Jan 23, 2009
Executives
Michael Lindsey – [Investor Relations] Aubrey Patterson – Chief Executive Officer Gregg Cowsert - Chief Lending Officer James Threadgill - Vice President Financial Services Nash Allen – Chief Financial Officer James Kelley – President and Chief Operating Officer
Analysts
John Pancari - JPMorgan Charles Ernst - Sandler O'Neill Asset Management Brian Klock - KBW Analyst for Jennifer Demba - SunTrust Matt Olney – Stephens Inc. Dave Bishop - Stifel Nicolaus Joseph Stieven – Stieven Capital Advisors
Operator
Welcome to the BancorpSouth fourth quarter 2008 analysts conference call. (Operator Instructions) Now, I would like to turn the conference over to Michael Lindsey.
Michael Lindsey
Good morning everyone and thank you. As is our normal practice we have with us, BancorpSouth's Chairman and CEO, Aubrey Patterson; Jim Kelly, President and Chief Operating Officer; Nash Allen, Chief Financial Officer; Gregg Cowsert, Chief Lending Officer; and James Threadgill, Vice Chairman of Financial Services.
Before we begin, let me remind you, during today's call, representatives of BancorpSouth may make certain forward-looking statements regarding future results or future financial performance of BancorpSouth. We caution you that actual results could differ materially from those indicated in these forward-looking statements, due to a variety of factors and/or risks.
Information concerning certain of these factors can be found in BancorpSouth's Annual Report on our Form 10-K for the year ended December 31, 2007. During the call certain non-GAAP financial measures may be discussed regarding BancorpSouth's performance.
If so, you can find a reconciliation of these measures to the GAAP financial measures on the Investor Relations portion of our website at www.bancorpsouth.com. Now our Chairman and CEO, Aubrey Patterson.
Aubrey Patterson
Welcome to BancorpSouth's conference call for the fourth quarter of 2008 and thank you all for being with us today. As usual, I will provide a brief overview of our fourth quarter financial results and then other members of the senior management team and I will address and questions you have.
I will begin this morning by saying that BancorpSouth's core operating performance for the fourth quarter and for all of 2008 validates our strong long-term commitment to conservative management principles. In a quarter in which the economic downturn had a more pronounced impact on our overall results, BancorpSouth still produced solidly profitable operations, continued growth in the loan portfolio, improvement in the net interest margin, controlled expansion of the balance sheet, and double-digit growth in key non-interest revenue streams.
In addition, even though we declined to participate in the Capital Purchase Program under TARP during the quarter, our capital structure at the end of 2008 strengthened compared to the end of 2007 and we continue to maintain ample sources of liquidity. Our credit quality remains strong at the end of 2008.
We had a moderate and manageable increase in net charge-offs as a percent of net loans compared with the third quarter, while non-performing loans as a percent of net loans actually improved somewhat from the third quarter. We increased our provision for credit losses for the fourth quarter and we are well reserved against anticipated losses as we enter 2009.
BancorpSouth had net income of $16.8 million, or $0.20 per diluted share, for the quarter. Included in these results were non-cash charges that were driven by the downturn in the national economy.
These totaled $15.3 million after tax, or $0.18 per diluted share. About two-thirds of this total reflected a $16.3 million pre-tax write-down of our mortgage-servicing asset.
The remaining one-third reflected an $8.6 million pre-tax write-down of our investment in pooled trust preferred securities. After this write-down, the remaining balance of these investment securities was $2.4 million, although they remain current on all interest payments.
Before moving to a more detailed discussion of our results, there are two final points I will emphasize about BancorpSouth's performance for the fourth quarter. First, as we have told you before, BancorpSouth is not immune to the effects of the current economic environment.
Much of the ultimate impact of the downturn on our results will obviously depend on its severity and duration. Within this context, however, BancorpSouth is continuing to demonstrate its strength and stability at a time of tremendous upheaval in the financial services industry.
The strength of our credit quality and our capital structure, our conservative asset liability and management strategies, our revenue diversification, and our thoughtful expansion strategies all reflect our commitment to operating BancorpSouth to achieve long-term growth objectives, a commitment that is supported by the direct experience of our senior management team and Board through many economic cycles. As a result, the second point to emphasize is that we believe BancorpSouth is well positioned on an absolute basis, and better positioned than most of our peers, not only to withstand the challenges of this downturn, but also to take advantage of the inevitable opportunities to expand market share that arise at this stage of the economic cycle.
