Trustmark Corp (TRMK) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's fourth quarter earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded. Now is my pleasure to introduce Mr. Joey Rein, Director of Investor Relations at Trustmark. Please go ahead, sir.

I would like to remind everyone that a copy of our fourth quarter earnings release and supporting financial information is available on the Investor Relations section of our website at Trustmark.com by clicking on the News Releases 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 our other filings with the Securities and Exchange Commission.

At this time I would like to introduce our Chairman and CEO, Richard Hickson.

Good morning, ladies and gentlemen. Thank you for joining us. In addition to Joey, I have with me this morning Louis Greer, who yesterday was elected Treasurer and Principal Financial Officer of the Corporation. Louis has been with the Corporation in various financial areas, including running accounting the last few years, for approximately 20 years.

First, I'm going to give you an update on Texas. Then I will discuss the year at Trustmark. And then I will discuss the quarter compared to last quarter. Then I will be happy to answer questions. I expect my comments to last approximately 10 to 15 minutes.

First, Texas, we have completed the merger with and integration with Republic. Chip Bryan and Jim Outlaw are working well together. I'm very pleased to say today that staffing is stabilized. We opened two branches in Texas last year. One additional one in the fourth quarter along the Southwest Freeway. We expect to open a minimum of three more in '07. One at 1960 in the Southwest Freeway, which many refer to as Sugar Land, an extremely good location in front of a new prototype Whole Foods store, will be the only branch bank in that center. Another one about three miles south of there near Missouri City in front of an H.E. Butt store. And another one on Fry Road, which is West going out toward Katy in a heavily populated area.

We've expect our locations that we open beyond that, we have a couple more. They are very good locations. We have purchased all of our land.

In December our average loan balance was about $708 million in Texas. About $670 million of it was commercial loans. Our deposits averaged $693 million. Non-interest-bearing DDA was 33% of that, or $232 million. And interest-bearing DDA and money market was 32% of that at about $227 million. Those are holding. We have seen some payoff. We're within our model. We have seen growth in loans to cover any of the loans that we had lost.

We feel the situation is now stabilized. Our staff has settled down. We're hiring some trained lending personnel -- expect to hire three or four additional ones in the first quarter. We, however, have the capacity to grow with the staff that we have. In addition, we have transferred a couple of people from Jackson and Memphis who wanted to move to Houston. They're very experienced in real estate and commercial.

Our loan pipeline is getting back to normal. We are focusing on customer retention, particularly from the Republic staff. We have people that are showing interest, approaching us and working for a smaller, well-run commercial bank making decisions locally. We're also making some headway in Trust and Wealth Management.

Frankly, I'm feeling much better than I did a couple of months ago. The expense cuts are done. We have cut our expenses from combined approximately $4 million to $4.5 million on an annual basis. That is about 19% of our combined legacy Trustmark and Republic. The way we're arriving at that is we're taking their average direct expenses of both organizations of April, May and June of '06, which we feel were the clearest to be looking at. They were running around $1.9 million at that point. In December they ran direct expenses in Houston just a tad over $1.5 million. We feel we're right-sized and ready to go.

Relative to the year, you have had a chance to take a look at our press release and stat sheets. We reported earnings for the year of $119 million, $2.11. I would like to refer you to note 1, page 7. You will see that we have made adjustments for you for Katrina and for the sale of our merchant operation from our credit card company in '05. Taking a look at that you would look at core earnings of around $113,500,000, or $2.01 a share for the year versus $109,500,000, or $1.93.

Based on best we can calculate using the April, May and June runrate for Republic, taking the cost of the debt, the amortization of intangibles, and the cost of cash involved at around 6%, we are calling Republic merger neutral at this point.

Taking a look at the net interest margin of the Company, it was flat at 3.84% with the previous two years, which were 3.83% and 3.84%, versus a 4.11% in '02. The difference between that 3.84% and a 4.11% at our earning asset level is approximately $20 million pretax. That can be attributed to the inverted yield curve. I will talk about that more specifically.

