Trustmark Corp (TRMK) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation fourth quarter earnings conference call. At this time all participants are in a listen-only mode. Following the presentation this morning there will be a question-and-answer session. (Operator Instructions). 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 fourth quarter earnings release and supporting financial information is available on the Investor Relations section of the website at trustmark.com. During the course of the 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 Richard Hickson, Chairman of Trustmark.

Thank you, Joey. Good morning, and thank you for joining us.

Trustmark had an excellent quarter and an outstanding year, earning just over $100 million. I would like to take a moment to thank all of you for covering Trustmark over the last 14 years that I have been Chief Executive Officer. As you know, we have a new Chief Executive Officer, Jerry Host, effective January 1. I will let you know that he had a great Board meeting yesterday as CEO, covering a number of issues, and feels very good about the direction of the Corporation and its future.

I will remain as Chairman of the Board until May 10 at our shareholder meeting, when I will retire. Before then, Jerry has asked me to remain fully engaged in acquisitions and risk management, working with him. And we work extremely well together.

Thank you very much, and I will turn it over to Jerry Host.

Great. Thank you, Richard. And good morning, everyone. I told the Board yesterday that I felt a little bit like the guy that's on the Chicago Bulls team that had been looked at by Phil Jack and pointed to and said, get in there for MJ. We had a phenomenal run with Richard as a CEO. He has built a very strong Company; strong earnings, strong capital position, and I think most importantly, he has built a well conditioned, seasoned team of executives that will run this Company forwarded. And I look forward to having that opportunity. One of the other comments we made to the Board yesterday was that just within the last ten years as we look back, the Company has generated over $1 billion in net income, and that is pretty phenomenal.

So, earnings continue to be very strong, as Richard mentioned. We had outstanding financial results for the quarter and the year. Strong growth in net interest income. Our asset quality improved overall. We had solid noninterest income. Continued our process of prudent expense management, and we continued to enhance our capital position.

During the fourth quarter of 2010, net income was $25.2 million, ourbasic earnings per share $0.39, and with return on average tangible common equity of just at 12%. Continued to pay our quarterly dividend of $0.23, and our pretax pre-provision earnings were $46.7 million. Our basic EPS of $1.58 increased 25.4% year-over-year, ourreturn on average tangible common equity year-over-year is 12.31%, and the return on assets a very healthy 1.08%.

What I would like to do this morning is to provide you some additional background and color commentary on both the quarter and the year, and I would like to start with loans. Our total loans held for investment were just above $6 billion. That was a decrease of about $260 million year-over-year, but let me explain a little bit more detail the dynamics within the loan portfolio.

Our construction and land development loans declined nearly 30%, or about $247 million year-over-year. If you look a little closer, you will see that almost $67 million of that was a decline in the Florida balances. Mississippi declined $57 million, Tennessee down $15 million and Texas experiencing $107 million decline. Those declines though, it is the composition that is really important.

Consumer loans were down $204 million due to a significant decrease, $192 million decline, in the indirect auto portfolio. If you will remember, that portfolio peaked at $850 million and is now down below $200 million in balances. And we think well reserved for and continues to be well managed. Loans in other business lines expanded $178 million; primarily in the categories like one to four residential, $81 million there; other real estate loans of $34 million, and that is principally multifamily and the farmland group; and C&I loans and income producing loans increased $40 million.

As you can see, we have a well diversified portfolio. We continue to reduce our exposure to construction and land development lending. We have no CRE concentrations. We have experienced a slight increase in loan demand. However, competition for quality loans has increased, particularly from a pricing perspective.

Now, turning to credit quality, and I know this is of key interest to everyone out there, and as I mentioned the metrics are showing improvement. Our nonperforming loans decreased $16.4 million, or 10.3%, linkedquarter to total $143 million, or 2.3% of our total loans. As we break it down, Florida declined $12 million linked quarter. That is primarily land and development loans, fourloans in particular that we have been working through for the last three years. In Mississippi, a decline of 9.2% linked quarter, primarily due -- most of that was a $6 million loan on the Mississippi Gulf Coast that moved back to performing. In Tennessee we saw an increase in nonperforming. That was due to two loans. One was a commercial real estate development, and the second was a residential development. Both of those loans have been rated substandard and have been well reserved for. In Texas, we are relatively flat with nonperformance.