Turning now to a more detailed look at our operating results, we produce a 1.5% increase in net interest revenue for the fourth quarter. This increase was consistent with asset growth of the third quarter of 1.6% and was produced primarily through similar methods.
In a declining interest rate environment we again benefited from a greater decline in interest expense than in interest revenue. We somewhat offset the impact of falling interest rates on interest revenue through a solid 5.6% increase in net loans and leases at December 31, 2008, from the end of 2007.
We continued to see moderate demand for high-quality loans across our eight-state franchise during the fourth quarter, as net loans increased at a 4.1% annualized rate from the end of the third quarter. Nevertheless, we did experience a comparable quarter decline in average asset yield of 129 basis points.
On the other hand, beneficially, the average interest rate paid on interest-bearing liabilities declined 152 basis points for the fourth quarter. Part of this decline in average interest rates paid reflected the continuation of our conservative pricing of time deposits during a period when the ongoing liquidity needs of many other banks increased the upward pressure on these interest rates.
By year-end 2008 this strategy had resulted in a 23.2% decrease in other time deposits versus the end of 2007. Over the same period, our savings deposits declined just 2.9%, which is not unusual in a low-interest rate environment and which reflects our clear commitment to maintaining a strong relationship with our core deposit customers.
Offsetting most of the dollar decline in time deposits, our low-cost demand deposits increased 14% during 2008. Furthermore, we again increased our short-term borrowings, which rose 25.1% during 2008 and 11.3% during the fourth quarter.
With the sharp declines in interest rates, our interest expense related to these borrowings declined substantially during the fourth quarter. Importantly, we continue to have significant capacity for additional short-term borrowings from the Federal Home Loan Bank, the Federal Reserve discount window, and other bank lines, providing us ample sources of liquidity.
The combination of these asset liability management strategies, with our loan growth for the fourth quarter, produced an increase in our net interest margin for the quarter to 3.74%. This increase contributed to a net interest margin for all of 2008 of 3.75% compared with 3.68% for the prior year, producing our highest margin in five years.
In my opening remarks I referenced BancorpSouth's strong credit quality, which has long been a defining characteristic of our company. At the end of 2008 our measures of credit quality are strong, both on an absolute basis and relative to industry averages.
It is, nevertheless, clear that the last two quarters of deteriorating economic conditions have had an impact on these measures compared with unsustainably strong levels last year. On a sequential quarter basis non-performing loans to net loans at the end of the fourth quarter actually improved slightly to 0.64% from 0.65% for the third quarter.
Total non-performing assets at the end of the fourth quarter increased 13.6% sequentially as a result of foreclosures that increased other real estate owned. Annualized net charge-offs as a percentage of average loans increased 12 basis points to 0.57% for the fourth quarter, annualized, compared with the third quarter.
Let me repeat, for those of you new to BancorpSouth, that our conservative credit policies lead up to begin tightening our real estate lending standards in late 2006, limiting our exposure to the non-owner occupied commercial market. In addition, these credit policies resulted in our having virtually zero exposure to the credit issues affecting subprime residential mortgages.
We are also committed to maintaining an allowance for credit losses that is fully sufficient to cover expected losses. Our fourth quarter provision for credit losses increased 9.3% from the third quarter to $17.8 million, well above net charge-offs for the quarter of $13.8 million.
Our allowance for credit losses at the end of 2008 increased to $132.8 million, or 1.37% of net loans, which is 2.1x our non-performing loans at year-end and 2.4x annualized net charge-offs for the fourth quarter. As always, during 2009 we will continue to focus on the early identification and resolution of any emerging credit issues.
Let’s now turn to our non-interest revenues, which continue to provide significant strength and stability to our operations. As described in my comments earlier, our non-interest revenue performance for the quarter was affected by the nearly $25.0 million in non-cash pre-tax charges associated with the decline in value of the mortgage servicing asset for the quarter and the write-down of other than temporary impairment of our pooled trust preferred securities.
