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Renasant Corporation (NASDAQ:RNST)

Q2 2008 Earnings Call

July 16, 2008 10:00 am ET

Executives

E. Robinson McGraw –President & Chief Executive Officer

Stuart R. Johnson – Chief Financial Officer

Analysts

Brian Klock – Keefe, Bruyette & Woods

Matt Olney – Stephens, Inc.

Andrew Stapp – B. Riley & Company, Inc.

Operator

Welcome to the second quarter 2008 Renasant Corporation earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Robinson McGraw, Chairman and Chief Executive Officer.

E. Robinson McGraw

Thank you for joining us for Renasant Corporation’s second quarter 2008 earnings conference call. With me today are Jim Gray, Chief Information Officer; Stuart Johnson, Chief Financial Officer; Harold Livingston, Chief Credit Officer; C.H. Springfield, Chief Credit Policy Officer; Mitch Waycaster, Chief Administrative Officer; Mark Williams, Credit Administration Officer; and Kevin Chapman, our Chief Accounting Officer.

Before we begin let me remind you that some of our comments during this call may be forward-looking statements which involve risk and uncertainty. A number of factors could cause actual results to differ materially from the anticipated results or other expectations expressed in forward-looking statements. Those factors include, but are not limited to, interest rate fluctuation, regulatory changes, portfolio performance and other factors discussed in our recent filings with the Securities & Exchange Commission. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes to future operating results over time.

Even as record high gas prices, slowing real estate markets, and lingering effects from the national credit issues continue to challenge the financial services and banking industry, we are pleased with our solid earnings results for the second quarter of 2008.

In looking at the real estate markets within our tri-state footprint, there has been a definite slow down, especially within the housing market area, in these economies. The Nashville Tennessean newspaper reported on July 10, 2008, weaker home sale prices in the Nashville area for June 2008 compared to June 2007, with the median price of a single-family home down 6% from a year ago. This is the sharpest one-month decline since 2000. The drop in unit sales volume was 28% for June 2008 compared to June 2007. Nevertheless, we believe that Nashville’s diverse economy and its lack of dependency on any one industry will help to insulate Nashville’s business and commercial market against the full impact of today’s real estate slow down.

The real estate market in our other key Tennessee market of Memphis, where we are the eighth largest bank in the Memphis region, based on deposits also remains slow. According to the Memphis Area Homes Sales Report 3,203 homes sold during the first quarter of 2008 as compared to 3,940 the same time last year. That represents a decrease of 18%. This area includes Shelby, Fayette, Tipton, Hardeman, Hardin, and McNairy counties in Tennessee.

While the Memphis and Nashville markets are both experiencing a substantial slow down in real estate and construction activities, we still believe our strategic locations and sound banking practices will grow our banking and financial services moving forward.

Moving to our Alabama markets, we have now successfully relocated our Alabama Executive Headquarters and our Corporate Mortgage Operations to the Park Place Tower in the downtown metro area of Birmingham. In addition, our watch branch has also moved to this downtown location. We believe that this strategic move will add to our presence in Birmingham, not only in physical location, but also as we now have signage on the top of the building that is seen within the city skyline. We believe that this move creates better continuity among our Alabama operations.

In Birmingham, total dollar sales of residential housing increased 11% from April to May of 2008. This is still 29% below the same period in 2007, according to Birmingham’s Multiple Listing Services Report. According to the report, it appears that we are beginning to see normal, seasonal, and month-to-month variations in sales, which MLS considers to be a healthy sign of a bottoming process.

The good news within the Birmingham market is that there was a 5.5% decline in active new listings and the average days on the market for a new home improved from 162 days to 143 days between April and May of this year.

In looking at our Huntsville, Alabama, market, Relocate America and Relocating Consumers’ Directory with community profiles for research and review information about the local housing market, the culture of each community activity and local businesses named Huntsville as a top ten place to live and relocate for 2008. In addition, according to a Huntsville/Madison County Economic Report for 2008, 18,000 of Alabama’s 28,000 new jobs gained over the past year were based in Huntsville. This represents 66% of the state’s total work force gains.

According to MLS real estate reports, May 2008 total dollar sales of residential housing in the Huntsville area were 18% higher than April 2008 but still 20% below last year’s level during this time period. The time for new homes listed on the market saw a reduction from 152 days to 142 days during this same time period.