One of the things that we're doing is a significant balance sheet reshifting. And what I would like to comment on first, which you can check the numbers, but I will give them to you broadly because I'm looking at them. Fourth quarter average '04 to fourth quarter average '06, or the 24 months, loans on our balance sheet increased approximately $1,250,000,000. Securities, particularly lower-yielding mortgage-backeds decreased $900 million. Total deposits on average have increased $1.6 billion, and wholesale borrowings have decreased $1.2 billion.

We will continue this through '07 where we are expecting approximately $325 million of low-yielding securities, approximately $25 million to $30 million a month on an equal basis to runoff. They're yielding between 3.5 and 3.6%. We expect to continue to liquidate our most expensive funding, which will likely be wholesale funding. I expect our margin to improve somewhat during '07 versus '06.

Average loans for the fourth quarter were $6.5 billion versus fourth quarter average a year ago, adjusting for the Republic merger of $458 million, a planned decline in our 1-to-4 family mortgages of about $58 million, and the sale of our student loan portfolio of $29 million, core loan growth was approximately $278 million, or 4.7%.

Approximately $250 million of the core loan growth occurred in commercial and real estate. Looking at our commercial and real estate portfolio, this increase was slightly less than 8% year-over-year.

On the deposit side, December 31 we are $7 billion, an increase of approximately $700 million, or 11% from one year earlier. On securities, our securities declined year-over-year $275 million, and $78 million from the prior quarter. The yield on our securities in the fourth quarter was 4.42% with a two-year duration. And I have mentioned the runoff of approximately $325 million expected in '07.

We now have approximately $400 million more in deposits at approximately $7 billion than we do in loans. Our margin has been hit as the marketplace has by interest-bearing liabilities pricing up at a higher rate than our earning assets.

A couple of comments on that, particularly on the liability side. We raised interest rates in early September on our money market accounts, on our interest-bearing checking. This was probably a cost in the range on an annual basis between $1.5 million and $2 million. We saw a [move run] in September on interest-bearing and money market, which approximates approximately $2.8 billion. In October and November and then through mix a rather significant drop in the month of December, back to the level of September. And we view that as a positive.

We have approximately $2.5 billion of CDs. Between September and October they priced up 12 basis points. Between October and November they priced up 8 basis points. However, between November and December that dropped to 4 basis points. I'm sensing that we're getting closer to the end of the pricing up of our deposits than we have been. And we're looking for that in the 1 or 2 basis point for the next two or three months. I think that will be positive for us as securities continue to runoff at a low level, and our commercial and retail loan portfolios slowly reprice.

Going forward for the year, holistically I see continued balance sheet management, reducing lower-yield earning assets, both home mortgage and bonds, replacing with higher-yielding loans, and managing our cost of funds. Between our deposit base, the home loan bank, Fed funds, and our new Cayman Island branch, which we opened last quarter, we are in a very strong liquid position to take advantage of any moves in the yield curve, which makes buying bonds attractive. If it is not, we will not buy.

We will also continue our DeNovo branching program. We opened seven branches last year, two in Houston, two in the highest growth areas of Jackson, two in Memphis, and one on the Mississippi Gulf Coast. We closed five branches in slower growth areas, essentially shifting personnel.

We plan to open eight to nine branches this year, two on the Gulf Coast, three in Houston, two in Florida, one in Memphis, one in Jackson, one in Hattiesburg. All of the land is purchased. We have been carrying it on our books this quarter. These branches will open throughout the year. We have identified our personnel cost and have them built into our budget.

I would like to take you to page 5 of our stat sheet, where we can talk about quarter-over-quarter. The margin was up a small amount. Loans were essentially flat for the quarter. We are seeing good pipelines. We're approving a lot of credit in our committee. We are seeing a significant amount of paydown of real estate projects on the Gulf Coast of Florida, on the Gulf Coast of Mississippi, and in Jackson, principally apartments or condominiums moving to permanent.

We're not seeing any significant growth or building going on in the Florida Panhandle relative to the Gulf Coast of Mississippi. The only thing that is happening of any significance is some new housing and a lot of housing repair. We do have one multi-family unit that is getting ready to be built. We are entrenched with the home builders. We are seeing some of our customers from Jackson and the Florida Panhandle and elsewhere buying property, but the property is not moving. Many of them saying the property is still too expensive.

We're having issues on the Mississippi Gulf Coast with insurance and with building codes. I think that is going to slow the process.