While these write-downs are fully in line with current account standards, we note that they are primarily driven by current market conditions, creating asset values that we believe are obviously conservative. The mortgage-servicing asset is valued at $25.0 million at year-end 2008, which equals 0.82% of the unpaid principal balance of the loans being serviced, down from a valuation of 1.15% at year-end 2007.
As interest rates return to more normal levels in the future, we would expect that the MSR valuation would experience significant recovery of value. The largest component of non-interest revenue continues to be insurance commission revenue, which increased 15.9% for the fourth quarter of 2008 from the fourth quarter of 2007.
This increase was the fourth consecutive double-digit increase in insurance commission revenue, following the acquisition of an insurance agency in the third quarter of 2007 and two additional acquisitions in the first quarter of 2008. Insurance commission revenue declined on a sequential-quarter basis primarily due to seasonal trends.
With the substantial decline in interest rates in the second half of 2008 we also produced our second consecutive quarter of 20% or better growth in mortgage lending revenue, excluding the impact of changes in the MSR valuation. Our mortgage lending operations brought a significant number of new mortgage customers to BancorpSouth in the second half of 2008.
Since approximately 40% of our mortgage customers make their monthly payments in person in our bank offices, we see first-hand the value these services provide to our community bank operations. We know they strengthen our existing customer relationships and for new customers, provide BancorpSouth a great opportunity to provide additional products and services.
With mortgage interest rates at historically low levels, we believe this business represents a continuing growth opportunity in 2009. To further mitigate the impact of the economic environment BancorpSouth is taking appropriate steps to control and reduce non-interest expense.
Despite two insurance agency acquisitions in the first quarter of 2008, as well as the opening of 16 full-service branch bank offices during 2008, non-interest expense increased just 0.08% for the fourth quarter of 2008 from the fourth quarter of 2007 and declined 4.3% from the third quarter. We intend to continue focusing rigorously during 2009 on the control and reduction of non-interest expenses.
During the fourth quarter our Board of Directors and senior management team, after careful consideration, decided that BancorpSouth would not participate in the federal government’s funding program under TARP. Instead, we will continue to rely on our conservative capital management plan, confident that our business model will continue to generate the capital we require to meet our growth objectives.
In this regard, our shareholders’ equity increased 3.6% at year-end 2008 from the end of 2007. With controlled growth and total assets of 2.2% during the year, the company’s equity to asset ratio improved to 9.20% at year-end from 9.07% at the end of 2007.
Our comparable quarter equity to asset ratio has now improved for 10 consecutive quarters consistent with when we began to tighten our lending standards in late 2006. On a sequential-quarterly basis equity to assets declined from 9.34% at the end of the third quarter.
BancorpSouth's ratio of tangible equity to assets was 7.15% at the end of 2008 compared to 7.09% and 7.25% at the end of 2007 and the third quarter of 2008 respectively. We remain a well-capitalized bank holding company as defined by federal regulations, which is the highest classification.
To be defined as well capitalized it requires tier-1 risk-based capital of 6.0% and total risk-based capital of 10%. At the end of the fourth quarter our tier-1 capital was 10.79% and our total capital was 12.04%.
In conclusion, BancorpSouth has continued to perform well during a period of national economic turmoil. Given the significant potential for a prolonged or deep downturn in the economy, we are property cautious in our outlook and we are taking appropriate steps to manage our growth, strengthen capital, control, and reduce expenses, and identify and promptly resolve any emerging credit issues.
We entered 2009 confident of our long-term growth potential based on the fundamental strengths of BancorpSouth. We are a well-capitalized, conservatively operated company.
We are strategically well positioned geographically across our markets, as well as in our diversified revenue streams. Both our growth strategies and our management team have proven successful through many economic cycles.
We believe BancorpSouth is prepared to effectively manage the challenges we will face in 2009 while continuing to build long-term growth in shareholder value. Thank you for being with us today and we would now be happy to answer any questions.
Operator
(Operator Instructions) Your first question comes from John Pancari – JPMorgan.
John Pancari - JPMorgan
I wanted to see if you can comment a little bit on the markets that will give you the most concern out of your foot print right now, in terms of where you are seeing some real deterioration in credit trends. And also, similarly, can you comment on which portfolios you would say at this point give you the greatest concern in terms of credit pressure.