Our foreclosed real estate increased $2 million linked quarter and now totals $86.7 million. During the quarter we reappraised 47 properties, resulting in no significant gains or losses. We feel as though this is very reflective of the appropriateness of our process of evaluating these properties. We added $9.7 million in ORE during the quarter, and we sold $6.6 million. No significant gains or losses on the sale of the ORE during the quarter. In Florida, we had four different properties that we have had significant improvement on. Two of those are residential developments where we have executed and began the process of takedown agreements with a large national home builder for the purchase of lots. On two others we have signed an agreement in principle to purchase lots, and that also is with a national home builder.

I'll stop a minute and explain this. All of these developments, what we have seen is that these are properties that are not directly on the water. They are off the water. The developers are taking these properties and building more affordable homes for those people that work in that market, and specifically in the tourism business. During the boom back in '03 to '05, what we saw were so many people that worked in the Panhandle market and the tourism business had to commute 40 to 60 miles a day simply because it was not affordable property. The thought process of the -- some of the developers in the market now are to buy these properties into affordable rates, build affordable homes and allow those workers to live there. So the strategy makes a lot of sense. It certainly is helping us so move some of this ORE off our books..

Finally starting to see some significant improvement in moving property. There is real interest, there is money behind it, and that was -- I will tell you that was during typically a very slow season in that Panhandle market. So as we enter the spring season with real optimism as to being able to move other Florida properties. In summary, our nonperforming assets decreased $14.4 million, or nearly 6% linked quarter, and now right at $230 million.

Our net charge-offs during the fourth quarter totaled $12.7 million, or 0.82% of average assets. We experienced a decline in Florida of $4.1 million linked quarter. Third quarter reflected $6.3 million related to a new impaired loans, where the fourth quarter had $1.7 million in charge-offs associated with new impaired loans. The provisions for roll-offs has totaled $11.8 million. That is a steady, continued reduction in our criticized loans, including $15.3 million decline in Florida. The reduction in criticized loans coupled with lower migration of new criticized and nonperforming loans resulted in provisioning being less than net charge-offs during the fourth quarter. Our allowance for loan losses is now $93.5 million, and it represents 1.94% of commercial loans, 0.78% of consumer and home mortgages, and total 1.54% of total on them. It is now 188% of nonperforming loans, and this does exclude the impaired loans.

I've said an awful lot about Florida, but let me give you a bit of a recap on Florida. In the past we focused a lot of time on Florida, andwe've carved it out specifically. In the future, if these trends continue, I would expect that we would simply make Florida, part of the overall credit quality plans without a specific carve-out for this in our calls. We are beginning to feel much better about Florida's situation, asis evidenced by the fact that our total portfolio in Florida is now $444 million. It is down 15% or $80 million year-over-year. The construction and land development exposure in Florida has declined by a third, or $66 million, and stands at $132 million outstanding. Our associated reserves with that $132 million is $16.4 million, or 12.4% of that total. We believe our exposure has been significantly reduced and that we are appropriately reserved.

Managing credit risk resulting from current economic and real estate market conditions, however, continues to be a primary focus for us. As I said, trends continue to improve during the quarter as evidenced by lower past dues, net charge-offs, nonperforming loans, nonperforming assets, and criticized and classified loans.

Turning to the balance sheet now. On a linked-quarter basis, average loans remain steady at $6.2 million. The average investment portfolio has increased by $165 million to $2.1 billion. Our average earning assets have increased to $8.4 billion. Average deposits at $7 billion showed a decrease of roughly $98 million linked quarter. However, when you look at the mix, average interest-bearing deposits declined $175 million, while average noninterest-bearing deposits increase $77 million. The lower deposit costs continue to reflect our strong liquidity while we continue our disciplined loan pricing and has required minimum loan rates to sustain loan yields. Our cost of interest-bearing deposits fell 7 basis points linked quarter and is now at 0.77%.

