Trustmark Corp (TRMK) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Trustmark Corporation's first quarter earnings conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to introduce Joey Rein, Director of Investor Relations at Trustmark.

Thank you, operator. I would like to remind everyone that a copy of our first quarter earnings release as well as supporting financial information is available on the Investor Relations Section on our website at www.Trustmark.com by clicking on the news release tab. During the course of our call this morning, 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, as well as in our other filings with the Securities and Exchange Commission. At this time, I would like to introduce Richard Hickson, Chairman and CEO of Trustmark Corporation.

Good morning and welcome. As those of you who work with us in the securities industry and those of you that are investors that are listening in, know this is the first time that Trustmark has had a quarterly earnings update. We're very pleased to be doing this. We think it gives an opportunity to talk more about what we're doing as a company, and after I give an overview, we'll have some other comments, and then we'll open for questions. I'm joined this morning by two people, both very able people, that will assist me in this. One, Zach Wasson, our Chief Financial Officer, who most of you know, and by Louis Greer, our Chief Accounting Officer, who will also make some comments and answer any of the questions that you might have today.

I am pleased to report that Trustmark had net income of $29.3 million in the first quarter, which represented basic and diluted earnings per share of 53%, up 12.8% from quarter a year ago, and approximately 9% in core operating earnings. The difference between the two would principally be related to Hurricane Katrina and our movement from low-com accounting to fair value accounting within our mortgage company. First quarter net income produced annualized return on average shareholders' equity of 15.53% and return on average assets of 1.45%.

Trustmark continued to make significant progress in advancing our strategic initiatives as reflected by solid loan and deposit growth, enhanced credit quality, and expansion within our higher growth markets. Average total loans during the first quarter of 2006 [sic], were up $558 million, or 10% relative to the comparable quarter a year ago. This growth continues to be diversified geographically and by product across our store force eight franchise. We continue to be very pleased with the growth and composition of our deposit base. During the first quarter, average total deposits increased $598 million, or approximately 10.7% when compared to the quarter a year before. And average non-interest-bearing deposits, which you know are becoming more and more valuable, represented 22.3% of Trustmark Corporation's total deposit base.

The aftermath of Hurricane Katrina has also had an impact on Trustmark. Many of our Southern Mississippi markets served by Trustmark have experienced a significant increase in liquidity which, has been reflected in increased deposit balances. During this first quarter of 2006, Trustmark's average deposits increased $263 million or about 4.4% when compared to the fourth quarter of 2005. The first quarter of '06 included a reduction in our brokered CD program of $88 million, leaving only $93 million of brokerage certificate deposits out of our deposit base.

Also, during the quarter, we have seen many examples of our customers using their new liquidity and profitability related to the cleanup and reconstruction on the Gulf Coast, use this liquidity to reduce their borrowings, which has translated into some slower loan growth in the first quarter of '06 relative to the fourth quarter. We anticipate that borrowing activity will reaccelerate for these customers as the cleanup effort end, and we transition to rebuilding.

Credit quality indicators remained extremely strong during the quarter. Non-performing assets totalled $30.6 million on March 31, down approximately 25% from a year earlier, and the allowance coverage for non-performing loans was a very strong 270%. We are particularly pleased that without any extraordinary items in chargeoff or recovery that our net chargeoffs represented essentially nothing in the first quarter, approximately .01%.

As you know on April 13th, we announced the signing of the definitive agreement with the Republic Bank Shares of Texas, and that they would merge into Trustmark. This transaction provides an excellent opportunity for Trustmark to expand and enhance our franchise within the attractive and high-growth Houston marketplace as we commented and discussed in our conference call a couple of days ago. As a refresher, Republic has six banking centers with $475 million in loans and about $590 million in deposits as of March 31st,. Including Trustmark's Houston operations at March 31 the combined company would be $670 million in loans and $750 million in deposits. Republic provides a very strong middle-market commercial lending base around which Trustmark and Republic will have an opportunity to build an enhanced retail mortgage banking and wealth management platform in Houston. We had previously secured five strategically-located sites for new banking centers to be open in the Houston MSA within the next six to twelve months, and when combining our existing offices with their offices, we will result in 16 banking centers serving the greater Houston marketplace.

