Trustmark Corp (TRMK) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's second quarter earnings conference call. At this time all participants are in a listen-only mode. Following the presentation this morning will be a question and answer session. As a reminder, this call is being recorded. It is now my pleasure to introduce Joey Rein, Director of Investor Relations at Trustmark. Please go ahead, Mr. Rein.

Thank you. I would like to remind everyone that a copy of our second quarter earnings release and supporting financial information is available on the Investor Relations section of our website at Trustmark.com by clicking on the news release 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 would like to caution you that these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties which are outlined in our earnings release and with 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 thanks for joining us. With me, I have Louis Greer, our Chief Accounting Officer, and Zach Wasson, our Chief Financial Officer, as well as Joey. I am going to make some comments for a few minutes overall as to how I see Trustmark today -- some items in the quarter itself and then open it up for questions which I will be happy to try to answer, and Zack and Louis will fill in.

I feel pretty good this morning that Trustmark had a solid quarter. The reasons I think we had a solid quarter is that we are continuing to see some risk move out of the Company and we are doing what we said we were going to do with our balance sheet transition and it has put us at a point where today we have a lot of flexibility about what we want to do in future quarters.

We earned about $31 million, $0.55 a share, a good ROE pushing 16%, ROA around 1.5 year-over-year quarter. Looking at the first six months we earned about $60 million, about a 15.6 turn on equity, again about 1.5, 1.48 exact ROA.

When I am looking at the quarter, what is most pleasing to me is an expanded net interest income and net interest margin at 390, up from 377 a year ago on the margin, 386 last quarter, and an absolute increase linked quarter of about $1.270 million in the margin. I will talk about why.

We are seeing some solid growth in wealth management, up 8% over a year ago, 4% linked quarter and insurance up about 4% linked quarter and a year ago. We are seeing a return in service charges and I am going to let Zach comment on the reasons we are seeing that, some of the things that we have done in the last couple of quarters that we are seeing it get back to pre-levels of where it started dropping in the industry last fall.

One of the most pleasing things to me is we have had some good fortune during the quarter on nonaccruals and severely graded credits. We had some payoffs that were very positive in the severely graded category and actual nonaccrual loans are down about 22% from a year ago, and actual losses are net, next to nothing, remain that way as they have been for the last few quarters.

All of our work in credit really looking very closely at Florida Panhandle and our other credit and looking at the loans we are doing in Houston makes us feel good that we're not expecting any significant credit deterioration at this time.

We are very busy in preparing for the Republic merger. Jim Outlaw, on the ground down there with Lee Cutrone working very closely with Chip Bryan and his people, and I will comment some more on that. We have opened about four branches, five branches this year. One actually opened yesterday at Northwest Houston, out near The Woodlands, but we opened two in Jackson and one on the Gulf Coast and, in about two months, they are up to a little over $15 million in deposits. So they are all right on schedule and doing well.

Loans year-over-year are up about $400 million or 7%. When we look at it, I have done a lot of looking back since Katrina, started looking at numbers a couple of months beyond Katrina, and then where we are today. We have seen very good loan growth in Houston, steady loan growth in Florida. We have seen a shrinkage in our southern region below Jackson and in Jackson in what we would call middle market and retail banking. And then a flatness in our real estate lending in the state of Mississippi from a lot of payoffs on the Gulf Coast and others.

So we have had some loan growth year-to-date about $90 million, even with some shrinkage that would total nearly $50 million in those core regions where Katrina came through.

On the deposit side, deposits were up about $600 million or 11%, and we have seen good solid growth in deposits in that same southern market and Jackson middle market. It's really offsetting significantly the paydown in loans that we have seen in those particular areas.

Our regional markets which would exclude our corporate and real estate departments are up about $250 million year-to-date in deposits, which has allowed us to not renew any of the brokered CDs. They are down significantly and we have been able to pick our least expensive source of deposits and wholesale funding, although our wholesale funding is down tremendously over a year ago and also down year-to-date. And this deposit growth is just really doing great. It is covering our loan growth year-over-year, plus we have been able to pay wholesale funding down more and fund the bonds that are sitting there at a little more comfortable cost.

The bonds keep paying off, as we said, and you've told that number is between $275 and $300 million over the next year, and we told you they are yielding about 3.5% and you can do the math on what it costs us this quarter and what it will save us in the next year as they continue to run off.

We have taken a look again very judiciously at our Katrina reserves. We had some relief of about $1.7 million. Remember, we had about $10 million and now there are about $5 million. We are still holding the reserves on the residential; things are moving slowly there. Most of our commercial, we came out better than we thought. The insurance covered the apartments that we had and other things, so that was very good. We have seen essentially no loss in automotive and what we are holding now primarily relates to homes.

