Trustmark Corp (TRMK) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's first-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.

Good morning. I would like to remind everyone that a copy of our first quarter earnings release and supporting financial information is available online at 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 have been outlined in our earnings release and other filings with the Securities and Exchange Commission.

At this time, I would like to introduce Richard Hickson, Chairman and CEO of Trustmark. Richard?

Good morning, and thank you for joining us. I have with me this morning Gerry Host, who's President of our General Bank; Louis Greer, our Principal Accounting Officer; and Buddy Wood, our Chief Risk Officer of the Company. And they'll be happy to join in the discussion when we answer questions after my comments.

As I look at the quarter, I would sum it up as earnings per share perspective -- not a good quarter. As I try to take a look at the reason that we reported $0.44, I would say that we're still taking the bitter medicine now and transforming our balance sheet, continuing to shrink both bonds that are lower yielding and 1-to-4 mortgages that are lower yielding.

Even though we saw a $90 million in loan growth on a linked-quarter basis -- and I'll get into that in great detail -- it was not enough to offset the continued pricing of deposits, which, by the way, I feel much better about after reworking our models during the month. We have reworked our asset/liability models, made any adjustments that we felt were necessary relative to loan volumes, rates, deposit growth and rates, and feel, as we said last quarter, that we will see a continued expansion in our net interest margin. I believe it expanded about 8 basis points on a linked-quarter basis, and we should see that continue during the year.

I feel we are in a low point on the margin where we are beginning to see the end -- the late hours and running off these bonds. There are about 700 million left. They're running off at about 30 million a month. As you know, they are yielding 3 60 or 3 70.

We're using that liquidity to erase all of our wholesale funding. You will note there was a significant decrease in that wholesale funding. The remainder of that funding will disappear in the next three, four, five months as it comes due.

We have seen an absolute surge in deposits. It is generally across the Company. And I will speak about it specifically.

As far as reserving, you will notice that we had a more normalized reserving. We have adopted the interagency agreement of December. We now have as we have always had for loans very specific [ken] grading system with specific historic loss records on that being used. And we are also using a qualitative method for a number of other factors -- eight or ten factors. We worked through it through the quarter. We think the system is working very, very well.

You'll notice that overall, we provisioned approximately at our level of charge-offs. We feel our provision is very strong.

Trustmark has absolutely no credit issues of any significance. We have virtually no subprime. Our past dues in our 1-to-4 portfolio are approximately 0.5%. Our past dues in our auto portfolio is less than 1%. So we're not facing any of the issues. Our centralized underwriting, which we have been using for a few years, is working extremely well in those areas.

Fee income is doing very well. We're seeing some solid growth in our wealth management business and some solid growth in our insurance business. We have seen a recovery in service charges from a year ago, particularly on the overdraft side. We're seeing a continued decline in basic service charges because of the industry move to retail to free checking.

Our general banking fees are up because we're seeing strong, continued growth in card usage, and we expect that to continue.

Compared to a year ago, our mortgage company looks down. However, it is flat. In January a year ago, we had some impairment recovery before we began hedging our MSRs late January a year ago. As you know, that has been extremely successful for us, and continued to be successful. During the first quarter, we had a slight gain in our hedging and -- taken a significant amount of risk out of the balance sheet.

You will note a year ago that we had about $800,000 of securities gains. And I will refresh you that that was the liquidation of some seed money that we had used to seed our lifestyle mutual funds when they were getting off the ground. And that is the reason for that.

When you take a look at expenses, we feel good about where we are in expense control at Republic. We are on target -- actually, a little above target at this stage of the game. We have removed about 20% of their expenses. What we're seeing elsewhere is some planned expense growth -- first quarter, we're spending more money on technology this year. In the first quarter, we finished up some expenses that did not produce income in the first quarter, but will produce some income in the second quarter and going forward.

Principally, we finished up our imaging. We're now exchanging fully imaged cash [riders] with our major correspondents and the Federal Reserve. That will have a positive impact to us from a cost basis, both from [couriers]. And also, it should eliminate in the second quarter our two-day float items, which total around $15 million on average basis.

We have also finished some spending on middleware to go into our legacy systems, which we're very pleased about, which is going to allow us to bring in software adjustments much more quickly and tackle efficiency issues more quickly.