Net interest income and a fully tax equivalent basis expanded to $92 million, resulting in a net interest margin of 4.36% during the quarter. That net interest margin is down slightly by 3 basis points for the quarter. We expect compression in net interest margin percentage to continue, and our focus is on maintaining the dollar amount in the net interest income. We know how to manage through a cycle. As we look back ten years, I show that the range in the net interest margin on a percentage basis has been between 3.83% and 4.85%, the high. And I think that proves our ability to manage through a variety of different [cycles].

Let's take a look now at noninterest income. Noninterest income totaled $38.6 million, representing roughly 30% of total revenue. A very solid performance. Two areas I think of particular interest for you will be service charges on deposit accounts and bank cards and other fees. Let me address service charges first. They totaled for the quarter $13.5 million and showed a decline of only $1 million. That is despite the fact that we have implemented the opt-in, opt-out portion of Reg E. We feel like that Trustmark executed a very successful educational program with our clients. We had overall a 70% response rate and 84% opt-in rate. Those numbers were in the 90% range for those higher users of this service. NSF fees declined approximately $870,000 linked quarter. The full impact of Reg E, which includes the opt-in, opt-out; it includes the potential impact of changing the posting order, number of occurrences, the minimum dollar amount that we might charge are estimated to be a reduction in the neighborhood of $6 million to $9 million for 2011.

On the bank and other fees line item we expanded the total to $6.5 million for the quarter. All of you are aware of the impact -- of the potential impact of the Durbin Amendment and some of the efforts around working to curb that impact. But if implemented as written and with the estimated time frame, we would show a decrease in 2011 of between $4 million and $6 million in that line item. It is really too early to project the revenue impact, because there is a great deal of uncertainty that remains. However, we are well into the process of reviewing our options, and to limit the potential impact of the Durbin Amendment on Trustmark.

Another very significant noninterest income line item for Trustmark is mortgage banking. Our performance reflected the stable mortgage servicing income, solid secondary marketing gains, and a very successful hedging strategy for the year. For the quarter our income totaled $4.5 million, which is a slight -- not a slight, a fairly significant decrease from the third quarter of $5.4 million. The decline for the quarter was due to two things; a drop in the net hedging ineffectiveness, and a decrease in the fair value of the loans that we hold for sale.

I'll also note that during the fourth quarter we executed on a repurchase and sale of $54 million of Ginnie Mae-serviced loans. These loans are loans that are 90 days past due. We were able to buy those loans back in a previously formed pool, repackage and resell to the market. In doing this, it decreases the amount of loans that we have on our books that are classified as 90 days past due and greater, and again, that is $54 million that have been removed from the -- this delinquency profile account. The result of this sale was a loss of about $390,000, and that shows up and is included in and netted against the gain on the sale of loans.

Our production for the fourth quarter was very solid. $481 million from the quarter versus $450 million for the third quarter. With the increase in rates that we have seen over the last several weeks we would anticipate some slowdown in that mortgage volume.

Our insurance revenue decreased $1.5 million linked quarter to total $6.2 million. This was a reflection on the fact that during the third quarter of every year we have a significant classification of clients that we write, and so there is always some seasonality in that third quarter number. From a wealth management standpoint, income totaled $5.8 million, which was an increase of nearly 11% on a linked quarter basis. We continue to grow the assets of the wealth management department. We saw a 4% growth, and assets now year-over-year -- with that 4% growth, assets now are at $8.8 billion.

In the other noninterest income line item, and we had disclosed this previously, there was a $2 million merger transaction breakup fee. Approximately half of this was offset with direct costs.

Now, turning over to noninterest expense. Our noninterest expense declined $4 million, or almost 5% linked quarter, and totaled $80.4 million. ORE foreclosure expense was $3.3 million for the quarter and declined 62%, or $5.4 million, due to the decreased write-downs. As I mentioned before, we work to be as accurate and timely as we can in doing our appraisals on problem loans and adjusting them accordingly.

The other thing of note is that our effective income tax for the quarter was 28%. This is reflective of our continuous investment and the utilization of projects that involve both federal and state income tax credits. And many of those are associated with Hurricane Katrina and the ability to issue GO Zone bonds. Our efficiency ratio reflects the prudent expense management that we have in place and is now at 61.65%for the fourth quarter.

