Trustmark Corp (TRMK) 2015 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, there will be an opportunity to ask questions. (Operator Instructions) As a reminder, this call is being recorded.

It is now my pleasure to introduce Mr. Joey Rein, Director of Investor Relations at Trustmark.

Good morning and thank you, operator. I would like to remind everyone that a copy of our second quarter earnings release, as well as the slide presentation that will be discussed on our call this morning is available on the Investor Relations section of our website at trustmark.com.

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, we'll turn the call over to Gerry Host, President and CEO of Trustmark.

Thank you, Joey and good morning, everyone and thanks for joining us. Also joining me this morning are Louis Greer, CFO; Barry Harvey, Chief Credit Officer; Tom Owens, Bank Treasurer and Breck Tyler, President of Mortgage Services.

Let's review some of the highlights for the second quarter beginning on Page 3 of the presentation material. We're pleased with the solid financial performance of our diversified financial services business this quarter and wanted to spend a couple of minutes discussing the progress we've made on a few of the strategic priorities we have in place to enhance shareholder value. The first and continued primary focus is profitable revenue generation. In the second quarter, noninterest income increased 7.5% from the prior quarter driven by broad-based growth across our diversified lines of business. Insurance commissions increased 9.1% linked quarter and totaled $9.4 million, the highest quarterly revenue since the second quarter of 2007. Business development continues to remain a focus of our associates and our associates have worked hard to create and expand customer relationships. Earlier this year, we hired additional experienced account executives that have begun to build traction and should contribute to our insurance business moving forward.

Similarly mortgage banking continued to perform well and revenue increased 5.8% from the prior quarter to total $9.5 million. During the quarter, we expanded our mortgage banking capabilities with an addition of 10 mortgage producers in our Alabama and Florida markets. These producers will complement our services and products in established locations as well as serve customers in new markets. Profitable loan growth continues to remain important. During the quarter, our net interest margin, excluding acquired loans expanded linked quarter to 3.49%, quite an accomplishment even with the intense competition in our marketplace. Our focus has enabled us to increase interest and fees on both loans held for investments and held for sale from the prior quarter and year. The acquired loan portfolio continues to perform well and exceed our expectations providing us with additional capital to support continued growth.

As mentioned on prior earnings calls, we've made investments to augment delivery channels and infrastructure, including investments in remote deposit ATMs and myTrustmark, our online consumer banking solution. We're very pleased with the results thus far and in particular have been excited about the adoption rates for myTrustmark. As you're well aware, the banking business has been undergoing structural changes that we want to ensure we continue to meet the wants and needs of customers in the manner they choose to interact with us. Along those lines during the quarter, we opened two new banking offices in markets with promising growth opportunities and consolidated five banking offices. We also announced plans to consolidate two additional banking offices in the third quarter. We've also been methodically optimizing our staffing levels and mix to ensure we continue to deliver the high level of service, our customers expect. Now on to credit quality, as usual, our two main focuses will be to continue our sound underwriting and review processes, while resolving existing problem assets. In this area, performance continues to remain solid and reflect steady improvement. Both classified loans and nonperforming assets declined on a linked-quarter and year-over-year basis.

In the second quarter, we also realized annualized net charge-offs that totaled seven basis points of average loans. In total, net income in the second quarter was $30.6 million, which represented earnings per share of $0.45, up 4.7% from the prior quarter. Return on average tangible equity, and return on average assets came in at 12.05% and 1.01% respectively. I'd also like to remind you, that our Board declared a quarterly cash dividend of $0.23 per share, payable on September 15, 2015, to shareholders of record on September 1.

If you turn now to slide four, we'll discuss the results in a little bit more detail. Looking at the deposit base at June 30, 2015, average deposits totaled $9.8 billion. Noninterest-bearing deposits represented approximately 28% of average deposits at quarter end. We continue to have a great low-cost deposit base, highlighting the strength of our franchise with nearly 60% of deposits in checking accounts. Although not fully appreciated in the current interest rate environment, we're proud of the relationships we've built over the years.

Now turning to slide five, we'll look at credit. Please note that these credit quality metrics that I'll discuss exclude acquired loans and other real estate covered by an FDIC loss-share agreement. At June 30, 2015, classified loans decreased 1.8% from the prior quarter and 11% from the prior year. Nonperforming assets decreased $8 million or 4.8% from the prior quarter and $19 million or 10.6% from levels one year earlier. During the second quarter, net charge-offs totaled $1.2 million and represented seven basis points of average loans. The allowance for loan losses totaled $71 million and represented 192.6% of nonperforming loans excluding impaired loans.