Our initiative to build additional banking centers in other higher growth markets within our franchise continues to build momentum. A new banking center opened in Memphis in March, while two new banking centers are opening this month in the high-growth ranking -- Rankin and Madison County areas of the Jackson MSA. We also are pleased to announce that earlier this week, we opened or first full-service banking center on the Mississippi Gulf Coast in D'Iberville, which is extremely centrally located just north of Biloxi where interstate I-10 and 10 intersect. Additional banking centers are scheduled to open during the third quarter in the dynamic growing eastern Memphis market and our Houston markets. The Republic merger as well as our branching initiatives reflects our commitment to build long-term value for our shareholders through continued investment and attractive and higher-growth markets.

Taking a look at the income statement of first quarter '06, compared to first quarter '05, we're pleased to report that with loan growth average of 10% and deposits of 12.6% that we have also worked through a process where we have decreased on average, our bond portfolio $530 million or 35% and our wholesale borrowings, $558 million and 32%. We have had a very significant transformation in our balance sheet replacing bonds and wholesale borrowing with loans and deposits, and we have seen an an increase in our core net interest margin in the fourth quarter of '05 from 3.80 to 3.86 or a 6 basis-point increase. And we have seen over the period of time from the year ago our wholesale borrowings go from $1.7 billion down to $1.165 billion at quarter end, where our wholesale funding ratio has gone from around 24% to around 16%. This very significant move of bonds to loans, and wholesale funding to deposits, has allowed us to hold our margin from year-to-year relatively flat in the face of the Federal Reserve raising rates a quarter of a point as we know every six meets when they met. And this has been very positive for us, and we think that if you look at this loan and deposit growth, and we have already made you aware of the duration of our bond portfolio, and it -- at the present time, we have not changed our appetite for purchasing bonds, because of the lack of spread, the flatness of the yield curve. As we continue to have solid reasonable loan growth, we would expect this transformation to continue, and as the yield curve steepens, we would expect that our strategic plan to increase our margin would happen.

Taking a look at non-interest income, you will notice in our press release that year-over-year service charges on deposit accounts was down about 5.6%. A significant amount of this decrease is being caused by the rise in short-term interest rates and giving a larger earnings credit to our business customers, who are using their balances to pay for their expenses -- monthly expenses as opposed to fee income. I would hope that this would diminish as the Federal Reserve reaches a plateau that it feels is neutral for the economic environment.

Insurance commissions are up 6.2%. It has now been approximately a year and a half since we acquired the Fisher Brown Insurance Agency in the Pensacola area. And I have mentioned to you before that Fisher Brown has 4,000 commercial customers in the Panhandle of Florida. I recently had a meeting with their top 25 insurance -- commercial insurance producers and management. They're on target with our projections. They're very positive. They have recovered essentially from the two major storms that hit the Panhandle year before last and are moving expeditiously to meet their budget this year.

I also had the opportunity to meet with the top 20, 25 people last week from the Bottrell Agency. They're taking care of their customers who experienced problems on the Gulf Coast. They're aggressively out looking for new business and are very positive about their year also. A big plus for us where we have been doing well for the last couple of years under the leadership of Duane Dewey is wealth management. And can you see that over a year ago, our wealth management fees are up 7%. This is principally coming from managing money for individuals as evidenced by our extremely good performance against all of our Lipper indexes. We're getting traction in the Florida Panhandle, and I'm seeing the amount of dollars that we're managing increase significantly. I feel good about Memphis, and Duane and I are very excited about the opportunities combining with Republic and giving us more scale in which to market wealth management in Houston.