And then finally, capital strength. Our tangible common equity is at $842 million and represents 9.11% of tangible assets. Risk based capital is at 15.77%, and it significantly exceeds the 10% regulatory requirement because it is well capitalized. As I mentioned before, pretax pre-provision earnings were $47-point -- $46.7 million. Trustmark's strong capital base provides strategic flexibility to support both organic growth and acquisition opportunities that strengthen the long-term value of our franchise.

Let me stop at this point and open it up for questions.

(Operator Instructions). Our first question comes from Steven Alexopoulos at JPMorgan.

Hey, good morning, everyone.

Good morning.

Maybe I will start with looking at the full year 2010, you charged off around $60 million, provided around $50 million, so you took the reserve around $10 million. Is that a similar level of reduction that we should expect going forward, or is there any reason to think this trend might have changed?

Overall I think you are going to see a continued positive improvement in the credit quality trend. I think that it going to be very much a function of the economic environment, as we continue to -- if we continue to see this steady slow improvement, I think you are going to see improvement in our credit quality numbers. If by chance there are changes in the economic environment that show a downturn, then I think we have to back off of our -- of these trends, and I believe that will be felt by other banks within the industry. Barry, is there anything you would like to --

In addition to what you just indicated, Jerry, I think the difference -- the gap between charge-offs and provisioning will likely continue, predominantly because of the level of reserving that we have, especially in the areas where we are experiencing the majority of our charge-offs, that being Florida. The -- that would allow us to be provisioning for the net difference between the current reserves and charge-off amount, which in many cases we find ourselves fully reserved for the charge-off. So that differential -- that gap between charge-offs and provision probably will continue to exist throughout 2011.

Okay. That's helpful, thank you. I wanted to talk about capital for a second. And since you guys announced last year the Cadence deal, pricing for a traditional M&A seems to have come up quite a bit. Given that you seem to have plenty of capital, and you are growing it quickly each quarter, can you prioritize for us how you plan to put capital to work in 2011 outside of just organic growth?

Good question, and I think you basically have three options outside of organic growth in terms of deploying capital. We could increase the dividend, but right now our payout ratio is about 58%, which on a relative basis, as you look back over time, is fairly high. We could do a stock buyback program. We feel good about the opportunity to be able to do that, but I think our primary choice would be to continue to look for acquisition opportunities that would enhance long-term value to the Company.

You made the comment that we have seen some significant uptick in premiums paid. We have shown I think from previous transactions as well as the Cadence situation, we are a disciplined acquirer. We will look at each transaction individually for what we would expect to be long-term shareholder value. If that means we have to adjust some metrics on the front end in order to accomplish that, we certainly would be willing to do that. But each transaction stands on its own, and I think what is most important is that we feel it has a significant long-term impact on the overall franchise value. I'll ask Richard, since you are still very much engaged in the M&A process, if you would like to add anything to it?

No, I think you have covered it well, Jerry.

So when you say adjust metrics on the front, do you mean accept a lower level of return? Is that what you are saying?

If that becomes necessary because the market is there, then we'll look very hard at that. You're comment about it becoming more competitiveI think is clear, and we feel like we have a solid stock price. We have adequate capital. We feel like we would have the ability to go out into the marketplace if necessary to raise capital to get a transaction completed.

Okay. Maybe just one final question on the securities book. The balances were up quite a bit this quarter. Do you just move cash into securities, and how should we be thinking about portfolio securities yields, given how much they fell in the quarter? Thanks.

I'm going to ask Mitch Bleske, who is our Chief Investment Officer, if he'll answer that.

In terms of our investment portfolio and the deployment of cash, it really just comes down to trends in the other components of our balance sheet, mainly the limited amount of loan growth and the runoff of our indirect auto and construction book. And so from that standpoint, yes, we've deployed a number of that cash into additional investment securities.

In terms of the yield, the additional investment security purchases have brought down the yield quite a bit. That being said, we don't really expect to see too much of a decline going forward. We try to be, though, quite defensive in what we buy; minimizing duration risk, minimizing convexity. And so with that we would expect to see a slight decline in the portfolio as we move forward, which is going to drive, of course, a slight decline on our interest margin.

Okay, thanks, guys.

The next question is from Adam Barkstrom at Sterne Agee.

Good morning, Adam.