It is we hope of everyone there that is involved very closely that we will see home building pickup during '07, but do not see a boom in '07. It is still going to be a long process.

Taking a look at our income statement, earnings for the third and fourth quarter, nominal rate we are essentially flat. They were down a couple of cents because of the additional shares outstanding. That was principally in our margin, dropping, as you'll see on page 6, from 381 to 378 for the quarter. Republic was a positive for our margin. But the pricing up that we saw in the quarter from adjusting our interest rates, which I have said is principally finished, i would say is the culprit, and very little pricing up in our loan portfolio. Principally it was just the runoff of bonds that held it relative to the pricing scenario.

We are pleased with noninterest income for the year, which was very good in Wealth Management and insurance. We saw a recovery in insufficient funds, a recovery from what we saw, and nationally everyone saw it in the fall of '05. We principally reworked our matrixes. We now have the ability for people, if they wish to do so, to overdraw on their debit card and at our ATMs. That has put that back on a growth curve. Regular service charges with the movement to interest rate checking, I think we will see a continued steady decline in those service charges.

Wealth Management is doing well in the quarter. Insurance is seasonal for us. We are heavy with the school business and those come in in the third quarter, and that is the reason for the drop in insurance from 8 9 to 7 8. General Banking was up a strong $866,000, as principally the debit cards. Noninterest income from Republic Bank was not significant to these numbers.

One thing I'm particularly pleased about, you'll see salary and employee benefits was essentially flat third quarter with four. We carried Republic for one month in the third quarter and three months in the fourth quarter. Other expenses that you see up were principally Republic.

Going forward we are in situation where we're extremely focused on loan growth by region, focused on deposit growth by region, focused on expanding our Wealth Management where we are seeing success. I would be happy to answer any questions for you.

(OPERATOR INSTRUCTIONS). John Pancari, JP Morgan.

I want to see if you can give us a little more color about loan growth regionally. Specifically what type of loan growth did you see on a quarter basis coming out of your Texas franchise, and if you can contrast that with some of your other markets?

We didn't have a loan growth between the third and fourth quarter. The kind of business we are doing (multiple speakers).

I guess if you could talk about production, like what you're seeing in production. I understand it could be offset by some paydowns you're seeing. So I guess if we can talk about it from a production standpoint, and how -- what types of -- where you're seeing the solid production contrasted to some of your other markets.

The typical business that we and Republic were doing, commercial, working capital lines, owner-occupied real estate, some commercial real estate. We're doing a lot of calling and penetrating some of the companies in the midmarket with a small piece of business, say a building that they have, something in that area, working our way in Texas.

In Florida it is -- and on the Gulf Coast -- right now it is principally residential building. Not on the beach. We're having some headway with a strong focus on commercial business in the Florida Panhandle. In Memphis and the DeSoto market, it is principally multi-family paying off and starting new multi-family.

In Jackson we're not seeing borrowing on the commercial side. We have approximately $1 billion outstanding between our real estate department and our commercial department. The growth there was in real estate, principally in Madison County and Rankin County, principally residential builders.

If I understand correctly then are you saying that each region was generally flat in terms of absolute growth, or did you certainly have some regions that did produce growth but offset by declines in others?

I would say that the growth in any region was not significant enough to mention, and the declines in any region was not significant enough to mention relative to our portfolio.

Any further questions sir?

Yes, one other question. You have indicated that staffing has stabilized at Republic. Can you just give us kind of a recap? How many -- if you are able to quantify how many experienced bankers did you lose and what type of (multiple speakers) package on the comp side?

Now, I don't have any (multiple speakers) in getting that granular. We have a good staff in place. We lost five or so people, all of which were replaced internally with people just as experienced in the Houston market. I'm very comfortable with our CEOs who are running our Houston markets. We have hired a couple of people. Our staff is approximately 133 there. We feel very good about it.

Charlie Ernst, Sandler O'Neill Asset Management.

Back on Texas subject, my understanding in these situations when people is that it can take 6 to 12 months for business to move out of the door -- out the door. So why are you so comfortable that situation is stabilized so much?