I would like to talk for a minute about specific geographic areas and lines of business. First, I've been particularly pleased with Texas in the first quarter. The personnel situation is stabilized. We have hired three or four very good people into the Company. In Houston, [bruss] had a couple of people transfer.

Loan growth in Houston for the quarter was $27 million. That's about a 17 or 18% growth rate. Their loan portfolio today is about $735 million. They actually had deposit growth -- only about $5 million during the quarter, but it stabilized.

We opened an outstanding new branch in Houston down in Sugar Land right in front of a new Whole Foods store that's coming in. We'll open another branch south of there in Missouri City this quarter. There's very positive attitude -- things I would call stabilized and upward from here.

Down in the Florida Panhandle, they had strong loan growth, about $41 million. They saw some deposit growth around the $10 million level. From a credit perspective, everyone is concerned about the Gulf Coast. So we dispatched our loan administration team, who spent a significant amount of time. They looked at between 70 and 80% of our loan portfolio, essentially anything with any size to it.

There were movements of loans within the past category, like a great 4 to a great 5, which would mean a super privately owned business to one that is fine that is well covering its cash flows; there's plenty of liquidity, but you might know that there is a market slowdown, so you might adjust it one grade -- very little moving into criticized or classified, and as you know, that is about a $650 million loan portfolio. We feel very good about the way it's underwritten.

I don't think anyone can tell you when the Gulf Coast of Florida will perk up again. But not having a hurricane last year helped significantly. As everyone knows, REIT's -- real estate sales were down 30 or 40% compared to a year ago, but we feel in good shape. We are in no major condominium projects. Everything we have is in a situation that our people are comfortable with at this point in time.

Our Southern Mississippi area is really percolating. Their loans grew about $18 million in the quarter and their deposits about $80 million.

We are seeing some activity on the Gulf Coast, principally residential. We're down there -- a large group of calling officers. Our branch that's open is doing well. We are in the process of building two more. We're seeing land finally being accumulated for residential and some residential building going on. We expect a number of residential construction loans that we have outstanding -- and they run 175 or $200,000 apiece -- to increase significantly during the second quarter.

We're seeing some commercial casinos. That's mainly being funded from the capital markets. We're seeing a lot of discussion now about new shopping centers. We're talking with a lot of customers and prospects about this, and I feel good about some things beginning to turn on the Gulf Coast.

That deposit growth is coming in on the Gulf Coast to principally higher-yielding money market and CDs. We have seen some very good loan growth. Gerry Host spent five days last week in the area. We are seeing a bustle of activity in Hattiesburg, in Laurel, in McComb, in Brookhaven. These are the towns 30, 40, 50 miles above the Gulf Coast -- sort of staging areas. These customers in these areas are beginning to draw down lines again, talking about drawing down lines, using up their liquidity.

So for the first time, we see a ray of light on the Gulf Coast. It's still going to be a long haul, but we feel we are in a position to take advantage of our share of it.

In Mississippi and Memphis we saw significant deposit growth. Some of it is seasonal with public deposits. Some of it is new school bond issues. A significant part of it is small CDs. This has been a positive for us.

We had an unusual situation in our Mississippi markets where we had five loans pay off, totaling about $60 million in the first quarter. We do not see this as a trend. And in discussing with our lending areas yesterday, we do not see anything like this in the second quarter.

Principally it was two large apartments that we financed. The good news is both of those large apartment companies are paid down to zero, so they can't pay off another one. The other good news is they've both started new projects which we are financing which we'll be funding up on the Gulf Coast and northern Mississippi.

Second, we had two major hospital loans both go to bond financing, one where we participated with a letter of credit -- you'd see fee income. And those together totaled about $25 million. And those three real estate projects totaled about $40 million. So we had marginal loan growth in our Jackson corporate and real estate area, but their backlogs look good.

Our auto division extremely well. I had mentioned to you before that we had hired the Baton Rouge Hibernia team. They're on board. They signed up the dealers they wanted, and our auto group grew about $30 million of quality paper in the first quarter.

This is a positive in a number of ways. The reason they came with us is they're not subprime lenders. They're quality lenders working with quality dealers, and did not want to enter into that business.