Hey, guys, good morning. I was curious -- just get a little more color on a particular item in credit. I was just kind of looked at the numbers, and you look at the Florida book and all the trends there, linked quarter looked good. I mean, net charge-offs were cut basically in half. Non-accrual linked quarter were down more than $10 million. And then you go back to look at the criticized book be in the back of your press release, and we are down like close to $50 million. And there was a pretty significant increase in -- specifically in the Florida provision. And I was curious if -- I mean, how do we reconcile that? Why is that? I would have thought that to be at the very least kind of flat linked quarter, given the positive trends that we saw. Are you guys taking perhaps an overly conservative stance there?

And I guess we have seen some of our competitor banks really take the opportunity this quarter to push the margin -- or excuse me -- the reserve down a bit more with it falling into earnings, and I'm just sure just curious why that provision number was so hot?

Sure, and I'll be glad to come of take you through that. What we did was, and what we constantly do every quarter is look at our impaired loans, which represents $97 million. And on all impaired loans, included Florida, we know we are going to be revaluing those impairing the loans as least annually as long as they remain an active loan. And goingthrough the process we reassessed what was going to be revalued as it relates to Florida, and looked specifically at the raw land loans, the lot loans, where in some cases there may be potential for additional changes in values as we move into next year and as the properties are revalued. And we set aside some specific reserves for properties we felt like had the potential to go down as they get revalued based upon some other things we have seen going on in the marketplace.

It is very much unique to a property-by-property assessment, and that is how we approach it. And we ended up putting approximately $5.6 million in specific reserves, associated with Florida impaired loans that will be revalued this year. And obviously when we get the results of those appraisals, if additional write-downs are needed, the reserves are there for that. If it turns out that not all of the additional reserves are needed, then the differential would come back into earnings at that time. We just felt like that is a more prudent approach to a market that has consistently had real estate values, or the least on the residential side, going down over the last three years. We do expect for that market to -- and we believe is that has begun to firm up, but we want to see those appraisals come in to evidence that. And we feel like that will be forthcoming this year.

Okay, thank you. Very helpful. One really picky question, maybe for Louis if you could explain. Back in the back of the press release when you break apart the mortgage banking line item, what is in that other net number? And then also -- and I will jump off after this --the significant reduction in ORE expenses this quarter is -- kind of looking out, doyou think this quarter's ORE expense level is just kind of a comfortable run rate here? Thank you.

Okay, Adam. Specifically on page 11 of our stat sheet breaks out the components, and included in other net you can see a change in the quarter about 3.9 from the previous quarter. What that primarily represents is a change in the value of loans held for sale. You can see on the face of the balance sheet in the quarter loans held for sale dropped $115 million. So that is principally what causes -- or what is included in the other net.

And specifically as you look at -- your second question is total real space, totaled $3 million for the quarter compared to $8.7 million. The principal decline was principally due to write-downs. Minimal write-downs in the fourth quarter, where in the third quarter I think were fairly significant write-downs.

Do you think that trend will continue going forward, or is that -- are we going to continue to see -- I'm guessing the latter, but continue to see some bumpiness in that number?

Well, Adam, I think we would expect that as we go next year that we could see a run rate similar to this. However, it can be a little bumpy. Depends on what happens to values, so --Barry, do you want to add to that?

Yes. I think, Adam, we are conscious to, as loans migrate from an impairment status, which most of them are impaired when they move into ORE, based on the dollar for impairment being $0.5 million or more. As they move into ORE, we're very conscious to assess the appropriateness of the value of property, and at which point, if we need an additional write-down, we take it. It runs through the reserve. So for those reasons we would anticipate the ORE values over time in 2011 versus in, say, 2010 being less on the revalue side, because we feel like we have got them appropriately valued as they're going in, and then that's another 12 months typically before they are revalued again, unless we see a change in the marketplace and feel the need to revalue them at that time. So I think for the revalue portion of the ORE expense to be lower in 2011 than what we experienced in 2010.

Thank you, are gentlemen.

Adam, let me make one final comment relative to Barry's explanation of the Florida reserve. We feel like, as I said earlier, that things have really stabilized and are showing improvement, justbecause of the real activity of sales in Florida. However, we have experienced numerous years of write-downs of properties. We have been very conservative in our approach in evaluating that Florida property, and we feel we've set aside adequate reserves. So for some reason we see another year of downticks, wehave got it covered. And if that doesn't happen, then certainly we can redeploy those reserves. So I just wanted to make sure that was clear.