Aubrey Patterson
As I pointed out, non-performing loans are actually doing quite well, quarter-to-quarter, sequentially. But obviously real estate acquisition development and construction lending in the more urban markets would be the areas that we would have seen over the balance of the year suffer the most deterioration.
No one particular market would stand out in that regard because in those where that might have otherwise been the case, those are also the ones where for almost two years now we have been pulling back our exposure.
Gregg Cowsert
The areas, as Aubrey said, that are causing us the most concern over this period and what we are anticipating going forward, is continued and further weakness in the residential acquisition development and construction market and that continues to be the case and that’s what we are anticipating and preparing for going forward.
John Pancari - JPMorgan
Can you remind me of the size of that portfolio, as well as if you happen to have the refreshed LTVs.
Gregg Cowsert
The residential acquisition and development portfolio currently stands at $600.926 million. To give you some ideas as to how that has performed during the year, we currently have non-performing loans in that area of 2.88%.
Our year-to-date charge-offs in that sector, or in that portfolio, are $6.2 million and that amounts to 1.03% of the outstandings.
John Pancari - JPMorgan
Do you happen to have LTVs for that book?
Gregg Cowsert
The LTVs for that are running less than 80%. Mid-seventies.
Gregg Cowsert
And that is refreshed?
Gregg Cowsert
Yes.
John Pancari - JPMorgan
Do you also have the total 30- to 90-day delinquency rate for the company?
Gregg Cowsert
I can tell you that year end our 30-day past dues were a little less than 1%. Our 90-days were running 0.48%.
John Pancari - JPMorgan
And that first one was the 30-day+, right?
Gregg Cowsert
Right.
Operator
Your next question comes from Charles Ernst - Sandler O'Neill Asset Management.
Charles Ernst - Sandler O'Neill Asset Management
Can you talk about the salary line real quick and just give a little color as to why it came down so much in the quarter?
Aubrey Patterson
It’s a combination of a number of factors. We instituted a hiring freeze two or three months ago that is obviously having a gradual but effective reduction in that.
We have capped salary increase for hourly employees at extremely low levels for the year and we have frozen executive pay for at least the first half of the year. So we should expect to see those factors, which we don’t consider to be extraordinary but meaningful and appropriate, continue to add some positive direction to that.
We did have in the fourth quarter, and I don’t have the absolute number on this, we did have a reversal of some prior accrual for incentive payments based on annual performance in 2008 so that would have had the effect of partially reducing those numbers as well.
Charles Ernst - Sandler O'Neill Asset Management
It’s probably fair to say that was at least a couple of million bucks, the accrual reversal?
Aubrey Patterson
Yes, that’s reasonable.
Charles Ernst - Sandler O'Neill Asset Management
I’m looking at the OCI mark in the bond portfolio and noticing that it continues to go down. Can you talk about what is driving that within the bond portfolio?
I had it at negative $27.0 million in the quarter. Is there a CMO portfolio of size?
Aubrey Patterson
No, we don’t have anything like that. Our bond average in there is less than 2 ½ years; it’s very short.
It’s just overall market conditions.
Charles Ernst - Sandler O'Neill Asset Management
But it seems like Treasuries, MBS, stuff like that, agency MBS, probably gained value in the quarter, so is there another part of the portfolio?
Aubrey Patterson
There was a significant reduction in pension valuation.
Charles Ernst - Sandler O'Neill Asset Management
And that would have gone through OCI?
Aubrey Patterson
That would have gone through other comprehensive income, that’s correct. I think the net after-tax effect of that was approximately $26.0 million.
Charles Ernst - Sandler O'Neill Asset Management
And can you just add a little bit of color to the insurance line item, what you’re seeing in your insurance business?
Aubrey Patterson
I made the comment that we had had a consistent run of double-digit increases in our insurance commission revenues. We did have a seasonal effect in the fourth quarter which tends to happen on a pretty much regularly annual basis.
James Threadgill, our Vice Chairman for Service Lines of Business, is here and he can comment more specifically.
Charles Ernst - Sandler O'Neill Asset Management
I guess what I’m asking is it seems like the decline was greater than your normal seasonal decline and was just wondering if you could add a little more color there.