Our retail banking or general banking fees are up 9.3%. That's significantly driven by the growth that we're experiencing with transactions with our debit card. Our other net income in '05 included about $1.1 million from the sale of [Paltz], and that is essentially the reason you see it down $925,000. One item that I will bring to your attention is security gains. Those are not security gains from the sale of bonds. When we opened our lifestyle performance funds, three of them -- two or three years ago, in order to meet minimum requirements, we seeded each of them approximately $5 million. They're doing very well and being sold very well by our associates, and we reached a point a few months ago where we felt we could remove those investments, and we're removing them over about an 18-month period. And those gains were gains which took place in the value of the mutual funds.

Taking a look at expenses, you can see that our overall expenses were up 3.9%. Salaries and employee benefits up $2 million, or 5.4%. Principally, that is increases in pension-related expenses and a 3% merit pool for our staff. What is extremely important to me, and you know our motto is, at Trustmark, we prefer to have fewer positions, therefore fewer people, but pay those people more money, resulting over time having better associates in those positions. With 10% loan and deposit growth, significant increases in wealth management and insurance, and opening new branches, a year ago quarter end, we had 2,616 people. Quarter end this year, we had 2,604 people, continuing our tradition of having fewer, better-paid associates who are equipped to give advice and financial solutions. We're very, very pleased in the environment with all of that growth that we were able to eliminate and cut our staff by 12. We were also able to control our other expenses very well.

The expenses that are increasing this year at Trustmark are variable expenses, such as salaries and benefits, spending on technology, and an increase in advertising. Holistically, I feel very good about Trustmark today. Hindsight, we're very, very pleased that we decided to give up revenue, shrink our bond portfolio significantly. We're seeing the fruits of moving in to higher growth markets. We're seeing significant solid loan growth of good credit quality from those markets. And we're seeing some very significant deposit growth in, what has been for the last few years, our non-urban, slower deposit, growth markets. And what we're seeing is Southern Mississippi strongly complementing our Florida Panhandle franchise. That would be one example.

We think continuing on this path of steady loan and deposit growth, maintaining credit quality, continuing to increase our head count in wealth management, taking advantage of the opportunities in Florida and Houston and Tennessee for our mortgage company should result in continued growth and long-term shareholder value. I would like to turn it over to Zach Wasson, our Chief Financial Officer who will talk with you about the footnotes to our earnings release.

Thank you, Richard. I'd like to explain a few significant items that occurred in the quarter. To do this, as Richard said, let's refer to the footnotes attached to our statistical supplement. First, I would like to update everyone on our Katrina reserves in note 1. During the quarter, we updated our estimates based on new information. After a detailed review of our effective loans, we determined that approximately $3.2 million in loan loss reserves should be released. This released is based on more current information on our indirect auto and commercial loan portfolios. We continue to hold the original reserve for the single-family mortgage loans that we have set aside in the third quarter of '05, adjusted for any changes in principal balance. We are waiting for information on how the governmental assistance will impact the single-family loans. In the second paragraph, you can see the remaining loan loss reserve related to Katrina, which totals $6.6 million. Also in our mortgage area, we re-evaluated our held for sale market value adjustment on certain loans in the affected area. We released approximately $550,000 from this reserve. We re-evaluated our reserve from market value depreciation related to our mortgage servicing portfolio and released approximately $250,000 of this reserve. At the end of the quarter, we had $780,000 reserved against our held for sale loan portfolio, and $500,000 in reserve against our mortgage servicing rights.

Each quarter we will continue to evaluate our reserve adequacy on loans that were impacted by Katrina, and we'll make whatever additions or subtractions from these reserves as deemed appropriate based on more current information. We will continue to update you in the notes to our press release and in our regulatory filings with the SEC. These reserve releases total $3.9 million on a pretax basis, and have the impact of increasing net income by $2.4 million, or about $0.04 per share. Next, I would like to refer to you note 3 on our mortgage banking operation.