HUD is beginning to release this block grant money. We expect that to be happening soon. I talked with the head of our mortgage company this morning. Those checks are going to be payable to the servicer and the customer, so we -- between our own portfolio and our servicing portfolio -- are going to have somewhere in the neighborhood of 600 customers down there that will be coming into our branch there, Biloxi, and you can do the math. We don't know how big their checks will be. They can be up to $150,000, but let's say they average $50,000. Well, that is about $30 million worth of checks that is going to come into that branch to talk with our mortgage people, so we are really going to be going after those deposits here in the next couple of months and it will be interesting to see what we grow down there.

I mentioned nonperforming was down by 22% from a year ago. You still recall that we have one large nonperforming loan, and I can report no deterioration and some signs of improvement in that loan.

On our repositioning of our balance sheet, I mentioned that. We are still holding the discipline and not replacing bonds. As you look through the stat sheet, you will see also that we are holding flat. Our lending shrinks on what our one to four portfolio and our loan growth over a year ago has been commercial. A lot of commercial and industrials, and a lot of owner occupied real estate, and it is the kind of diversified loan growth that we want to see and we would hope that would continue.

I have taken a look trying to get a sense. I asked Gerry Host, our President, to give me all the pipeline reports last week on the commercial side of things and also had him go back and -- our loan committee meets once a week on relationships over $5 million, and I totaled up the first quarter of new commitments which would include lines and real estate loans and he totaled up the second quarter for me and the second quarter was doubled the first quarter. And so based on the pipeline reports and what we have been approving in the last two or three months, I feel pretty good that we could begin to see an acceleration of pre-Katrina and I am not talking about activity just in the three counties where it principally hit. I am talking activity again in the Jackson MSA and southern region, as well of course as Houston and Florida and our other markets.

As far as Republic, Republic is doing just fine. Their earnings are doing fine. The week before last, we spend the entire week talking about the, with individuals, about employee benefits. This week we are doing merger training. We will have constant training between now and closing. I will let Zach let you know where we are on the regulatory side and other issues that he is allowed to talk about.

Overall, I am feeling good about the Company today. I am feeling good about some recovery in Mississippi, activity going on with [SeverCore] in Columbus. Nissan's still having a positive impact. Growth in suburbia Jackson, in Madison and Rankin County, and I am very, very excited about what our existing franchise is doing in Texas and when we put it together with Republic, I think it is going to be a very positive for Trustmark. I will close with that, and we would be happy to answer any questions that you might have.

(OPERATOR INSTRUCTIONS). John Pancari, JPMorgan.

Can you just give us a little more detail on the jump in the deposit service charges in the quarter?

Sure, we would be happy to. I am going to let Zach do that. Can you hear him, Zach?

Hi, John. This is Zach. When we look at our service charges, the basic increase for the linked quarter was in the NSF category. We made some changes to our overdraft matrix during the quarter. We also now allow overdrafts at our ATM as long as the customer affirms and understands that they will be charged for that overdraft.

In addition to that we increased our NSF fee slightly during the quarter and another factor is that we actually opened or have more DDA accounts now than we did at the end of the year. We are probably net up some 4000 to 5000 in DDA accounts. So a combination of those factors, more accounts, and a little few changes in our matrix and NSF policy.

So for the most part, it is more of a onetime jump there to get to kind of a new base?

I would not say it is a onetime. I would not necessarily assume it to increase that much every quarter. But it should be a consistent number, not just a onetime event for the second quarter of '06.

And would you view these changes more of getting you more in line with where your peers are?

Yes. We definitely review our market and our competition and stay pretty much in line with the markets that we operate in.

Okay. And, separately, can give us a little bit of color on the jump in your other noninterest income line?

It's a call from the previous quarter. In the first quarter of this year we actually had a loss from an FDIC we were invested in, so it is more of a recovery from a low quarter in the first quarter of this year than anything.

(OPERATOR INSTRUCTIONS). Andy Stapp, Cohen Brothers.

Just wanted to clarify the $275 to $300 million reduction in investment securities, is that over the balance of the second half of the year?

No, that would be over the next twelve months.

Over the next twelve months. Okay. And --

If you look back at our last investor presentation.

Right.

In there, we cover I believe it was June to year-end and then all of next year, but it is a number of about $25 million a month. Can you comment on the duration and how much of those mortgage backs are still there?

Our duration of the investment portfolio, 2.42 in total. Mortgage backs we have about $900 million. Those are a relatively low yielding portfolio, but they do mature over the next two or three years, and those yields will role off the books, and we can either fund loans at a much higher spread, in our case, paydown wholesale borrowing at a much higher cost.