James Threadgill
I will tell you, we had about a 1% if you remove the acquisition in the fourth quarter. For the year our organic growth was about 2% from our core agencies.
The premiums are coming down a little bit. We are still in somewhat of a soft market and that does result in a reduction in commissions.
We are in the process of consolidating all of our agencies under one operating system, which we think is going to enhance our ability to service our customers, as well as provide a lot of efficiencies, eliminate a lot of duplication of certain areas. So right now we are kind of focusing on the efficiency aspect of those agencies and obviously continuing to try to grow revenues at the same time.
Charles Ernst - Sandler O'Neill Asset Management
The tax rate seems a little light in the quarter. Is that just year-end true-ups or is there anything else going on there?
Aubrey Patterson
I think it relates to some of the charge-downs we also had in the quarter, which are a little bit heavier than what we’ve seen in prior quarters in the reduction of taxable income is the main thing.
Operator
Your next question comes from Brian Klock – KBW.
Brian Klock - KBW
Following up on Charlie’s question would be the FAS 87 pension adjustment to OCI. Is that going to result in higher personnel expense as you wash through your pension adjustments?
So can we expect higher expenses?
Aubrey Patterson
I don’t think you’re going to see higher expenses. I think you may see more of a continuation of the same.
We have a pension plan that has essentially been frozen but the assets in the plan will have to remain at a constant level in order to meet the pension liability. We may have to continue to make contributions and recognize expense relative to that plan as we go forward.
A higher level than what we had hoped but I don’t think it’s going to be significant.
Brian Klock - KBW
The residential A&D portfolio at the end of the year was how much? It was $600.0 million?
Gregg Cowsert
Yes, residential A&D.
Brian Klock - KBW
So that looks like that was up from $553.0 million at the end of the linked quarter.
Gregg Cowsert
That’s correct.
Brian Klock - KBW
Is that sort of just draws to finish up the construction in process?
Aubrey Patterson
That would be correct. We’re not looking at virtually any new construction acquisition development loans at this point.
Brian Klock - KBW
Obviously there is the movement for the non-performing loans into ORE. At the end of the third quarter you had $25.0 million of NPL in that total real estate construction and A&D portfolio.
Can you update us on where the NPLs in that portfolio stand at the end of the year?
Aubrey Patterson
In the construction and acquisition development portfolio we had total non-performing loans at $24.8 million, which is 1.47% of that portfolio.
Brian Klock - KBW
How much of that is non-accrual versus 90 days past due?
Aubrey Patterson
Non-accruals are $12.3 million, 90 days past due are $12.4 million.
Brian Klock - KBW
What were the big components of the delta, what moved out of NPL into ORE? What collateral type was that?
Aubrey Patterson
That would be commercial real estate. It would be construction and development.
That’s primarily what drove it.
Brian Klock - KBW
Looking at your C&I portfolio and the commercial real estate portfolio, it looks like those portfolios are still performing pretty well. Is there anything in the pipeline or anything in your watch list that you are seeing that contagion may be spreading?
In any of your markets in the commercial book?
Aubrey Patterson
No, we are staying on top of that and staying close to it. But like I said before, at this point it’s primarily in the residential construction and development.
Our commercial real estate portfolio is holding up very well.
Brian Klock - KBW
Within fee income the other operating fee income is up about $2.0 million versus the linked quarter. Is there anything seasonally in there?
The other non-interest revenues, the last other line, was $11.4 million in the fourth quarter versus $9.6 million in September.
Nash Allen
I’m not sure there are any seasonal things in there. In the fourth quarter we took some security gains but outside of that I’m not aware of anything.
Brian Klock - KBW
The other than temporary impairment charge you did take on the pool trust preferreds. What rate of tranche were those in?
Nash Allen
You are asking me a question I don’t know. They originally were rated A2.
One was rated A. There are two different tranches.
Brian Klock - KBW
Within the change of fair value, do you have the component of how much of that was normal, the K versus the change in fair value?
Nash Allen
On mortgage lending service?
Brian Klock - KBW
The change in the MSR.
Nash Allen
Pay-downs were $1.3 million during the quarter. The market adjustment was $15.0 million, if you rounded it.
Operator
Your next question comes from Analyst for Jennifer Demba – SunTrust.