On January 31 of 2006, Trustmark began hedging the market value of our mortgage servicing rights. Also in the first quarter, we early adopted FAS-B number 156, accounting for servicing financial assets, which allows us to record the servicing asset at fair value, versus the old method under FAS-B 140 of recording the asset at lower of cost to market. We felt this was a more appropriate accounting method due to our hedging of the servicing assets. This will more closely match gains or losses on the servicing asset to the gains or losses on the hedging asset. We engaged United Capital Markets, or UCM to manage a derivatives position that offsets any increases or decreases in value of the MSR. UCM has been assisting financial institutions in hedging servicing rights since 1987.

Due to changes and interest rates from January 1 until January 31, the servicing asset increased in value by approximately $1 million pretax and this was recognized into income. From January 31 until March 31, the servicing asset increased in value by $2.8 million, which was offset by the loss in the hedging position. In our note, the change in value of MSRs is the increase in value due to changes in interest rates of $3.8 million reduced by decrease in value due to time decay, which is similar to the amortization of the MSRs of $2 million. This gives us a net increase in fair value of MSR $1.8 million as disclosed in the note. If you remove the MSR fair value changes, the fair value of derivative changes, and the MS amortization of MSRs from our mortgage banking result, the core business is relatively flat compared to the previous quarters. The hedging of the MSA was very successful during the quarter, with very accurate hedging effectiveness. This will remove a significant amount of noise from our quarterly earnings report, where we then can focus on the true contribution of the mortgage group and the true performance of Trustmark.

I next would like to refer to you note 5, which details the yields and calls to burn assets and liabilities. During the quarter, our net interest -- both income, net interest margin increased by 6 basis points to 386 from an adjusted 380. To refresh everyone's recollection in the fourth quarter earnings release, we had two positive impacts that Richard referred to earlier. The combination of these two factors, which one was a dividend, special capital gains dividends on mutual funds we own, and accretion of $1.2 million of -- on acquired loans in Texas and Florida. This combination increased our net interest margin for the fourth quarter of '05 by 11 basis points to 391. So, on an adjusted basis, our margin for the fourth quarter of '05 was 380.

One other thing I would like to note is that net interest income was negatively impacted by two [divest] days in the quarter, than in the fourth quarter. This has a dollar impact of reducing net interest income by $1.6 million on a length quarter comparison. The -- to obtain a core earnings number, we had two other items that impacted net income in a unfavorable matter. We had an unusually large write-off on an investment in an SBIC in the quarter, and also, an unusual operating loss and chargeoff during the quarter. Those two items accounted to $974,000 of earnings for the quarter. If we take the Katrina impact of $0.04, the gain on sale of securities of $0.01, the MSR recapture of $0.01, and then add back the SBIC loss and operating loss of $0.02, we take our reported earnings of $0.53 down to $0.48, which is a 9% increase versus our first quarter 2005 operating earnings of $0.44. In the question-and-answer section of this call, we will be available to answer any questions you may have. I now turn the call back over to Richard.

We would be happy to entertain any questions.

Thank you. [Operator Instructions] We'll take our first question from Charlie Ernst with Sandler O'Neill.

Good morning, guys.

Good morning, Charlie. How are you? I'm good. Richard, can you run through the mutual funds gains again when you put the $5 million into the fund, and how much of the gain is left. Yeah, Charlie, I'm going to let Zach go through that specifically with you. Why don't you go through the three funds, what they are. What they do. And, Charlie, it was $5 million in each of three that we're going through the district.

Right. Charlie, we seeded the performance funds, lifestyle funds about two and a half years ago. We have a conservative fund, a moderate fund, and an aggressive fund. And we use these funds and sell them through our investment management group and through our retail branches. The $15 million now in our liquidation plan is down to $9 million of balance with about a $1 million gain left in it. And we will continue to liquidate that $9 million over the next nine months of this year.

Okay, and then Zach, can you just walk through the accounting adjustments on the mortgage again, and maybe it will be easier to just say, to start out out with what the MSR was last quarter and then to kind of say what increased or decreased that and how that flowed through the income statement.