Now turning to slide six, we'll be looking at our legacy loan portfolio. We continue to focus on profitable, credit-disciplined loan growth. At June 30, 2015, loans held for investments totaled $6.4 billion, an increase of approximately $33 million from the prior quarter. When compared to one year earlier, this portfolio grew $260 million. Both the $66 million in Alabama and Texas was partially offset by $33 million in reductions in Mississippi, Florida and Tennessee. Loans secured by nonfarm, nonresidential, real estate increased $50 million (sic - see presentation, "$56.9 million") during the quarter as growth was distributed evenly between income producing and owner-occupied properties. The single-family mortgage portfolio expanded from the previous quarter and was driven by growth in our Mississippi and Alabama markets. Other real estate secured loans, which include loans secured by multifamily residential properties increased during the quarter, reflecting growth in Texas, Alabama and Florida. Commercial and industrial loans in Tennessee, Alabama and Florida grew approximately $13 million, but was more than offset by $22 million in reductions in Mississippi and Texas. State and other political subdivision loans decreased $40 million from the prior quarter. Construction, land development and other land loans decreased slightly as balances migrated to other segments of the held for investment portfolio.

Now on to our energy portfolio. As you're well aware, Trustmark has no loan exposure where the source of repayment for the underlying security of such exposure is tied to the realization of value from energy reserves. That said, we continue to monitor our energy exposure closely. At quarter-end, Trustmark had total energy exposure of $408 million and outstanding balances of $190 million, both of which were down from the first quarter. Should oil prices remain at current levels or below for a prolonged period of time, there is a potential for downgrades to occur and we'll continue to monitor the situation as appropriate.

Now looking at slide seven, let's discuss the performance of our acquired loan portfolio. At June 30, acquired loans totaled $466 million, a decrease of approximately $32 million from the prior quarter, but the second quarter of 2015, the effective yield on acquired loans was 7.46%, which was in line with expectations and recoveries on acquired loans totaled $3.6 million resulting in a total yield on the acquired loan portfolio of 10.43% for the second quarter. As a result of our most recent re-estimation of cash flows, we expect the yield on acquired loans excluding recoveries to be in the 5.5% to 6.5% range for the third quarter of this year. We also anticipate during the third quarter that acquired loan balances excluding any settlement of debt will decline by approximately $35 million to $45 million.

Let's look at revenue highlights by turning to slide eight. Revenue totaled a $142.5 million, a 7.8% annualized increase from the prior quarter. Net interest income on a fully tax equivalent basis for the second quarter totaled $101 million and resulted in net interest margin of 3.81%. Excluding acquired loans, the net interest margin in the second quarter totaled 3.49%, up from 3.47% in the prior quarter. In the second quarter, noninterest income totaled $45.5 million, an increase of $3.2 million or 7.5% from the prior quarter. Linked quarter insurance revenue expanded 9.1%, while service charges on deposit accounts increased 7.5%. Mortgage-banking revenues and production increased 5.8% and 36.9% respectively from the prior quarter. Banking card and other fees performed well, increasing 9.7% from the first quarter. As a reminder, when comparing the year-over-year change in this line of business, Trustmark became subject to the Durbin Amendment on July 1, 2014. Wealth Management decreased 2.9% from the prior quarter due to lower income from brokerage commissions and retirement plan services. Other income increased linked quarter due to a few factors, which can be referenced in our second quarter earnings release.

Turning now to slide nine, we'll review noninterest expense. In the second quarter, our efficiency ratio improved to 66% with noninterest expense totaling $100.3 million, excluding ORE and intangible amortization of $2.9 million, noninterest expense totaled $97 million, an increase of $1.3 million from the prior quarter. Salaries and benefits increased marginally linked quarter primarily due to increased commission from higher mortgage production.

ORE and foreclosure expense decreased $194,000 from the prior quarter and $2.9 million from the prior year. Service and fees increased from the prior quarter reflecting additional legal and data processing expense while other expense increased on higher loan expense. As mentioned earlier on the call, we continue to review our retail delivery channels and branch network and believe that banking will continue to evolve as something customers will do, not necessarily some place they will go. During the second quarter, we completed the previously announced consolidation of five banking offices and announced plans to consolidate two additional offices in the third quarter. Since 2012, inclusive of pending closures and openings, Trustmark will have consolidated 30 offices reallocating a portion of those resources into eight new offices in attractive markets. Separately we expanded our mortgage-banking platform in the second quarter with an addition of new mortgage loan-production office in Florence, Alabama. In July, we also opened a mortgage loan-production office in Pensacola, Florida. Coinciding with the optimization of our delivery channels, we continued to methodically augment staffing levels and mix to continue delivering the high quality service that our customers expect. While we recognize technology will become increasingly more important in our industry, there's nothing that can replace personal and professional relationships.