Analyst for Jennifer Demba - SunTrust
To follow up on the residential ADC book, you had mentioned that maybe some of the more urban markets are providing a bit of stress. Do you have any comments or color on how St.
Louis, Birmingham, and Memphis are performing, within the residential ADC book?
Aubrey Patterson
In my comment my reference was broadly to the more metropolitan markets but that response that I made was by design because there is no single hot spot that I would particularly want to point out. One of the things that continues to be a positive attribute for our company is our diversification of risk, both geographic- and sector-wise and this is a pretty good example of that.
Obviously the more difficult markets are the more urban markets but I would not identify a single one or two of those as being particularly problematic for us at this time.
Analyst for Jennifer Demba - SunTrust
Do you have any thoughts or updates on the Toyota plant in Tupelo and if that has any impact on any kind of credits going forward, if any borrowers have potentially jumped the gun and started up any operations or anything, before maybe some plant slowdown or halting.
Aubrey Patterson
You opened the door for a potentially light-hearted comment, or I guess light-hearted in the sense that with the environmental policies that are being indicated by the new national administration with respect to offshore drilling, we are probably going to see fuel prices go back up more rapidly than they would have otherwise. We know, inevitably, they are going to go back up.
Toyota is positioned to move forward on pretty short notice with their new plant, which for those of you who don’t know, it is designated to product the new model Prius. It is speculative because Toyota is going to move at their own pace.
They have committed $300.0 million to what’s in the ground now. But our best guess is we are probably 18 to 24 months from seeing them roll of the line.
The other supplier companies are pretty much wedded to that same timetable and other industries that would be peripherally affected will be affected along the way, too. So really there is a delay for this particular three-county area of what is an eight-state bank.
It’s not to understate its importance, it is an important new asset for us. It will be there in the long run.
Analyst for Jennifer Demba - SunTrust
You had talked about mortgage banking income doing okay and you are getting some new customers. How much of new mortgage production these days is re-fi versus new purchase money?
Aubrey Patterson
That needs to be broken down into a couple of things because there is refinancing of our existing loans and there are refinancing opportunity from competitors. I am going to pass this question to James Threadgill to be more specific about, but we see this as a great opportunity for us.
Obviously the model calculation of current market value of the MSRs is pretty dramatic in its immediate impact but as you well know, it also is cyclical and we have every reason to expect, as I said earlier, that when rates rise to more normal levels we will recover a significant portion of that value, in any case. But what is also very significant, and James is prepared to comment on this, is the fact that a number of our previous competitors who were more national in scope, especially those based on the West Coast, who were highly visible in our markets, are less competitive and our origination opportunities are greatly enhanced.
And we see this as a tremendous expansion opportunity for the front end of our mortgage business.
James Threadgill
Of the $961.0 million of mortgage loan originations that we did in 2008, 44% were refinance, 56% were purchase. It’s interesting to note, too, I think Aubrey mentioned it in his comments, in the month of December 42% of our mortgage loan customers made their payment at the teller window.
I think that indicates that we have a strong relationship with our mortgage loan customers and as a result, when they do look at interest rates and see that they are coming down and they look for refinance opportunities, they typically call us as opposed to one of our competitors.
Analyst for Jennifer Demba - SunTrust
So the numbers, 44% re-fi, 56% purchase, but that was over all of 2008. What about most recently?
December? And any comments on January trends.
James Threadgill
I don’t have that number. I will tell you that the volume has certainly picked up.
We did, in the month of December, $110.0 million in originations. Of that $960.0 million, $110.0 million was in December and we will exceed that amount in January.
Aubrey Patterson
My point earlier, and I’m not sure we have the precise number, but a lot of the refinancing we are doing in this enhanced refinancing market, are refinancing of other banks’ and other mortgage banks’ existing loans, not our own.
James Threadgill
Our portfolio in the beginning of 2008 was at $2.967 billion. At the end of 2008 it was $3.161 billion.
So that’s about a $200.0 million increase in outstandings, even though it declined in value, our outstanding increased by about $200.0 million for the year.
Operator
Your next question comes from Matt Olney – Stephens Inc.
Matt Olney – Stephens Inc.
I wanted to jump back on the pooled trust preferred securities. What was the original value of that when you purchased it?
Nash Allen
$11.0 million.