You know a lot more about this than I do, because I have never measured how long it takes business to move out a door. The people that left us went to banks, generally $100 million to $200 million in size. I'm sure that some business will leave. Not much has left to this date, and those people have been gone, most of them 90 days. So I'm just listening to Chip Bryan who knows all of these relationships. I have no way of predicting the future on what is going to happen.

I had a meeting with the entire staff of management down there last month, and feel that the Republic people are now on board. Chip feels comfortable with it and we're moving ahead.

In terms of the credit quality this quarter can you talk about adding color to the increase in NPAs? And also just talk a little bit about your reserve methodology. My understanding is that if NPAs are going up, then based on everybody's formulas then that should probably drive reserve to loans (multiple speakers).

Yes, we came in after and have been working for three or four months on our loan loss reserve. We feel we are in full compliance now with the December 13 interagency directive.

The increase in non-performing was two loans, one here in Mississippi, one on the Gulf Coast of Florida. The one in Florida is a warehouse that became vacant that we expect we are seeing activity on, and don't expect any loss on that. The other one in Mississippi is a real estate secured loan, a owner-occupied auto. We expect that to be cleared up and be sold. We aren't expecting any significant losses.

We did have approximately $1 million in losses out of Republic as we went back in, and mainly $1,500,000 type loans as we went back through their portfolio very thoroughly. We feel that is cleaned up now. Our total losses for the year were 6 basis points. We feel we are well reserved and we are in compliance with the interagency agreement.

Is there any color you can add though specifically as to why your methodology allowed you to drop the reserve when one of the big factors going into the methodology would probably suggest that the reserve should have gone up?

Well, Louis, you want to answer that?

Yes. I would like to comment. I think the two loans that Richard is specifically talking about that caused our NPAs to go up are specifically reserved for the value of the collateral. We expect to sale and retain money on. So as a result of this increase in non-performing, those loans are specifically reserved.

And the change in the methodology basically was for documentation to the qualitative factors that Trustmark had. As a result of our change in methodology, our reserve basically stayed as it was. But this uptick is basically because those loans were specifically reserved.

One thing I think you need to look at s the breakdown of our loan portfolio. There are about $3.8 billion in commercial loans. Approximately $1 billion included loans held for sale in our mortgage portfolio. And approximately $1.5 billion of consumer loans, about half being our auto company. Those consumer loans are charged-off very quickly. And we reserve for those consumer loans based on a 20 quarter moving average through the cycle. They have been essentially flat. Charge-offs are rather minimal when we look at recoveries.

Then if you look at us reserved for the commercial side, you would probably find that -- I don't know exactly -- I believe in the $140 million range. So we are well reserved. And change in methodology might have moved our loan loss reserve $1 million one way or the other is not really significant at the $75 million level.

Lastly, do you have any thoughts in terms of provisioning next year? It does seem like we are seeing more NPAs going up at more companies than not. Do you think that maybe we will start to see reserves flatten out?

It depends on market conditions in our different markets. In our qualitative analysis we take eight or ten factors and judge the risk as low, medium-high, decreasing or increasing, and then we assign a numeric factor for that. If those conditions don't change, and we have loan growth, we will see reserving for loan growth. If the risk lessens then you'll see us release reserves from our qualitative section. Quantitative section -- qualitative section.

Specifically we reserve for all of our business portfolio based on our 10 level grading system. And that has been in place, and that is very similar to all organizations. And I think our rates are very similar. So just going to depend on whether we have loan growth and depend on market conditions.

I do not see at this time any significant deterioration for us in the Panhandle of Florida. We have been back down, been through the entire portfolio. We think it was well underwritten. We have our own outside insurance specialist that we brought in, that is not part of Fisher-Brown, that has been through the entirety of that real estate portfolio to see that our insurance policies are in place. Talked with customers to have them go back to their agent and effect changes. We have built a lot of goodwill with that.

At this time we're not expecting any deterioration. The non-performing loan here at Jackson was related to an older part of Jackson with migration. The customer had been a customer for 30 something years. And the Florida one was an isolated warehouse loan having nothing to do with the beach building.

We do not have -- the one Florida condominium project we have, we are expecting it to pay off during February. It has sold out and closed. Wish we had a couple of more, but nobody is really willing to start one right now.

Thanks a lot.

I mean we are not seeing strong loan demand from the types of loans that we want to do in any of our markets. And we're not headed toward the national participation business. Did that answer your question the best I can?