Now looking at slide 10, we'll discuss capital management. Trustmark continues to maintain a solid capital position and remains well positioned to meet the needs of our customers and provide value for our shareholders. At June 30 of this year, Trustmark's tangible equity to tangible asset ratio was 8.93%, while total risk-based capital ratio was 15.07%.

Now looking at slide 11, we'll conclude by discussing our strategic priorities. We've already discussed profitable revenue generation, process improvement and expense management and credit quality, but do not want to overlook our other strategic priorities since they're very important as well. Looking at leveraging existing infrastructure investments, we've made significant investments in recent years and are well positioned to support a significantly larger organization. Effective risk management, we take this very seriously and have committed a significant amount of resources to this area to ensure that our risk management processes help us more effectively manage our businesses. And our mergers and acquisitions, we will continue to use M&A as an opportunity to complement internal growth and expand into additional attractive markets, but we will be patient and disciplined in our process, so we can ensure that we continue to create long-term value for our shareholders.

And now at this time, I would be happy to take any questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Brad Milsaps, Sandler O'Neill

Hi. Good morning.

Good morning, Brad.

Just wanted to ask you couple of questions, maybe on the core NIM this quarter, you had a couple bits of expansion, really looks like driven by a seven basis point increase in loan yields. Just curious, kind of what you are seeing there in terms of pricing, what effect if any, did, some of the payoffs have in terms of prepayment fees and kind of how you feel about that core NIM going forward?

Yes. Pricing has been very competitive and obviously I'm sure one of the other questions we'll get will have to do with loan growth, we have remained very disciplined there. I think that affected growth in the second quarter, but we're staying very disciplined with our pricing and really with our credit disciplines, but in terms of the overall core NIM, let me ask Tom Owens if he will add some color Brad.

Sure. So Brad, we've talked in the past about normal quarter-to-quarter volatility in loan fees and talked about how that sort of a normal range of about 10 basis points or so expressed as net interest margin. In the first quarter, loan fees were sort of at the low end of that range and in the second quarter, normalized closer to the middle of that range. So the majority of that increase that you see is due to just normal volatility of loan fees -- core net interest margin.

Got it. So, absence of noise around loan fees, you kind of see that core NIM sort of [balancing] in this range?

Yes. So, if you think about the previous guidance that we've given sort of low-single digit percentage compression in net interest margin year-over-year, I think that guidance still holds, I mean you look at our core NIM, year-over-year is off six basis points, that's about a 2% decline year-over-year. And I think that is a reasonable expectation going forward that it will be low-single digit compression. We continue to believe the growth in earning assets will offset that. So that core net interest income should increase overtime, which it has.

Great. That's helpful. Thank you.

Thank you, Brad.

Preeti Dixit, JPMorgan.

Hi. Good morning, everyone.

Good morning, Preeti.

In terms of loan growth, can you talk about how the different portfolios performed versus expectation, particularly this day in political book, which I know is down about $40 million or so in the quarter? And then if you can update us on how you feel about that mid to upper-single digit growth given where the pipeline sits today?

Okay. I'll start and ask Barry to add a little color and then maybe come back on what we're thinking for the remainder of the year in terms of overall growth. As far as state political subdivision, that market has become extremely competitive and we're seeing this has extremely low return levels. And so, we effectively have backed out of replacing some of the normal run-off. So bottom line is the $40 million you saw pay-off was expected. However, we did not replace much of that at all. As far as some of the other mix, let Barry comment on what's going on there. We have seen -- we saw what we had expected, pretty good growth for the second quarter that was offset with some unexpected take-outs of both in the [loan] portfolio, as well as some of the construction and many [farm] portfolios. So Barry, you want to add to that please.