Matt Olney – Stephens Inc.
So you had not written off anything until Q4, is that correct?
Nash Allen
That’s correct.
Matt Olney – Stephens Inc.
Jumping back on insurance, is there any reason to believe we will see some sizeable contingency payments in the first quarter?
James Threadgill
We, historically, have received contingency payments in the first three months of the year and fully expect that to continue.
Operator
Your next question comes from Dave Bishop - Stifel Nicolaus.
Dave Bishop - Stifel Nicolaus
When we think about the balance sheet and use of capital and growth next year, obviously we know the macro headwinds there. Number one, what are you thinking in terms of just overall loan growth, and number two, what are your lenders seeing out there?
Are they seeing good opportunities from some of the other super-regionals in our market we know that are struggling? And what has been the call flow there, request for lines or opportunities to sort of pick off some credits from some of the competitors that are struggling out there?
Aubrey Patterson
We are not anticipating significant year-over-year percentage growth in loans. We did single digit.
But in all candor, our crystal ball is not any clearer than yours in that regard. We are prepared, as I think all of my comments and the comments of my colleagues have indicated, we are preparing for a challenging environment and the ability to generate volume is important but it has to be quality volume.
We are moving some business to us, some blue-chip commercial customers that are seeking the qualities that our company reflects in these difficult times and hopefully, frankly, we will continue to benefit from that. We have to this point.
But it would be obvious to any observer, we’re not seeing a lot of new initiatives. Most thoughtful businesspersons are expressing the same reserve that we are in terms of expansion of their business lines and we don’t expect to see anything other than mid-single-digit in growth opportunities for the balance of the year.
Hopefully we will have a recovery sooner rather than later, but we’re not anticipating that.
Dave Bishop - Stifel Nicolaus
As we look at the dividend payout here, obviously up around the 50% range, maybe for the year or so, how should we think about the common stock dividend as we move forward here? In terms of maintaining the dividend and potentially increasing.
Aubrey Patterson
As you know, we have an extremely long history of stable and growing dividend payments. I touched briefly in my comments on our capital plan, our belief in the importance of maintaining strong, tangible capital and total regulatory capital.
We will continue to do that as part of a coordinated overall capital management plan. With the earnings performance that we have we certainly don’t see any radical departure from our dividend policies of the past.
Dave Bishop - Stifel Nicolaus
In terms of the uptick in net charge-offs this quarter, maybe some color, what was contained in that? I assume a lot of that was the marks on some of the residential construction flowing to other real estate owned?
Nash Allen
Exactly. It was driven by just what we have talked about.
Residential and acquisition and development financing.
Operator
Your next question comes from Joseph Stieven – Stieven Capital Advisors.
Joseph Stieven – Stieven Capital Advisors
When you look forward are you starting to see the ability come to you, as an institution, especially because of your stable base, to have more pricing power on loans that are coming up for renewal versus in the past? And also on the deposit side, again because of your stability.
And are you seeing changes to take advantage of that right now?
Aubrey Patterson
That’s a good question. Obviously I think it’s reasonable, especially in the region that we operate in and maybe nationally as well, to take the position that we are operating in and from a negotiating position of strength because of our stability and strong capital on consistent performance.
I would say this. Certainly we want to be adept at pricing.
We want to get what our product is worth and we want to protect our deposit base and we are intent on doing that, even in the face of some liquidity-challenged institutions that are bidding rather high rates for deposits. Some almost to the point of irrationality from time to time, although I think that is steadying a little bit now.
So we have to be competitive. But you are correct in your assumption, or thesis, that we might be in a bit of a stronger bargaining position in these times because we could reasonably be presumed to be a more dependable lender.
We are going to get what our product is worth, in answer to your question. But philosophically, we are also a relationship-driven company, we’re not interested in the commodities in this business either on the deposit side or the loan side.
We want to build long-term relationships and the new clients that we are seeing come to us are doing it because they want to do that same things. So we certainly want to treat them fairly and we are going to do that.
Operator
There are no further questions in the queue.
Aubrey Patterson
Thank you for your questions this morning and your continued support . If you have a need for additional information or some other question that comes up, please don’t hesitate to call Jim Kelley, our President, Nash Allen, or me.
Operator
This concludes today’s conference call.