Charlie, we'll be happy to do that, and Louis Greer, our Chief Accounting Officer could talk about that for about four hours.

We don't need that.

Yeah, it's like pension accounting, okay. So, we're going to give you a pretty short answer again, and feel free, if we don't clarify it for you, to call us back, and Louis can talk through the accounting with you again too.

Great.

Charlie, this is Louis Greer. If you would just refer back to note 3, I think although this accounting is very complex, I think what you're seeing is basically a fair value accounting in the first quarter of '06 change that totals about 3.8 as Zach mentioned, offsetting that is about $2 million in decay which would normally be referred to amortization of 156 as you net those, and as can you see, the derivative impact of the loss of about 2.5. So, there is some line changes, and basically, you're netting your decay against the fair value increase. So, simplistically, I think Zach mentioned that normalized earnings is pretty consistent from the prior year.

Okay, and then, Richard, you made the comment that it sounds like the servicing is kind of a push in terms of the contribution to the bottom line. Is there any thought as to just getting rid of the whole headache and not servicing in-house?

We have looked at that, Charlie, but right now, there are 60,000 households writing a check to Trustmark every month. There are about 4,000 households down on the Mississippi Gulf Coast writing a check to Trustmark. We actually have downstream correspondent banks that sell us their mortgages because we do such a great job doing it. It is my opinion that if I have my checking account with someone, and I write my home mortgage check to them, I'm banking with them. And we're doing a good job of cross-sell. So you could see us, and we've said, more actively manage and contain the size of the servicing portfolio, but the gain from it indirectly that you aren't seeing in our retail branch network is positive, and we will, at the present time, plan to continue servicing loans that are in our footprint. You know, I am very, very pleased with what I have seen in the first quarter with our ability to manage this servicing asset, and we want to go through this process of hedging for a few quarters, and then reassess at that time. I think the key for us, we're really getting there now, is to be able to grow our loans and grow our deposits and grow our fees, control our expenses, and produce some quarters without a lot of noise in this, and had we not hedged, we would have had additional income, but it feels pretty good being hedged, and with the nature of our historical markets and the fact that we have built a superb home mortgage company, I think it's something that we need to continue to do, and it's helping us in the Panhandle of Florida, and my initial discussions with the Republic officers are it's going to help them significantly when they are servicing their home mortgages, as opposed to having their customers have them shipped away.

Great, thanks a lot.

Thanks.

[OPERATOR INSTRUCTIONS] We'll go next to Gary Tenner with SunTrust Robinson Humphrey.

Morning.

Hi, Gary.

Hi. A couple of questions for you. Just first, I was kind of focusing on the balance sheet for a minute. Obviously over the last year, you've made some real strides in really making over the asset sides of the balance sheet, and just trying to get a sense of what we should expect going forward. Should we expect continued runoff in the securities portfolio, at least over the next couple of quarters, as some cashflows come off there and the curve remains pretty flat, or have we have gotten down to where you'd probably want to keep it?

Gary, we have addressed that before, and I said earlier in the call that with the present yield curve, we have not bought bonds in the last year because we thought the environment was not good. We have not seen the environment change. We have indicated in the past that if you take a look at our bond portfolio that mortgage backed and corporate securities make up about $1 billion -- round numbers -- of that $1.3 billion, that their duration is a little bit, I think, 2.2 years, so that would tell you that -- and I think I actually have a slide in Boston that somewhere between $275 and $300 million of those bonds are going to mature in '06 and '07 on a rather consistent monthly basis. So, I think that would allow you to project, if you so desired, without additional bonds what our bond portfolio size would be by the end of this year.

Okay. That's fair and I apologize if I missed those comments earlier.

That's all right.

The -- I guess that brings to the next question, which is, given that you're now in some markets that, presumably over time should be giving you some better loan growth than we've had in the past. Even in -- .

Well, we have had a five-year tagger of, I think, 7.7% loan growth? And then last year, 10.7% loan growth, something that that range?