I think the number that we used on those is about $900 million of mortgage-backs they are now. You might use a number of around 3.5% yield on those, and the duration on those is pretty short, I think, shorter than the other, so it is principally those that are paying off every month. So compared to what you might expect our wholesale funding to be, it gives us a pretty good kick every quarter, everything else remaining equal.

Okay. I believe you may have mentioned this in the past but if you could refresh my memory. Where will the eight new offices slated for 2007 be located?

Sure. Be happy to do that. One is in Madison County, which is a high-growth area, you know, five-year growth, 12% or so in North Jackson. One is in DeSoto County -- well, let me back up. DeSoto County is opening in the remainder -- in this year August. One in Madison, one in Florida, in Fort Walton Beach, one in the western sector of Hattiesburg, which is growing very well, which is in Southern Mississippi; one in the far eastern sector of Memphis in a place we call it Houston Levy that's just super growth area and then four in Houston, one down in what I call Sugar Land directly in front of the new Whole Foods prototype store. Another one about three miles south of there in Houston in front of an H.E. Butt store. Another one in West Houston, what we call Cinco Ranch, a high-growth area, and another one in Northwest Houston that fits extremely well with Republic in what we call Barker Cypress.

So those four are on the West and Northwestern Houston, and that is a pretty firm number. We could open one more in Houston or one more in Florida but we are trying to make sure we are giving you accurate numbers for what we would do at a minimum. That is going to expand our franchise in Houston, so that the grid is looking really well from The Woodlands, all the way back down to the Southwest Freeway.

Okay. And you are going to have Republic management look at these locations.

They have done more than look at them.

So they are agreed with what you originally had slated.

Yes. They are particularly excited about the 1960 Highway 59 Sugar Land. That is where the big Exxon development was through the years and it is -- these are great sites. As you know, H.E.Butt is very strong down there and our Barker Cypress is in front of an H.E. Butt. We are following their openings. It is a very strong privately owned grocery chain, and does extremely well, particularly also caters to the Hispanic market and Whole Foods and we have another one slated, piece of land that we aren't opening quite yet that is in a big neighborhood not far from the compaq headquarters.

So we really have taken our time, got first-class locations. Our branches that we are building there are pleasing to the Republic management too and are working very closely on it. By the way, they are helping us look at other locations because they lived and grew up in The Woodlands and on out the northwest, so they are excited about doing some other things there. We want to get these five or six open and see how they do.

And will these offices be spread out fairly uniformly throughout the year?

I would say probably get more of them open in the first and second quarter. We have the Sugar Land, the Missouri City, and the Cinco Ranch ready to go now, clearing land on one of them, and should start building on all three. So those will probably be in the first quarter and then maybe one each quarter after that during the year.

We want to get those open quickly because we don't have anything there and Republic wants to put some lending people in there, particularly in that Sugar Land area. They have been eyeing it for years.

Thank you very much. That's all I have.

Matt Olney, Stephens Inc.

I am trying to get an idea of the timeframe of the rebuilding from Katrina and how that relates to your loan growth going forward. You mentioned some pre-Katrina rebuilding in the southern part of Mississippi. Can you give us an idea of what type of growth that is and when you expect to see kind of the larger scale commercial growth?

You probably should talk with someone who is on the Gulf Coast in those three or four counties. I am down there off and on. I will be back down there next week.

I would say that the building on the Gulf Coast in those three or four counties is moving at a slower pace than everyone might have hoped. There are a lot of issues to work out with zoning. What they need down there is homes. There are an awful lot of people that want to build those homes. I was talking with a consortium of people yesterday who have strong capacity to build homes and they are having trouble finding land because anybody who owns any land down there is asking sky-high prices for it. So it is sort of a standoff.

Now they are building homes down there, but they have got 38,000 families in trailers in Mississippi. So those people aren't going to live in a trailer forever, and somebody is going to build them a home, but it is going to be a little while before there is any large-scale building down there.

You know the governor has said one, two, five years. They don't need a lot of commercial down there and they are still struggling over zoning down close to the ocean. So the way I see that is a lot of home building over the next three years, some apartment, some condominium. Those big casinos don't ask us to lend them any money when they build one.

Our construction companies are going great guns. You know we specialize in insuring construction companies and lending to them. Most of them paid off their debt and now they are beginning to draw up steel fabrication companies and others. When you get off the Coast, up into Hattiesburg and Loral and Brookhaven and Macomb through there, they are seeing population increases so they are growing at a moderate pace, and we have all of our regionals and presidents in now and yesterday afternoon I had a discussion with them. I went around the room and I said, where are your loans going to be 90 days from now compared to today, and I cornered about 10 of them and I am not going to tell you what they said, but I got it written down and I feel pretty good about it, that things are going to start picking up. But right down there in those three to four counties, it is going to be a while. And I don't know what George and others are telling you, but that is what I am hearing from everybody.