Great, that's helpful. Thank you.

The next question from Kevin Fitzsimmons at Sandler O'Neill.

Good morning, Kevin.

Good morning, everyone. I just wanted to clarify what you are guiding on the service charges there. So, Jerry, is what you are saying that, if we were a total of -- I think we're for the full year $55.2 million, roughly. So you are saying it going to be -- 2011 is going to be $6 million to $9 million lower off that, is it part of it is already kind of baked into the run rate and not that severe?

Good question. We believe that it is going to be $6 million to $9 million lower than the total amount.

Okay. With the bulk of that occurring over the decline hitting in the [first] half of the year?

Well, actually, the service charges, the NSFs particularly, you will see that probably from third quarter -- excuse me, from the end of first quarter on. As you look at the interchange you going to see that second -- third and fourth quarter after the second quarter.

Okay. And does that include -- the $6 million to $9 million for example in service charges, are you baking in any kind of mitigating steps you can take, changes in fees? Or are you confident you can come up with steps that might reduce that hit?

There are no -- at this point we have not baked in any kind of a net number that would help reduce that loss of revenue. What we have done is this. We have for the last six months since we got some sense for the direction of this legislation, we have been evaluating -- segmenting our deposit base, evaluating different options in how we would we work existing products, packaged certain products, reevaluate our free checking products. We have looked at our debit rewards program. We would expect that we could cut out at a minimum $1 million in expenses associated with that program. And we have not decided to eliminate the program completely, because there may be some options to reworking it in conjunction with some new products that would make sense. But we have significantly reduced those costs.

So these aren't -- we are not baking in any offset numbers. It is a little airily to tell. I will give you an some example. Some of the banks have already stepped up and said, no free checking; we are going start charging a $5 service charge. Well, when we look at that the potential for running off some accounts that have opted in, and even with some of these limitations, picking up $1.5 million in $5 service charge fees could result in some significant losses on the NSF side, even under these new amendments. So we are very carefully analyzing all the interaction of changes to these accounts and have put no estimate as to how much of this service charge lose we'd be able to mitigate.

Okay, great. Helpful. That was very helpful. And just -- I wanted to just make sure I understood how you guys feel about the [spread] revenues going forward. That it sounds like on the loan side you see some positive movement in loans, but you're still continuing to see risk, so I would think loan balances are going to be maybe kind of be flat to gradually increasing. Securities, if I heard you right, they -- we had a pretty sizeable increase this quarter, but you're looking to keep it stable after that, and then the margin is going to be declining. I then I guess if that is all correct, how low could that margin go?That is a pretty wide range historically you gave, Jerry. I mean I know in the past we talked about the margin going back to a 4% level. Would we look at going that far back to a 4% from this level over the course of one year, or what do you think?

Let me try to answer the questions or concerns. As far as the loan side, yes, we are starting to see some pickup, specifically in C &I, income-producing properties, owner-occupied properties, and the issue there is that competition has -- pricing competition specifically has tightened, simply because there is fewer quality loans out there, and all banks are going after them. What we do see, though, is that we maintained relationships. And that's been -- and I talked about before -- a primary focus of our relationship managers, maintain relationships with our clients so that as their businesses begin to pick up in the better economic climate, they will start utilizing existing lines that are out there, and we will see some pickup there.

On the securities side, yes, we see -- we have increased. We will allow ourselves the opportunity to grow that portfolio further if necessary. I think we are at about 28% right now -- excuse me, 24%. We would grow that -- I wouldn't expect that we would grow that to any more than 30%. But one of the things that we want to focus on is that as the net interest margin as a percent begins to come down, we want to keep that gross dollar amount up where it is as much as we possibly can, and the mix will be a function of the economic environment. Now to be specific, Kevin, to your question as to where do we see that margin headed? We could see it more along the lines of in the 4.15%-4.20% range. We would not expect that to fall that a 4% level.

Great, thank you. Very helpful.

The next question comes from Brian Klock at KBW.