I'm sorry sir. Would you press star one on your touchtone phone again.

That's okay.

(OPERATOR INSTRUCTIONS). Gary Tenner, SunTrust Robinson Humphrey.

Just a couple of questions. Richard, your comment on the margin and your expectation for I guess a modes improvement in 2007, which I think you said was 1 or 2 basis points essentially, was that off of the (multiple speakers)?

No, I didn't quantify.

Oh, you did not. I must have misheard that.

I don't believe we are allowed to do so because we don't give forward guidance.

Okay. But just for sake of clarity, was your comment with regard to the -- based off the fourth quarter number or the full year 3.84%?

The full year.

The full year 3.84% number. Okay, I just wonder if you could comment on what your folks down in the Gulf Coast of Mississippi are telling you in terms of what they are seeing in the way of deposit inflows from the block grant money that should be coming in this quarter a little bit?

We opened that bank, or shopping center, and I believe deposits are a little north of $40 million in that branch after -- is that correct, Jamie -- after a few months. We are seeing block grant money move through. We are also seeing some insurance payments. We are seeing a lot of people trying to get about remodeling and rebuilding existing homes. Labor is an issue. The casinos are open. But that is about it at this point in time.

Home-building is going on, but they're having to put in infrastructure in these subdivisions. Luckily we're financing one large one north of Interstate 10, and it has a significant amount going on in it. Where there's infrastructure, builders are moving in, but we're having to wait on the infrastructure.

There's a lot of talking going on about doing a lot of things, but it is taking time. And that is coming. I specifically had a lot of calls made down there in the last three weeks. I talked with two of our Directors yesterday that are heavily involved down there. One been a major heavy equipment dealer down there, and the other being the largest construction company in the state, and they just don't see it yet. Land prices are still too high, and nobody is lowering their price and that is holding it up.

Finally, one of the earlier questions talked about the prospect of some more loan runoff in Texas, or you should have reviewed that as stabilized. Can you talk a little bit about the opportunity to increase your penetration in services to customers to gain more of their business and actually improve your loan balances there with some money (indiscernible)?

I guess we will do -- every commercial relationship manager has call quotas, prospects. They are out calling. Treasury management is out calling. We are out calling heavily. If you take a look at the state of Mississippi, we increased our market share June over June. If you take a look at Jackson, we increased our market share. June over June our deposits in Mississippi were up, what, $800 million as published, and the state grew by $5 billion. We're getting our fair share.

We have a super CEO in Gene Henson in Memphis. He ran the Jackson market. He's engaged. He has that place beginning to move. I'm very pleased with people I am meeting with and talking to in Houston. It is just blocking and tackling and making calls and building personal relationships. There is no magic to it. And the problem is most banks around today are pretty good at, so it is extremely competitive.

(OPERATOR INSTRUCTIONS). Bain Slack, KBW.

Just a quick question on the -- most of my other questions were answered, but on the mortgage line, it looks like you had a strong gain on sales this quarter. I was just wondering if you could give us some color or breakdown between the volumes versus the margin on those gains?

No, I don't have anyone in the room that knows that information. It is more or less normalized. Our hedging operation is working extremely well. Originations were on target. I believe they were in the range of -- Louis, do you recall? $120 million a month, something like that.

The industry was projected down, but we have been hiring a lot of people on our mortgage side, some very good people. We have hired some excellent people on the Mississippi Gulf Coast, Houston, and added management, separated Destin and Panama City. So I'm expecting our mortgage business to hold. If our hedging, which is now a year old, continues to work, we are expecting our mortgage business to hold up.

And having no further questions in the queue, I would like to turn the program back to Mr. Hickson for any closing remarks.

I want to thank you for joining us. We're continuing to see, as I have noted, the restructuring of our balance sheet. We are reacting to the yield curve. We, like you, have no predictions on interest rates. We're trying to state as close to neutral as we can. We're a little bit positively gapped, but not in such a way that one or two 25 basis point moves by the Fed in either direction is going to have any significant impact on us.

We're in a positive do business mode. We are well staffed. And we are out looking for business. I appreciate you joining us today.

Thank you everyone for your participation in today's call. You may disconnect at this time.