In Mississippi, DeSoto continues to be the fastest growing county in Mississippi and one of the top forty fastest growing counties in the entire United States, according to the Census Bureau data. The total assessed value of property in DeSoto rose over 6.5% in the last twelve months, according to an article in The Commercial Appeal, despite the slow down in residential development. DeSoto County also has the fourth lowest unemployment rate among the 82 counties in the state, this according to the latest figures from the Mississippi Department of Employment Security.

According to data provided by the North Mississippi Board of Realtors, the number of new listings in the majority of our North Mississippi legacy markets decreased from 484 for the second quarter of 2007 to 385 during the second quarter of 2008.

In Oxford, the University of Mississippi recently announced the addition of a manufacturing-based school to help train workers for careers in automotive manufacturing. We believe that this should not only help supply Toyota with a ready-made work force but should help to recruit to new manufacturing industries within the area.

In our corporate headquarter city of Tupelo, we continue to enjoy strong market share. Toyota Motor Manufacturing North America recently announced that it will make the Prius hybrid instead of the previously announced SUV Highlander in the new $1.3 billion automotive manufacturing facility. While construction is well underway with this decision to make the Prius, operations are now expected to commence in late 2010 rather than the spring of the same year. We believe that the shift in production by Toyota is a positive change since consumer demand has been moving away from SUVs due to high gas prices. We do not expect this change to negatively impact the expected employment gains related to the plant or expected supplier employment gains in the local area and region.

Suppliers in North Mississippi include Toyota Boshoku, Toyota Auto Body, Toyota [Gosa], NuTech Corporation, PK U.S.A., and Arvin Sango. All have recently announced plant locations in close proximity to Tupelo that will bring approximately $375 million in capital investment and approximately 1,800 combined new jobs to the region.

Despite the change by Toyota, we believe that the construction and operation of the Toyota plant and other anticipated tier-one and tier two service providers enhances the future growth and prospects in our mature North Mississippi markets, and they especially help to insulate Tupelo and the Tupelo market from the full effect of possible down turns in the Mississippi and national economy.

Reflecting on our financial performance for the second quarter of 2008, net income was approximately $7.9 million, up over 12.5% compared to $7 million in the second quarter of 2007. This increase in net income is attributable to high levels of net interest income and non-interest income, offset partially by increase in non-interest expense in our provision for loan losses.

Basic and diluted earnings per share were $0.38 compared to basic EPS of $0.42 and diluted EPS of $0.41 for the second quarter of 2007. The decrease in basic and diluted earnings per share can be partially attributed to the shares of our common stock issued in connection with the Capital Bancorp acquisition, which was completed on July 1, 2007, and the related equity offering of our common stock during the same year.

The acquisition of Capital [Bancorp] on July 1, 2007, increased total assets by $614.8 million, total loans by $516 million and total deposits by $490 million. These amounts are not reflected in our financial statements as of June 30, 2007. Total assets at June 30, 2008, were $3.8 billion, representing a 4.7% increase from December 31, 2007, and a 35.5% increase since June 30, 2007.

Stockholders equity was $403.8 million at June 30, 2008, an increase of over 27.5% from $316 million during the same period of 2007 and an increase of nearly $400 million at December 31, 2007. Changes in stockholders equity reflects earnings, dividends paid, and changes in unrealized gains and losses on investment securities available for sale. At June 30, 2008, the company’s regulatory capital ratios remained above well-capitalized requirements.

Total loans were approximately $2.54 billion at the end of the second quarter of 2008, a decrease of about 1.8% from $2.6 billion December 31, 2007, and in increase of almost 29% from about $2 billion at June 30, 2007.

Total deposits were $2.46 billion at June 30, 2008, representing a 3.17% decrease from December 31, 200[7], and nearly 11% increase since June 30, 2007. Net interest margin declined to 2.43% for the second quarter of 2008 as compared to 3.66% for the second quarter of 2007.

On a linked quarter basis net interest margin was 3.43% for the second quarter of 2008 as compared to 3.52% for the first quarter of 2008. Excluding the impact of income on loans accounted for under AICPA Statement of Position 03-3, and non-accrual loans from net interest margin from both the second and first quarters of 2008, net interest margin, on a linked quarter basis, increased 1 basis point during the second quarter of 2008.