Good morning, Brian.

Hey, good morning, gentlemen. I guess, Jerry, maybe you could follow up on Alex's question related to capital -- or Steve's question, I mean -- sorry -- earlier about capital. And I think you said that you had -- given where the strength the stock price is now, you would feel comfortable with raising capital to do a deal. I guess I'm thinking with 9% [PCE] and 12.9% tier-1 common you have a lot of capacity to put on an acquisition with a sizeable franchise. Maybe you can talk about whatkind of a size transaction would you be looking at without raising capital? And then maybe you can talk about what you be willing to do, and what sort of capital levels are you able to go down to?So are you focusing on [PCE] as that target level? The tier-1 common as the restrictive target level? Maybe you could talk more about that part of the M&A strategy.

Good question, Brian. I'll answer it this way. Thank you for putting my comment in context. Any type of a capital raise would be in conjunction with a significant acquisition that required us to put on additional capital. That certainly is an option. You have seen a number of those transactions in the market. We certainly wouldn't discount that from being an opportunity or potential for us in the future. However, I will tell you that our focus relative to acquisition targets falls more in the $500 million to $300 billion -- excuse me, $3 billion range. So, we have shown before that we have the ability to acquire a company, to consolidate it in an orderly fashion, to pull the expenses out, to incorporate those people into Trustmark's way of doing business, and then to move forward from there. So, target level for capital -- yes, it is very strong. But I would not anticipate that we would feel at all comfortable if it fell below 7.5%. So we are going to want to at least want to stay in that range or slightly higher.

Okay. That's very helpful. Thank you. I guess if -- as you commented, obviously some of the deals getting done now you can probably say that they are more strategic. Some of franchises' value, they may not be indicative of pricing going forward, so maybe there is some potential to getsome deals out there yet. But say those deals might be priced outside what you are willing to pay. Would you look at a buyback? I don't think you have an authorized buyback program out today, right? Is that true?

We -- yes, the one we had I think has expired. Would we look at that? Certainly it would be something that we would consider, but I think our primary focus would be to utilize the capital we had, either acquisition-wise orinternal growth -wise.

Okay. Great. One last question. Obviously the best place and way to deploy your excess capital is organic growth. [Your first time] loans held sale has grown at an [end of period] basis in three years, and you have good C&I growth. So I guess maybe are you thinking about -- is there are certain that C&I growth that's better? Maybe be you can just comment on that.

Thank you. Yes, the -- our C&I growth has been a function of our commercial and corporate area. I think the greatest potential forward is going to be in those high growth markets, specifically Texas as we've talked before. That is where there is the greatest opportunity. We have a solid team of people that are well seasoned and from that market out there now. We have done what I believe is an excellent job at integrating some of the corporate lenders and the credit administration folks here in Mississippi with that group. So is gives us I would say more soldiers on the ground looking for opportunity. That market is where it is.

At some point, Memphis, which I think struggled more than most Southeast markets as a result of subprime lending and the amount of lending that took place. Again, I'll reiterate, we didn't do any subprime lending, but we were impacted by it in Memphis, and that whole community was impacted. We seen Memphis as being an opportunity as the economy recovers.

All right. Thank you for taking my questions.

Thank you.

The next question comes from Heather Wolf at UBS.

Good morning, Heather.

Hi. Actually this is [Elena] stepping in for Heather.

Oh. Hi, Elena.

Hi. Just wanted to ask a couple of follow-up questions. I guess I will just start with M&A again. How willing would you be to look at a bank with a footprint that is more contiguous with your footprint as opposed to having a little bit more overlap?

Such as a Louisiana or an Alabama?

Well, I guess more -- we could talk about those areas as well, but also just some areas in Texas that you have not yet penetrated into.

Okay -- then you are referring to Texas as a country, and they sometimes refer to themselves as a country as well. Certainly there is tremendous growth opportunity in the in many markets in Texas, including Dallas and Austin and San Antonio. As opportunities arose to acquire institutions in those markets, or branches that may be part of a divestiture, they would certainly be things that we would be interested in looking at, yes.

And then let's just talk about loan growth a little bit more. You said that the landscape is getting more competitive in terms of pricing. How willing would you be to, I guess, be competitive in your pricing to be able to gain market share?

