob you discussed the difference between fore or full closure that we are seeing in places like Tennessee, Mississippi. You didn’t take [a lot] for you to understand, I think if you don’t.

Bob Hardison

Yeah, it really affects not only our workout strategy, but also the time it takes to get some of these matters resolved. In Florida, we have to go through what is termed a judicial foreclosure, which is a full closure that is supervised through the courts. It is a bit lengthy, time consuming, and a process we used to go through. It takes anywhere from four to six months once you start, whereas in Mississippi, Tennessee and Texas our other markets, the full closure process it normally will take four to six weeks. So it's much more expeditious in these other states, but in Florida it's just the way it is and something we have to deal with, but it makes the resolution of these matters a little more time consuming and we don’t if it will ever move as we would like one to.

Brian Klock - KBW Investment Bank

And okay. And then maybe just one last question you mentioned the --.

Richard Hickson

I want to comment on too, just got off of my mind. Also our home building is not at the second home. Some of our major customers for example at the Panama City market, are building moderate housing for the air force base, and they have been doing so, and that’s continuing to move ahead. And want to that comment? Excuse me, go ahead Brain and finish the question.

Brian Klock - KBW Investment Bank

And I guess that Bob mentioned that three of the four loans that were at its [NPLs], the fourth one you said was in Memphis? Is that right?

Richard Hickson

You want to cover that Memphis.

Bob Hardison

That was the Memphis that was smallest of those. I think we had included in the full one loan that was a not a new, non-accrual when I mentioned about the charge-offs. But the one in Memphis was to a cardiologist who had some health problems, who became disabled for a period of time, and we have his clinic finance, his residence, and we think he is back working now, and we think that will be resolved either through a recent payment plan or full closure on our collateral. Any exposure there would not be significant.

Richard Hickson

I think what you need to look at one other thing is that, we don’t have any ballooning, we are actually seeing a shrinkage of loans past due 90 days that are not all non-accrual. We are addressing those issues quickly and we put them on non-accrual before we get there if we think there's problem.

Brian Klock - KBW Investment Bank

Okay. I guess just one last question I guess related to Memphis. You did say that there is $1 million charge-off to a homebuilder there. If you can just talk about, I guess first how big is your Memphis loan portfolio, and maybe you can talk about the housing market in Memphis and what you're seeing there.

Bob Hardison

Our portfolio is not a real estate driven portfolio. To that strength, we've looked at every homebuilder there. This was the major homebuilder at Memphis; it's well publicized at public bank meetings. We are foreclosed in OREs and charged off about a $1 million and marching through it the whole process in OREs a couple of $3 million, about $2 million. This is not an issue with us. You should not have any concern with us with Memphis.

Brian Klock - KBW Investment Bank

Okay, great. Well I’ll let someone get on and ask questions. Thank you.

Bob Hardison

Thank you.

Operator

(Operator Instructions). We’ll next go to Gary Tenner with Suntrust Robinson.

Gary Tenner - Suntrust Robinson

Good morning guys.

Richard Hickson

Hi, Gary.

Gary Tenner with Suntrust Robinson

Just a question as it relates to balance sheet, you have mentioned your expectations from the margin, but I wonder if you could just update the run-off and the securities portfolio expected for the next couple of quarters, and your expectation at this point given where the yield curve is an opportunity to [buy] those run-offs?

Richard Hickson

I’ll make a comment, then I will turn it to Buddy Wood for a second. We’re budgeted runs off for about a $20 million - $25 million a month. We’re using our one to four portfolio, which is I think still in the range of $75800 million of very quality loans just care a letters of credit of Federal Home Loan Bank to continue our complex public funding. This is not a heavily funded bank of public bonds. So we see the ability to continue to do this as long as we need to. I will let Buddy Wood comment on our feelings about reinvestment today and the yield curve, Buddy.

Buddy Wood

Jerry, we continue to monitor very closely the investment opportunities that we have, given the combination of the preferred investments that we have, which are usually in some form of mortgage-backed, usually agency-backed mortgage product, where we have expectation that our yields need to be more attractive than it has been for us to start that reinvestment. Where, watch the shape of the yield curve, which continues to steepen in recent periods and may if that gives us some opportunity as the year goes on, as we match that, we are just not there yet. So, we still have $20 million a month that will mature during the year relate or below 4% and we will continue to be favorably deployed into our lending areas at the 250 basis points tick-up similar to what we've been able to do last the couple of years.

As you talked about the margin, you saw as Richard mentioned, we moved from borrowing funds in the form of CDs, which has traditionally been in much tighter to where other alternatives like the Federal Home Loan Bank has provided us, and the overnight funding markets. When they got to the point where we saw 40 basis points as the differential, we started making that shift. We continue to see that type of benefit for us, which is significant. We also took several steps during the year to improve our earnings asset ratio, and you will see almost $200 million of additional earnings assets, which contribute to our margin.