Although recent reductions in interest rates have caused our yields on earning assets to decrease, we have mitigated this effect by managing and re-pricing of our deposits and utilizing cheaper sources of alternative borrowings. Our focus on managing our funding costs is reflected by the fact that interest expense increased 4% during the second quarter of 2008 as compared to the second quarter of 2007, while the average balance of interest-bearing liabilities increased by approximately 40%.

Due to the current economic environment we, as with most financial institutions, continue to experience an increase in non-performing loans and net charge-offs during 2008. Annualized net charge-offs as a percentage of average loans were 43 basis points for the second quarter of 2008, up from 26 basis points for the first quarter and 6 basis points for the second quarter of 2007. Year-to-date annualized charge-offs as a percentage of average loans totaled 35 basis points. As discussed in previous conference calls, we generally target our net charge-offs to be 20 basis points of average loans. In spite of our first and second quarter charge-offs, we still anticipate net charge-offs as a percentage of average loans for 2008 to be within 10 basis points above this target.

Non-performing loans was $26.6 million at June 30, 2008, as compared to $16.2 million on December 31, 2007, and $7.5 million on June 30, 2007. We continue to actively monitor all relationships which we believe may be at risk for deterioration. Furthermore, we are persistently tracking our current non-performing loans and are seeking to bring these credits to resolution by identifying a stable payout stream, taking additional collateral moving towards foreclosure.

Through these efforts, since June 30, 2008, we have experienced a net reduction in non-performing loans of $2.7 million, of which none was a result of foreclosure. Management has evaluated all non-performing loans and believed all non-performing loans have been adequately reserved for in the allowance for loan losses at June 30, 2008.

Non-performing loans as a percentage of total loans were 1.05% on June 30, 2008, compared to 63 basis points on December 31, 2007, and 38 basis points on June 30, 2007. On a linked quarter basis, non-performing loans as a percentage of total loans increased 85 basis points for the first quarter of 2008 as compared to the 105 basis points that we mentioned for the second quarter of 2008.

We have $1.2 million in OREO under contract to be sold at a small gain within the next month. Subsequent to quarter end we reached an agreement with a borrower in our Memphis market to accept deeds in lieu on the property securing its relationship in the amount of approximately $7.8 million, which was not reflected as a non-performing loan on June 30, 2008. Based on current sales prices of the homes, we believe there is sufficient equity in the properties to minimize any future losses.

Although non-performing loans increased, the company’s total past due loans, which are loans past due 30 days or more, or overdue and non-accrual, as a percentage of total loans decreased from 2.66% during the first quarter of 2008 to 2.28% for the second quarter of 2008. This decrease in the past due percentage on a linked quarter basis was a direct result of our aggressive collection efforts throughout the quarter.

Another positive report related to past due loans is our HELOC portfolio, which reflects only 64 basis points of total loans over 30 days past due. This represents a decrease from 84 basis points on April 30, 2008.

The allowance for loan losses as a percentage of loans was 1.05% at June 30, 2008, as compared to 1.02% on December 31, 2007, and 1.04% on June 30, 2007. The provision for loan losses was $2.2 million for the second quarter of 2008 as compared to $800,000 for the same period in 2007.

Non-interest income increased 7.17% to $13.7 million for the second quarter of 2008 from $12.8 million from the second quarter of 2007. The growth in non-interest income was due to increases in fees from loans, deposits on our mortgage lending division. Other non-interest income decrease during the second quarter of 2008 compared to the first quarter of 2008 is due to the receipt of a $409,000 from the Visa initial public offering and $271,000 in contingency income related to our insurance division during the first quarter of 2008. Excluding these two items for the first quarter of 2008, non-interest income for the second quarter actually grew at an annualized rate of 18.6% as compared to the first quarter of 2008.

Non-interest expense was $27.7 million for the second quarter of 2008, up 18.5% compared to $23.3 million for the second quarter of 2007 and up 3% on a linked quarter basis.

In conclusion, let me re-emphasize that we remain ever vigilant in watching our credit relationships and we have implemented strategies to proactively manage the challenges presented by the current economic conditions. Although it appears that no one is immune from 2008’s challenging economic environment, we believe that we have the proper tools, insurgent credit culture, underwriting processes, and the people in place to aggressively work through any credit issues while minimizing any losses that may arise in the future.

Now, Jessica, I will turn it back over to you for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Brian Klock – Keefe, Bruyette & Woods.