I would say that our primary focus is going to be on prospecting for long-term relationships. And if weed we have an opportunity to do a variety of types of business with a relationship, we would be more inclined to be aggressive with our pricing. If it is a straight- up transaction, I think we would clearly not be as aggressive. We would look to Mitch and compare what he could do in the bond portfolio simply because there is into incremental value added. So as we step and look at opportunities we want examine, there are some things within the relationship that would allow us to leverage in treasury management products. Retirement products, overseeing a 401 K program,being able to right their insurance. So those are casing would be go willing to be more aggressive in pricing, if we could pull in an entire relationship.

Thank you.

Thank you.

The next question comes from Andy Stapp at B. Riley & Co.

Good morning, Andy.

Good morning. What are you expecting in terms of the effective tax rate in 2011?

Well, we -- I'll let Louis answer that.

Andy, you can see, if you calculate oureffective tax rate on a year-over-year basis, you can see it went from slightly over 30% to below 30%. And that is a result of continued investment in tax credits, which doubled from '09 to 2010. So I would say we expected to be slightly around 30%, a little higher than 30%. Maybe a little lower. Just depends on how many tax credits we invest in the current year, so --

Okay. And the 4.15% -- just to confirm, the 4.15% to 4.20% net interest margin guidance, that is over the course of the year, not full year, right?

That is, correct.

Okay. That's what I thought. Okay. That's all I have. Thanks.

Thank you.

The next question comes from Ebrahim Poonawal from Morgan Keegan.

Hi, guys.

Good morning.

Good morning. A question going back just to your guidance on the $6 million to $9 million impact opt year-over-year on the service charges. Does that include the $4 million to $6 million anticipated charge due to Durbin?

No, that is a total impact on this years number.

There is two components on that, Ebrahim;the service charges by itself, or the NSF, would be $6 million to $9 million, and then the banking card fees included in the Durbin would be a $4 million to $6 million, which is separate from the NSFs. So there are two separate line items that those are made up of. $6 million to $9 million is in the service charges on the deposit accounts. The Durbin amendment of $4 million to $6 million is included in bank cards and other fees.

Got you. And did something cause to change that? Because -- and maybe I have my notes wrong here, but I thought the full year impact was about $5 million that you expected from Reg E, and most of that was kind of in the fourth quarter number?

Well, I think on an annualized basis -- and we [on the] last year in one of the previous Qs that we indicated that on an annual basis that would be the impact. So ifyou look at an annual impact from what we had in the fourth quarter, that would be around a $3.6 million number on an annualized basis just for opt-in opt-out. And as Jerry mentioned, there is other considerations to Reg E, like posting an order, the number of occurrences, and minimum dollar amounts that could impact [10-11] as well, as included in the $6 million to $9 million.

And the Durbin, aren't you guys exempt from the Durbin Amendment, because you had assets less than 10 billion at year end?

We are. However, I think the markets have a way of becoming efficient, and for us to compete in the debit card business and remain competitive, I think to think that we can be part of this split pricing maybe a little bit unrealistic, so we are preparing for the fact that we are going to have to have pricing that is consistent with a larger organization. And remember, as -- all of the banks are going to be affected by these two things, both service charges on NSF fees, remodeling and restructuring their overdraft protection program, and on the interchange fees.

Got you. That's all I have. Thank you, guys.

Thank you.

Thank you, Ebrahim.

Our last question comes from Michael Rose at Raymond James.

Good morning, Michael.

Good morning. My questions have actually been answered, thank you.

Thanks, Mike.

That does conclude today's question-and-answer session. I would like to turn the conference back over to Jerry Host for any closing remarks.

Thank you very much. In conclusion, let me say that Trustmark continues to look forward to a future of solid earnings, because of the fact that we have I believe some of the strongest people in the industry working in this organization. Thanks to Richard. Over the last 13 years he has helped to strengthen the capital position of the Company, improve its focus, put us into highly competitive markets that give us a chance to grow this Company. We just need to step up and take advantage of that, and I will tell you that I feel very, very good about the prospects of this year, this organization and the opportunities that are out there for us.

Again, thank you for taking the time in covering us and in being interested in our Company, and we look forward to the next quarter.