Yes.

11.5. So --

So, if we're to assume a continuation of that enhanced level of loan growth --

Right.

Especially when the Gulf Coast loan -- loan [inaudible] bank kicks in.

Yes.

Should we expect that going forward you won't feel as inclined to put on leverage in the form of securities even more normalized yield curve environment?

Well, let me answer that question this way. We -- our personality as a company is not to try to be large. It's to try to be profitable. And we measure ourselves many, many ways against 23 other mid-cap banks in the country, with a market cap between $1 and $3 billion. And all of our long-term incentive plans for management are key to how we perform against those companies. So, capital management is very important to us and when we can use our excess capital to make good acquisitions, we'll do so. Particularly those that are strategic to us. We have used our capital for share buyback Almost 30% of our company in the last five years around a little over 20 million shares at a cost of a little over $22 a share and today, I think we're trading around $31 a share. Clearly, and we've had significant increases in our dividend, clearly it is our desire to use our growth in capital to support good solid loan growth. Credit quality is important to us. We are national bank. We take a great sense of pride in our credit quality of being in with peer, and I should suspect you would see us doing everything we can in the most astute way we can to utilize that capital in the most profitable way.

All right, thank you.

[OPERATOR INSTRUCTIONS] We'll go next to Barry McCarver with Stephens, Incorporated.

Hey, guys, all our questions have been answered, thanks.

Thank you, Barry.

Thanks, Barry.

And we'll go next to Peyton Green with FTN Midwest Securities.

Okay, just a followup, kind of on the outlook going forward. I mean historically, I think, for the last three years basically, the net interest income number has been a little bit stuck, so to speak, around $70 million per quarter, give or take, and I was just wondering now that you have kind of the de novo branch initiatives rolling out over the next two years, how much of the marginal improvement in revenue do you think that's going to take to get it built out the way you want to and to staff the way you want to, versus the current efficiency ratio? Do you think it's something that, at the margin, costs more than the overall efficiency number, or do you think you get positive operating leverage out of the improved mix in loan growth going forward? Thank you.

The question is do we anticipate abandoning the tradition of paying attention to head count and expenses. And the answer is no. Do we anticipate our margin increasing, and I would say that would be giving forward guidance which -- this is our first call and we're having to work through this -- and I think we can't give you any guidance on that.

Okay, fair enough. Thank you.

Thank you, Peyton. Operator, are there any additional calls?

There are no more questions at this time. I'll turn it back over to Mr. Hickson for any closing or concluding remarks.

I want to thank you for joining us. It feels great to look over the last year and see the changes in our balance sheet, between $500 and $600 million of loan growth and $500 and $600 million of deposit growth. To see lower-yielding mortgage backed securities move away at a good, steady pace. To look at deposits that have grown and for Trustmark to be able to say that we are neutral to FOMC moves, feels very good to me. I'm very, very pleased with what has been happening in the Gulf Coast of Florida, both with our [inaudible] branch purchases and our Fisher Brown purchase. I have been very, very pleased with the growth of the bank branches that we purchased in Houston two years ago, and you can look back at those numbers and know that most all of those loans that we purchased are gone, and you can see what Lee Cutrone was able to accomplish down there, and when we take Chip Brian and his group, and Lee Cutrone and his group, and put that together, and my understanding of the Houston marketplace, and our board support, and understanding, and competence in that management team, and the rebuilding, and the amount of dollars, and the generosity of the federal government in rebuilding Southern Mississippi, and the changes that the demographers have made on our principal MSA, and have it growing 6% in the next five years, for no reason in particular except increased activity, and how I look at our major two counties in our home MSA, Rankin and Madison County, with growth rates that look like the Panhandle of Florida or Houston, admittedly not as large, but the percentage is good, and with our dominance, I have about 30 of our presidents in meeting this morning and the mood was very positive. Thank you very much for joining us today.

That does conclude today's conference call, you may disconnect at this time and thank you for participating.