Brian Klock – Keefe, Bruyette & Woods

Actually just a couple of quick questions related to the asset quality. I just wanted to make sure I understand this correctly. You said that post the end of the second quarter there was a $2.7 million reduction in non-performing loans.

E. Robinson McGraw

Yes, let me give you a little color on what has occurred between quarter, how non-performing loans changed. We had a little over $3.3 million of non-performing loans at the end of the first quarter that went into OREO. We had a renewal of $156,000 loan. About $1.8 million of non-performing loans in the first quarter paid off during the second quarter, and we had a charge-off of $300,000 of the non-performing loans during that quarter. We also added a total of $10.7 million of new loans to non-performers during the quarter. Actually, though, of that $10.7 million that we added, $2.8 million of that $10.7 million actually moved out and became performing loans after June 30 of this year.

Now a little color on your other real estate, at the end of the quarter we had $12.8 million. We actually at that time, on June 30, had seven properties under contract. That was $1.2 million of OREO book value. The sale price on that contract, under contract, was $1.234 million, so it was a slight gain in there. Of those three properties that already closed and have sold, we had a net gain of $31,000 on those that did close, at this point in time. We do anticipate the remaining four properties to in fact close this month.

In addition to that, we have an additional six properties under contract now that came under contract after the end of the month, at the end of the quarter end, OREO book value of $1.194 million and the sales price is $1.184 million, which will be a $10,000 loss on that property, so all that should occur between now and July 31.

We added about $8 million of OREO, as I mentioned during the call, after quarter end. This was actually a performing loan that was in an orderly liquidation. The opportunity came to go ahead and do that liquidation ourselves and they do deeds in lieu, gave this property to us. This property has actually been selling, we are in it for about 80%, they have been selling for pretty much what the value of the houses have been. So we do not anticipate any losses. I can’t say that we will have gains, but I think on netting out on the houses we shouldn’t have any losses.

About $2 million of that $8 million is in lots and we do anticipate probably keeping that in the ORE a little bit longer than the houses, but that was only a small portion in comparison to the whole and we see the houses continuing to move out as we go forward.

So that was the adjustment to ORE since the end of the quarter. And, again, I mentioned on the non-performing loans the two that moved out at a net of about $2.8 million.

Brian Klock – Keefe, Bruyette & Woods

Maybe we’ll just shift gears a little bit and talk about the $2.8 million charge-offs in the second quarter. Can you give us a little bit of color on what type of development that was and what the aggregate of those charge-offs were.

E. Robinson McGraw

The charge-offs for the quarter basically boiled down to about $3 million of charge-offs. We had recoveries of about $296, 000 during the quarter. Of the charge-offs, construction loans were about $598,000, commercial loans about $58,000, real estate one-to-four family mortgages was about $1.794 million, commercial mortgages about $597,000, and installment loans to individuals about $70,000.

Then we had some recoveries that netted that out a little bit and the recoveries were pretty much similar to what we talked about what the charge-offs were.

Now, part of that one-to-four family mortgage charge-off, of the $1,794 million, was the $300,000 we mentioned on the large home down in Destin that we had been talking about. It sold.

Brian Klock – Keefe, Bruyette & Woods

Let me just ask you two more quick questions. In the other non-interest expense during the second quarter, it was about $7.6 million, up about $700,000 from the first quarter. And Stuart, was there anything in there that was non-recurring, like a quarter number?

Stuart R. Johnson

In the second quarter we did have some ORE of about $160,000. As Robin had said, we believe we are pretty much at par with what’s in ORE right now. So most of the other increases, we will probably have until the third quarter. FDIC insurance, our credit runs out with that, so that will continue.

E. Robinson McGraw

Let me mention something on that ORE. We actually did a gift sale that offset the loss we had when that piece of property, which made up most of that $158,000 that the offsetting tax effect made it a net wash.

Brian Klock – Keefe, Bruyette & Woods

Then looking at that $7.6 million of other is that a good run rate to go forward with or will it come down in the third quarter?

Stuart R. Johnson

It can be down.

E. Robinson McGraw

We think it will be down slightly. Really, of those additional items the FDIC assessment kicked up about $168,000, which was, our credit running out with the FDIC. That was the reason for that. So that should be part of the run rate. But otherwise, the rest of them, I think, we shouldn’t see recurring.

Brian Klock – Keefe, Bruyette & Woods

In the loan portfolio overall loans were down $40 million linked quarter. I like the fact that you were able to bring down the construction exposure without really taking any significant charge-offs on it. And then you talk about the plans within that construction portfolio as far as run off and what we can expect to see, overall loan growth to offset that runoff in the construction portfolio, just a little color on that.