Glad to, Gerry. I guess backing up to the [public] finance part of your questions, what the reduction we had, the $40 million reduction we had, the $22 million in that was one credit that was scheduled pay-off and as Gerry mentioned did pay-off according to plan, so it was a large credit with the same participant bank and really the same Board, different market, we're going to have another opportunity for a similar type of transaction, so we're excited about that. We've also had recently within the last 30 days to 45 days, we've had probably a good $60 million plus worth of public finance deals that we bid on have been successful, they're in the process of being boarded and they will be dealt upon when they are boarded, so we're encouraged about that particular business, and as Gerry said, it is very competitive price wise, we try to be disciplined (inaudible) long winded, on the shorter durations we try to be extremely competitive because it is good business and it is something that we do well. Just in general terms about the loan growth, I think it's a very positive story going forward, we believe. When you look at the CRE construction bucket, it looks like on the financials we're [probably] $9 million dollars down, in reality we had about $76 million worth of migration out of CRE construction into existing categories, whether that be non-owner occupied, owner occupied or multifamily. So in reality, the CRE construction continues to grow, we actually grew about $69 million this quarter. It's a bigger chunk that got deferred out into the existing categories, so we still think good opportunities in the commercial construction category whether it be for multifamily, office space, retail, etc., so we're encouraged by that. We're also very encouraged by what we saw in the month of June, we had about $61 million worth of loan growth in the month of June. We're seeing that same type of activity and volume moving into July as well. So, while the first part of the year was much slower than we had anticipated, probably for a number of reasons including the -- some unexpected pay-offs as Gerry referenced, we're very encouraged about what transpired in June and we're very encouraged by what we're seeing transpiring thus far in July, hope that trend will continue.

Okay. That's very helpful color. That $61 million is on the total book?

It was for the month of June.

Okay. Great. And then switching gears to expenses, I know you plan on two more branch consolidations in the quarter. Can you talk about the opportunity from here for further consolidation? And then as we move through the year, should we expect expenses to start grinding higher from that I guess it's about $97 million ex-OREO, given the investments you're making?

Louis, I'll comment quickly on future branch consolidation, but you -- if you would answer the question about core expenses. As far as future branch consolidations, we see our sales really going through as the industry as a whole goes through a transition from physical location to more of an online type of environment. So we have put technology in place, made the investments to accommodate how our customers want to bank with us in the future. We still believe though that the branch network is a vital part of these relationships that we have. And what we have to do is watch the demographics, look at the overall mix of branch locations and other opportunities that we have available to us. So it will not be an immediate closure of X number of branches, but more an ongoing process of optimizing each of the markets that we have and growing where there are opportunities. So Louis, you want to comment on the core expenses?

Yes, Gerry. Thanks. Preeti, this is Louis and I will tell you that related to our core expenses, we continue to expect to maintain that core expense between the $96 million and the $97 million range, maybe a little closer to $97 million, I know, we had some increases in our data processing and legal expenses, some of that was one time. We do expect to manage those expenses continually in that $97 million to $96 million range on an ongoing basis, specifically through the third quarter and project it for the fourth quarter as well at this time.

Okay. That's super helpful. So then in terms of the efficiency ratio, you think sitting at 66%, I mean, obviously growing some higher efficiency fee businesses? How should we think about the direction of the efficiency ratio overtime?

Yes. We work out to get that efficiency ratio down every day, there's a lot of moving parts. As you look at, not only the revenue side, the expense side, but you can see it's been pretty consistent for the last two quarters. So hopefully, we can maintain that ratio at least at a level hopefully bringing it down in the future.

Okay. I'll step out for now. Thanks for all the color.

Thank you, Preeti.

Michael Rose, Raymond James.

Hi. Good morning, guys. How are you?

Good morning, Michael.

Just, one quick one first, the other miscellaneous income on page 11 of the release was up fair amount, I know that categories won't be anything, any color to add or anything happened in the quarter in that line?

Michael, this is Louis. I can tell you that we do have a gain related to some relative contract of around (inaudible) follows the biggest piece of noise that's in there, I think, that's bad (inaudible), but that's a combination of various things.

Okay. That's helpful. And then maybe for Gerry, if you can just maybe remind us, kind of what you look for, I mean M&A landscape and maybe what you see mortgage in terms of pricing and maybe in some of the various markets and just remind us kind of what you look more in terms of size and any color you can add? Thanks.

Sure. We -- although you haven't seen anything announced, we continue to remain very active in looking for opportunities on the M&A front. Our focus primarily in the Southeast, as we talked before. We don't have physical locations in Louisiana, although our corporate lending group has relationships there, both with other banks and individually and we don't have physical locations in Georgia either. Yes, because of the Alabama acquisition, there are opportunities to expand in that market as well. Tennessee, currently we are in Western Tennessee, there's a lot of activity, economic growth in Central Tennessee and so, those are some of the areas of focus for us from a geographic standpoint or a size standpoint, Michael, we would love to do anything more likely in the $500 million to $3 billion size wise.