And the third is that as we see our less expensive opportunities in funding, we should be able to continue to have 30 to 40 basis points, by using the yield curve, which is an important part of our overall structure. From a liquidity point of view, we always monitor that we have enough half return funding mixed into the total, we've got significant amounts approaching $2 billion of available liquidity that we don't have on a regular basis within the company, a very strong pledging capability with the Home Loan Bank to discount with another places. So, if that is helpful I'd be glad to comment on other related balance sheet subject if you like.

Gary Tenner - Suntrust Robinson

That's fine. I appreciate it the color.

Operator

We will take our next question from Peyton Green with FTN Midwest Securities.

Peyton Green - FTN Midwest Securities

Hi, good morning, Richard.

Richard Hickson

Good morning, Green.

Peyton Green - FTN Midwest Securities

I was just wondered, if you can give a little color on where do you think we are in the (Inaudible) and do you think the 75 basis points move changes a lot or little or…

Richard Hickson

Hey I'm getting a little bit of static. Can you repeat that question, I apologize.

Peyton Green - FTN Midwest Securities

Yeah. No, I was wondered, if you could comment on what you think the effect of the 75 basis point cut is. Is it really going to be something that helps to carry those of your borrowers that are feeling stress, or does it prolong be inevitable?

Richard Hickson

I suspect you've asked that question patent to the number of people much bigger than I am in the last 24 hours. The point I may make, if my interest will were $1 million, now it's all be $900,000. That here goes is all the world is going to help and I think what we are dealing with in the state of Florida, politically, is we have to see some transparency in the global situation, there has to be a situation that will work through the national markets.

And then once people get there, they are going to say, well, I want to buy a new house or a new lot or a new whatever and more. I think that is going to take time, and these rate cuts and the lowering of rates, most of this is floating rate, that I suppose everyone has down there, and it's also holding down mortgage rates. So, I think overall it's going to improve the situation somewhat.

I don't think there is any kind of see to the situation down there except eventually, and we are seeing that now to an extent, people are going to say, there are going markets down there, and I don't believe our whole body more stops right now. I am going to buy something down here. Let me give you an example. Over the holidays, I mentioned to a major investor here in Jackson, that although days are going to get right down there. He called me yesterday, we want to go down there next week, we want to visit with your president. We want to understand more about this market down here.

There is a lot of discussion and a lot of interest. The people that we see, are hedge fund discounted borrow dealers. Their folks they want to buy one or two things down there, permanent or whatever. So, it's not turnaround yet, I think that's about how I see it. I think the point I would make on the Panhandle is that no one has really good transparency at this time down there.

[Gearing] was down there, the people all are bored -- don't run a small retail shop there are the major owners down there, and they have been in the big projects for 30 and 40 years. And they are seeing that this thing will begin to change this year, this spring and summer and fall and all we can do is look to them. They have been through this many times. And I think just a question of waiting to see as transparency comes up.

Peyton Green - FTN Midwest Securities

Okay. So, they do expect some improvement in the spring, summer selling season.

Richard Hickson

Jerry, the answer is they are, they are guarded with their optimism let me put it that way. The things that the lowering of the rate environment is going to help the barrowers, there is the hope that it will stimulate some additional investment in that market place, as we said all along it is the matter of time, that is the matter of when people start going and buying properties in that market place.

Jerry Host

We already borrower can get credit down.

Richard Hickson

We are seeing values drop, that has helped the situation. That is working to stimulate some activity. At this point it is still very slow though.

Peyton Green - FTN Midwest Securities

Okay, great. Thank you.

Operator

(Operator Instructions) We will go next to [Lexi Luzinski] with Sandler O'Neill.

Charlie Ernst - Sandler O'Neill

Hey, guys. This is actually Charlie Ernst. How are you there?

Richard Hickson

Hi, Charlie.

Charlie Ernst - Sandler O'Neill

Good. Can you actually walk through the part of portfolio again, it was little unclear to me. You started out by saying that was income producing property, and then it started to get a little bit confusing after that?

Bob Hardison

Charlie, one of the issues that we are having, and we actually called big people in your community, everybody is using the word homebuilder. We are not sure what that mean. I think everybody is using these terms to mean different things and we can categorize our portfolio for you to the extent that it is a driven by various sick homes and whatever. But if you said raw land, in terms all whether [King Carl] owns the raw land and it's part of 3% of their net worth, or whether or not it's only about someone, who is a strong builder or a weak builder or someone, who was doing it is a hobby or side lines. That is the complexity, and that's what concerns us because we've plenty of regulators and credit officers. So, I would not jump to any conclusions, I don't think it means a lot, but we can give you some of this breakdown.

Charlie Ernst - Sandler O'Neill

C,an you say, what I mean we understand that, but can you just say how much of your portfolios land, how much is construction?

Jerry Host

We can give you some broad ranges. Number one we're not talking about billions of dollars here. We're talking about in tens of millions. So, relative to -- I'm going to ask him to give some numbers, but I would not react if we said we had a $100 million of debt, unless you went through with me and you look at the quality and strength of the borrowers. Bob?