E. Robinson McGraw

Well, our pipeline is good, but again, we continue, this quarter we had about $143 million in new loans and ended up with a net decline. Including the net decline was about $9 million of student loans that were sold. We still had a decline in loans and that’s basically because we are not seeing draws, whether it be because of our efforts or the borrowers themselves, on construction lines, and we’re not actually making any, or many, of those types of loans at this point in time, so we should continue to see a decline in that area.

For example, of our current pipeline, about 66% of the loans would be classified as not being under the CRE guidelines, which is a reversal from what we’ve probably seen in the past. Mostly what we’re seeing occur are more owner-occupied real estate, things of that nature, that we have a pretty good comport level with going forward.

Operator

Your next question comes from Matt Olney – Stephens, Inc.

Matt Olney – Stephens, Inc.

You mentioned the $8 million in new OREO that has been put on since June 30. Can you give us an idea of the geography of that OREO?

E. Robinson McGraw

Yes, it was actually in DeSoto County, Mississippi. Of that we had, it was actually about a $12 million credit. Someone bought at par about $3.5 million of it, a substantial portion of it. What we ended up getting was actually the residential portion, the houses that were already completed, and about $2 million of actual real estate. We have about 29 houses that came in that transaction. These houses have actually been selling and I’m just going to give you an example because there are various prices, but you’re talking about maybe $150,000 house that we’re in at about $120,000. And they’ve been selling pretty much for that asking price in the past, $140,000-$150,000. And we have seen closings on those houses.

They were in an orderly liquidation and were doing a good job. This was a strong builder and they were not ahead of us. We felt like that it was the appropriate time, though, to go ahead and take deeds in lieu on this property and we are continuing with that orderly liquidation. And we anticipate being able to come out at a break-even basis on this, so we don’t anticipate any problems. It will just be that it will continue with that orderly liquidation. But it was in DeSoto County.

Matt Olney – Stephens, Inc.

But of that $8 million it sounds like $2.8 million are lots that could stay on OREO for a few quarters.

E. Robinson McGraw

I think its $2.1million and of that about $1 million is an office building and two shops, which we’ve had some interest in already. And the balance of it is about $4.3 million of it consists of 29 houses. And the lots are about $2.4 million, I think.

Matt Olney – Stephens, Inc.

It looked like you added about $100 million in securities since Q1. Can you give us an idea of what opportunities you’re seeing there and do you expect these opportunities to continue going forward?

Stuart R. Johnson

What we did in the quarter, we bought about $147 million of securities in that transaction we funded with laddered Federal Home Loan Bank money. Of that portfolio, about 62% came from mortgage-backs, about 25% from CMOs, 12% were PRETSLs, and about 1% were other, basically tax credits.

At that particular time we did it we were looking at the market and we were able to evaluate a spread with those particular securities and then we laddered our Federal Home Loan Bank to match the cash flows of those securities.

Matt Olney – Stephens, Inc.

So was that transaction big enough to affect the margin in Q2 or was it just too small to affect it?

Stuart R. Johnson

Yes, in the second quarter it was close to four basis points 5-basis points.

Matt Olney – Stephens, Inc.

Dilutive?

Stuart R. Johnson

No, accretive.

Matt Olney – Stephens, Inc.

So what is the outlook in terms of a similar strategy going forward in Q3 and Q4?

Stuart R. Johnson

We will not be doing any more of that strategy.

Matt Olney – Stephens, Inc.

Is that because of the loan growth outlook looks better than it did in Q2, the pipeline?

E. Robinson McGraw

The pipeline looks better. Again, it goes back, Matt, on pay downs, as to what we see there. And that’s been our biggest issue in the first two quarters, has been the issue of pay downs on the other lines, so as to what the net result will be. We do anticipate toward the end of the year that we will see some net growth in the loan portfolios but at this stage we are still evaluating.

Operator

Your last question comes from Andrew Stapp – B. Riley & Company, Inc.

Andrew Stapp – B. Riley & Company, Inc.

In the securities you purchased, did I hear you say there’s $12 million in PRETSLs?

Stuart R. Johnson

Yes. About 12%, which would be about $17 million in PRETSLs?

Andrew Stapp – B. Riley & Company, Inc.