We have [drew] solid steady earnings growth, have been able to build our capital levels back from the BankTrust merger, the levels that will allow us to look at acquisitions within that range. As you know, we're diligent in our approach to acquiring to ensure that we could find deals that will be very quickly accretive to our shareholders. We found that there seem to be more players in the market than they were two years back and pricing in terms of what we've seen -- as with loans pricing for M&A transactions appears to be getting more competitive. I hope that helps.

Yes. That's great color. Thanks, Gerry. Thanks for taking my questions.

Thank you.

(Operator Instructions) Kevin Fitzsimmons, Hovde Group.

Hi. Good morning, guys.

Good morning, Kevin.

Just wondering if we could go little more top level on NII, I know you guys have talked about the core NIM and what you expect in terms of the accretable yield separately, but if you look at it in whole, do you think we're getting close to a point where reported NII will stabilize? It was only a modest increase this quarter, while you were dealing with the headwinds of accretion income going down and the loan pay downs that we talked about, are we getting close to a point or we still a few quarters up from that? Thanks.

I think, Kevin, Tom is worth to answer that. By indicating the current trend we're on, you would show some decrease, some of the things we've done to help to minimize that or some of the pre-funding that we've done in the investment portfolio. Tom, any additional thoughts that you might have?

So Kevin, I would say that for the remainder of 2015 and into 2016, you'll continue to see when you add it all up, some pressure on total net interest income, including core. And so, it's tough to put a number on it, but very low-single digit compression when you add it up in 2016 versus 2015. I don't know off the top of my head, if there's a quarter in late 2016, where you do hit that inflection point that you're talking about. But for the year, in 2016 I would imagine you would still have total net interest income slightly lower as a result of the acquired loan run-off.

Okay. And I guess in terms of the reported margin versus the core margin, we should think about the 3.81% gradually working its way down towards the 3.49%, although maybe the -- not including the impact if short-term rates start to go up. And that time period maybe as a year, year and a half that we should bake in, in terms of that normalization?

Kevin, this is Louis. I think we've disclosed in the current quarter that the yield that we expect in the third quarter, the future is going (inaudible), but the unknown really is the settlement that come across in the recoveries associated with that. As we look at that, we've disclosed that every quarter that has a pretty big impact to that total NIM as well. So, depending on recoveries, we feel like that the accretable yield is [sailing] around at 5.5% to 6.5% moving forward, but it's really the uncertainty related to those recoveries. So it's hard to determine when that's going to compress all the way back to the norm, but as you're aware we're at $466 million a day. As (inaudible) payoffs moving in the future or again we're between that $35 million and $45 million in the next quarter, and then we could see a leveling off of those payoffs coming based on the expected cash flows as well. So it's going to take overtime for those to merge back together as the paydowns continue on the accretion.

Okay. Hi, Kevin. This is Barry, I would like to mention to you that we [profit] from our recovery standpoint. I think we feel like the second half of the year, there's some good opportunities that still remain that we expect to get resolved and then after that, it's going to be, as Louis indicated, I think it's going to be a little more predictable and a little less volatile as we move into 2016.

Great. Very helpful. Thank you. Just one add-on question on the M&A from a minute ago. Gerry, you mentioned Louisiana in the past month plus, we've seen oil prices come down and some banks down there tend to get lumped in with having energy exposure, how do you feel about that, in other words, if you had a conversation with a bank that had some healthy amount of energy exposure, and is that something you would just avoid at all costs or do you look at it more from a longer-term basis and willing to take on some volatility and take on some of that exposure? Thanks.

Thanks, Kevin. To answer your question, we look at any M&A transaction with a longer-term view. We look at it from perspective of what can -- what do they bring to the table that we can help to improve and expand on when there are opportunities. We feel like we have very strong credit disciplines that we could bring into a situation as far as energy exposure, specifically we do extensive due diligence anytime we look at a transaction. And if we saw that there was significant energy exposure, that would be the first place we'd look, we take a deep dive, we would determine what we felt like was the appropriate risk, market accordingly and move on from there. So Barry, anything you add to that.