Bob Hardison

Yeah, I'll try to runback although if I wasn't clear, I apologize. What we're trying to do is to more or less frame the portfolio and get it down to a number that we think we need to work with. But starting at $700 million, we're saying was about third of that is income producing properties that is performing very well secured by…

Richard Hickson

Not even real estate.

Bob Hardison

Yeah.

Richard Hickson

Say maybe 500 is real estate related to active risks.

Bob Hardison

But also 100 is not C&I. There is consumer loans and some other things, but a lot of it is income property loans. I will concern, I mentioned was a residential build portfolio, we should represent about our core of the portfolio, and separate and apart from that we went through a detail analysis satisfying to portfolio, where we saw the problems by the potential might be for concern I got it down to about half of portfolio, once we take out the income property, take out consumer and some of the C&I get it down to a level, where we think there maybe the amount of money that might be at risk at some degree at some point, so…

Charlie Ernst - Sandler O'Neill

Are you saying that's the problem today or you think, there might be a problem?

Richard Hickson

No, but we try to -- we try to come away with what we think is not a problem and once you think where what the not a problem become with roughly half of the portfolio of the real estate. Yes, real estate it could be a problem.

Bob Hardison

It couldn't, we don’t think it could be a problem. The thing is all and all, it might be a problem, but until (inaudible) is extremely strong borrowers underneath.

Charlie Ernst - Sandler O'Neill

And your stock is down 6.5% today when the stocks overall are very strong.

Richard Hickson

I think we want that analysis this morning and yesterday, when you look at. And also the lacking back end what was it, it's drop down and was backup around I don’t know where it is at this time.

Charlie Ernst - Sandler O'Neill

Okay. It's down 6.5%, but so obviously the market things that you guys have a problem in this portfolio, and the stocks have been going down during the call, so my guess is that means if people you don't feel like the question have really been answered in terms of what the risks are in the portfolio? So, is there anything else that you can add to your color and commentary that would give people maybe a better sense?

Richard Hickson

I have read an awful lot of releases and listened to a lot of calls. The thing here is of being very thorough for [45] months.

Charlie Ernst - Sandler O'Neill

Okay. Yeah.

Richard Hickson

I don't believe I've heard other institutions any more granular than we have been, or any more positive than we have been or really any more negative if we have been. We can't sit here and tell you about transparency, but I've told you we proactively reserve and charge-off down there in the fourth quarter.

Charlie Ernst - Sandler O'Neill

Okay. And then...

Richard Hickson

We feel that we are on top of it.

Charlie Ernst - Sandler O'Neill

Okay.

Richard Hickson

And this is not a company to win in both and put together a bank that was called hold together down in Florida Panhandle and we know that market. We essentially know all of the borrowers, and everything we are lending it very well. So, I don't know what else I can tell you. We can't take our loan portfolio and go loan by loan with you.

Charlie Ernst - Sandler O'Neill

Okay. Can you just talk about given the stock is now where it is $19.5, where do you guys stand with regards to capital management? Do you think about buying back the stock?

Richard Hickson

We've not bought back any stocks as early in the second quarter. Our earnings are well over twice our dividend on a forward basis. We plan to build tangible equity through earnings. We are not anticipating with the runoff of one to fours, others. We don't see really heavy asset growth holistically for the year. And we see our tier 1 and tier 2 capital levels moving up quickly over the next two quarters.

Charlie Ernst - Sandler O'Neill

So, given that the stock is where it is, does that make you more or less inclined to buy back?

Richard Hickson

I don't have any comments on the buy back at this time. We have not been in the buy back mood. And since you say, since we started talking our stocks down 6%.We will have to figure that out and make a business decision.

Charlie Ernst - Sandler O'Neill

Okay. And lastly, Richard you guys have talked about expense initiatives in the recent past, where do you stand on those and what should we expect over there?

Richard Hickson

You should expect us to hold firm in our efficiency ratio. We met essentially 90% of our salary related expenses for last year. I think, you should see some continued revenue growth in the company and very well controlled expenses. We will not cut expenses absolutely on a dollar value above what they ran this year. But we will control them just as we always have traditionally strong. They are not getting ready and get out of hand or anything.

Charlie Ernst - Sandler O'Neill

Okay. So, you kind have said two conflicting things. You said, you would hold the efficiency ratio, but then you said, that you are going to see decent revenue growth with controlled expenses, which is acceptable?

Richard Hickson

No. I'm talking about 1% or 2% one way are the other.

Charlie Ernst - Sandler O'Neill

Okay.

Richard Hickson

That makes sense.

Charlie Ernst - Sandler O'Neill

Okay, all right. Thanks a lot.

Operator

And gentlemen, there appear to be no further questions. At this time, I'd like to turn the call back to Mr. Hickson for any additional or closing comments.

Richard Hickson

Thanks Lynn. Thank you for joining us. Again we are in $24 million for the quarter. We had good solid loan growth. We are proactively addressing the issues that exist in the Florida Panhandle with a very strong professional staff. We appreciate you joining us. We need you to reflect realistically on the earnings strength to this company, the diversification of its income both geographically and by line of business. And this is something that we have all the capability of handling and moving directly through. Thank you very much.

Operator

And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.

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