So in the Hattiesburg and Loral and around there, is that more just mortgage growth right now like family mortgage growth, or it is something else so far?

Couldn't be anything else. I mean you don't go down there and see any building cranes up in those towns. It's people that have moved up there, people that are in there, maybe somebody is building a new McDonald's out there on the west side or this, that, and the other, but it is principally consumer-driven. You might see a new Ford dealership going in somewhere, something like that, an apartment but not anything big down there.

Thank you.

Gary Tenner, SunTrust Robinson Humphrey.

I just wonder if you all can talk a little bit about the Florida franchise. I'm sorry if I missed some of the comments you had made earlier, but just some sense on what you're seeing in the market. Obviously we're all reading and hearing a lot about a slowdown there. Any comments about the types of lending that you're shying away from, if at all, down there right now would be helpful.

Be happy to. Stayed particularly close to that. I had dinner last night with John Sumrall, our CEO, and Jeff DiBenedictis, our President over at Panama City and I had about a two-hour conversation two weeks ago with Jack [Turney], Chief Credit Officer. We are going through that with a fine tooth comb, and our underwriting is holding up very well. I was told that some of the condominium projects that were beginning were put on hold in Panama City, you know, with pilings in the ground, just putting it on hold.

We have a number of customers who made a tremendous amount of money because they grew up there and their family owned a little motel on the beach or something about 1200 feet of beach and now they have got big institutional companies coming in there doing development. That development seems to be moving ahead at a slower pace. They don't borrow any money at the institutional. St. Joe seems to be moving ahead.

I am sure there are some condominiums that people have left but if people got into that property a couple of years ago, they aren't hurting. Prices, who knows how much prices are down, say 10%, 15% down on the beach. They aren't down very much at all. A lot of those people that are taking those condominiums, in our opinion, are going to have to feed them next year. They will probably have the wherewithal to go ahead and close their loan. They are not going to lease up as much as they might have thought, but I spent the Fourth of July weekend down there, and I told my wife, I said, I may never go again. It was so crowded.

So if they can get by without a hurricane down there this year, lots of folks want to go to that beach. I don't see any deterioration in our $600 million to $700 million loan portfolio down there. We are very fortunate in that we had John Sumrall and a lot of local people who are really good at underwriting who had a lot of experience, and we are picking and choosing very carefully any loan we make it down there and we are being very careful not to take things coming out of another bank.

And we hired an insurance consultant to go in there who was retired and was our professor at FSU, extremely smart in commercial insurance who didn't come out of Fisher-Brown who has been in there about three months looking at our entire Florida portfolio, on insurance, getting with loan officers, getting with the customers, and really making a lot of headway to be sure that our customers and we are insured.

It's down. It is slower, but it is sure not on its back down on the Gulf Coast. Your construction company told me yesterday they were still getting business down there. Lots and lots of home building going on. Does that cover it for you, Matt? Gary?

Yes, it does. Thank you.

Beth Messmore, Merrill Lynch.

When does the Republic deal close, please?

At the end of August.

And can you please review your cost saving assumptions there?

Yes. I am going to use a round number. Between us and them about 20%. I believe the number -- and they can correct me -- pretax is about $4 million on an annual basis.

Thanks very much.

Let me just tell you one other thing. Jim Outlaw and Chip are right on top of that and it looks to me like it is pretty close to schedule in their planning right now. And you know that is supposed to take place a little bit of it in the fourth quarter and start really taking effect in '07. The vast majority of it is going to happen more quickly because it is backroom operations of Republic, plus we pick up all of our items through Imaging out of Houston and we will be able to move them in the same way, Beth, and we won't have to make any additions here in our operation of any significance to do that. We have not had any departures yet of lending personnel since our announcement from Republic.

Thanks, again.

It appears that's all the questions we have currently. I'd like to turn the program back over to today's speaking site.

I would like to thank everyone for joining us. Again, when I look at us and I look at that strong movement over the last year between low yielding bonds that you compare over a year ago, and loan growth and paying down wholesale funding, you know, like $700, $750 million in that same range of end-over-end deposit growth, I see a company that is ready for the yield curve to straighten itself out. I see a company that is not negatively gapped, that hasn't been hurt with rates moving up in the last couple of quarters and if the Fed tries to -- decides to go a couple more times, it is not going to be a negative to us.

I see an awful lot of flexibility. We are comfortable with this merger. We are comfortable that we will have a management team on the ground between Chip Bryan and his people at Republic, Lee Cutrone, what he has done with our operation in Houston on the two and a half years and then Jim Outlaw who is a very senior executive here will be a very strong management team and able to compete down there. So we appreciate your joining us. We look forward to talking with you next quarter.

That concludes today's conference. You may disconnect at any time.