Second, these loans are going on the books at about 8%. They are about a five-year maturity. They help us with our risk management. It helps us with our convexity, since we're not replacing bonds. And we see that as a positive.

And we expect to see some accelerated growth as all of this is essentially around the Baton Rouge area, north of the lake. And as you know, this paper pays out on an average of about 40 months. It's five-year paper, so we should see some accelerated growth here during the year.

I remind you that our charge-offs in this business for the last five years have averaged less than 0.5%, and our past dues have averaged less than 1% and are less than 1% today. It's a super business for us. We have a lot of auto professionals, and it's coming at a time that we need it.

We're seeing our Florida insurance operation continue to expand. Fisher-Brown has been with us into the third year. It is a tremendous franchise. They're seeing good growth. They're seeing some increasing in fees, particularly from windstorm and liability. They're getting the insurance on a lot of these apartments -- condo conversions that we didn't finance. But they're there. They're the most dominant insurance agency in that area, from Pensacola to Panama City -- did very, very well.

Our asset management business is doing well. Our mid-cap fund ranked in the top 10 U.S. mutual funds in the first quarter. We're still seeing success in growing assets under management.

Our mortgage company is holding flat in its originations in the face of a housing slowdown. We think that's because of the relationships that we built locally in the marketplace through the years.

On the expense side, if you look outside and try to remove Republic, whose expense is in good order, it's a marginal -- controlled expense growth, principally in data processing, which I have discussed, and office occupancy, because of our continued branch building program.

We opened in the first quarter one branch in Houston. We will open in the second quarter one more branch in Houston and one in Memphis, and probably five or six during the remainder of the year. These are all in very good locations, going completely according to schedule. And I was looking the other day at the six branches that we have opened recently. We have about 60 or $70 million in deposits in those branches already. And that's going well.

The issue I want to really address is expenses. We recognize that we are controlling asset growth. We reduced 1-to-4 home mortgages by $22 million out of our portfolio last quarter. We reduced bonds about $73 million. We're going to continue doing that. We're not going to reinvest until the yield curve turns.

So you'll continue to see commercial and commercial real estate loans and consumer loans grow. We expect those to grow at a rate of around 6%. And we expect our auto and bonds to continue to run off as we have said. We expect a margin expansion.

But we have tackled expenses in light of this. We set up an internal program to move us back into the 50s. On our efficiency ratio, we have set up a team of three people -- our Chief Financial Officer, our Chief Risk Officer, our Chief Technology Officer, who are moving through the Company with all of our managers methodically looking for areas of efficiency and re-engineering. We're spending money on software programs where we can see quick efficiency.

We have addressed and are addressing vendors. We had great success with our vendor program in the first quarter. We are approaching all of our major vendors, and asking them to pitch in with the yield curve where it is, and they are happily doing so.

I won't say that we haven't had a couple of bake-offs in vendors. But they have come around.

We're taking a hard look at people. As you know, we run a very lean operation. We're going to be able to see some cuts as we finish up to moving into electronic banking. We are also taking a look at non-customer-sensitive areas where we have turnover, and delaying replacing those people until we see the yield curve change.

I see our major expense cuts coming from a hard mindset in all 2,600 associates that this is a time not to spend any money that is absolutely necessary for business development or improvement in efficiencies until we see the yield curve change, at which time, we can reinvest our bond portfolio.

Holistically, it was not a good quarter on the numbers. However, I felt that we had during the quarter a strong realization in the Company that we need to do something about expenses, that they need to be adjusted down to this revenue level until revenues change.

I feel very good about loan trends, pipelines. I feel really good with our loan deposit ratio moving down to 90% range; the fact that the couple hundred million left in wholesale funding will be completely gone within three or four more months; that the attitude across the Company is very positive; that overall, a real strong feeling that it's now been eight months or so since we finalized our Houston acquisition. They are on board and moving forward as part of the Trustmark team.

I would be happy to answer any questions.

(OPERATOR INSTRUCTIONS)

Okay, we don't have any questions. I feel like I have covered it very thoroughly. We look forward to expanded earnings from this quarter. And thank you for joining us today.

All right, operator, that concludes our call. Thank you very much.

Thank you. This concludes today's conference. We appreciate your participation.

I think there are about 33 other things that I could have told them, but in 25 minutes --