Are you talking PRETSLs, the FTN ABW CDOs?

Stuart R. Johnson

Yes, these are pooled trust preferreds.

Andrew Stapp – B. Riley & Company, Inc.

And which trusts were they? AAA trusts?

Stuart R. Johnson

Yes.

Andrew Stapp – B. Riley & Company, Inc.

And what other CDOs do you have on your books?

Stuart R. Johnson

We don’t really have any. Are you saying as far as trust preferreds or CDOs, because we’ve really stayed away from CDOs? We have some trust preferreds that are with Bancorp South, we have one that they have a private issue with trust preferreds.

Andrew Stapp – B. Riley & Company, Inc.

These are single-issuer CDOs?

Stuart R. Johnson

No, these right here are pooled. What we bought are pooled.

Andrew Stapp – B. Riley & Company, Inc.

So they are CDOs, right?

Stuart R. Johnson

Well, yes, from that standpoint.

Andrew Stapp – B. Riley & Company, Inc.

I many have missed this, but what was the impact of SOP-03-3 on your net interest margin in the second quarter?

E. Robinson McGraw

We can give you a pretty good breakdown on that, Andy. For the last several quarters, on a breakdown of what’s happened. Looking at a quarter-by-quarter basis, in the third quarter of 2007 our margin was 352, and we had no 03-3 and had no impact from non-accrual loans. If you look at taking out the impact of 03-3 and non-accrual loans on quarters four, one and two, you would see quarter 7 being about a 349. Net 346 in quarter one and a 347 in quarter two. So we actually, on a core basis, show an uptick of about one basis point over this quarter. But we had that 0 in 03-3 this quarter. It was very minimal. If it was a percentage point it would be 0%.

Andrew Stapp – B. Riley & Company, Inc.

And do you hold any Freddie Mac or Fannie Mae securities?

E. Robinson McGraw

No. Are you talking about the equity? No.

Andrew Stapp – B. Riley & Company, Inc.

Equity, preferred, whatever.

E. Robinson McGraw

No.

Andrew Stapp – B. Riley & Company, Inc.

Do you have the dollar amount of development loans at June 30? Maybe you could also tell me how that compared to the end of the first quarter.

Stuart R. Johnson

Are you talking all construction and land development or just development?

Andrew Stapp – B. Riley & Company, Inc.

You disclosed the construction in your earnings release but I think the development loans are in CRE. If you could give me all construction and development loans, that would be fine.

E. Robinson McGraw

Development loans would be $383 million.

Andrew Stapp – B. Riley & Company, Inc.

And how did that compare, I don’t recall where they were at the end of [Q1].

E. Robinson McGraw

It would be flat, Andy.

Andrew Stapp – B. Riley & Company, Inc.

And your reserve power of MPAs was down late quarter. Is that just a reflection of your comments regarding the resolution of some of these MPAs, as well your total non-current loans going down? Is that basically it or anything else?

E. Robinson McGraw

As we look at what our reserve is, taking into account the remaining 03-3 that we have on the books, that would increase our reserve up to a 113, which is not reflected in there. Based on what we see in the way of charge-offs, recoveries, and provisions in the upcoming quarter, we should see that coverage amount going up. Just based on what we see and anticipate happening.

Andy, let me go back and remind you and everyone that we are very aggressive in our risk rating system. In addition to that, 22% of our reserve is based on qualitative factors. We have qualitative factors for such things as the oil situation, real estate crisis, the fact that we are in newer markets, and the fact that we have made larger loans over the past couple of years than we have made in the past. But that is nearly $6 million of our total reserve is based on those qualitative factors, $5.8+ million. And again, that is an increasing number that we do. And this is over and above the specific reserve that we have for the loans in our portfolio which are, in fact, risk rated rather aggressively. So we feel very, very comfortable with where we are from that standpoint.

Andrew Stapp – B. Riley & Company, Inc.

How do you treat interest reserves on your construction involvement loans? Do you capitalize interest until the developers’ cash flow; do you make them pay periodically interest? Could you just give me some color on that?

Stuart R. Johnson

If it’s a commercial development it may include interest in the cost figures that are part of the you determine what you’re going to loan against. If it’s any residential, they have to pay the interest, usually either monthly or quarterly.

Operator

There are no further questions.

E. Robinson McGraw

We appreciate everybody joining us today and look forward to you joining us again on our third quarter conference call.

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