I don't think so, Gerry, other than that. Kevin, we're trying to stick to what we understand and when you look at our energy exposure today, well there are several credits in there that have a direct correlation to the commodity price. In many ways, at the core they are operating companies and that's what we understand. Therefore, you don't see us in the EMP side, you don't see us in the reserve base side. Not that those are'nt good businesses, they are, and if we have the expertise, which we would be interested in acquiring them if we have the opportunity, but if we have the expertise then we would be in those lines, those pieces of the business as well. So it's just a matter of assessing the opportunity as Gerry indicated bringing in some expertise if we didn't feel like we have the expertise to assess the risk in certain categories and then market the (inaudible).

Okay. Great. Thank you very much.

Thank you, Kevin.

David Bishop, Drexel Hamilton.

Maybe following upon on Kevin's question there. Just curious, where you stand in the review of the energy book, maybe give us an update in terms of what you saw in terms of review of financials quarter-over-quarter?

Let Barry do that.

Our exposure as is indicated in our press release and (inaudible), just show that the exposure we have is $408 million, about 4.5% of the total bank exposure, outstandings about $190 million or 3% of the bank exposure. What we've seen as it relates to funding has been very consistent whereas in that 47%, 48% of funded lines. So we're not really seeing increasing drawdowns. The quarter-over-quarter changes, we've reduced exposure by about $21 million quarter-over-quarter, about $5 million in outstandings. We've reduced exposure about $24 million year-to-date and $18 million on the outstandings. Our [composite] stayed pretty much intact as we've reported in previous quarters, we're tracking about 45 credits, they represent about 96% of the energy exposure launched in those very carefully. Today, we've got one special mention credit that is about $7.8 million. We've got $85,000 worth of substandard and then no doubtful, no non-accruals. We're looking at the statements for margin measure, we're getting them timely, looking at them quickly when we get them, look to all of our covenant testing, (inaudible) when we have covenant bust. And if we do, we're getting quickly to the table with our customers. We've had probably about four instances where either the, we had a covenant bust or we had a projected covenant bust that the customer want to go and deal with now as opposed to later in the year. We felt like based upon that assessment that we're in good position today, we've gotten as everybody has, regulatory reports provided to them that may cover some of these energy credits. We've not had any adjustments we've had to make as a result of that. So on the whole, I think we're feeling pretty good about energy book. We fully understand that as the commodity prices drift back down, which they have (inaudible) and continue to and that becomes protracted over an extended -- over a long enough period of time, then it will continue to put stress on these borrowers and will continue to potentially have downgrades. We don't see the provisioning for those downgrades to be significant at this time, but there's always a potential for those downgrades to occur if you continue to have stress on these borrowers. What we have seen from visiting with our customers is they've been extremely reactive to the drop in revenues with the reduction in expenses through first and foremost people, but also stacking rigs, drop in insurance, they've also gone through the process, of course, CapEx is little to none for most of these customers at this stage based on what they see as their potential business opportunity. So on the whole, we've been pretty pleased with how our energy portfolio has performed. We've been very pleased with the customer reaction we've had, which has been quite a bit. And more or so, their reaction to the downturn and their reaction to the belief that the downturn may be protracted and taken pretty aggressive actions to try to get that expense base in line with the drops in revenue.

Good color. And then in terms of sort of maybe the last comment in terms of the companies maybe making adjustments, layoffs and such, have you seen any sort of stretch yet on any of the consumer portfolios, you may be to the extent that there's an auto loan or home equity or residential mortgage out there, have you seen any sort of tickup, maybe in -- the early stage delinquencies related to the consumer book with an uptick in rising unemployment maybe in some markets?

We really have and I talk to our collection guys everyday about kind of what conversations they're having with our customers in terms of reasons such as, you see $4 gas and there is the auto customers are going to be quick to tell you, they can make the card payment or they can fill up the vehicle, they can't do both. In this case, we're just not hearing any comments from any of our customers that they either don't have as many hours or have lost the job relating to the energy industry. So, at this point we've not seen any impact on our consumer portfolio based on the downturn of the energy section.

Great. Thank you for the color.

Thank you, David.

Emlen Harmon, Jefferies.

Hi. Good morning.

Good morning, Emlen.

Question on expenses, and just related to both branch closures and some of the new branches being developed, how much of an effect do those activities have on the expense base and is there a temporary effect from that, I mean, on the closure side, obviously, you could have someone timer's in terms of either severance or lease terminations that kind of thing, but just kind of curious to what their business development costs tied to that, and just want to get a sense of the overall effect on the expense base to that?

I think you'll see the impact over a long period of time, the steady continuous decrease as it relates to the cost of operating the branch network. From time to time, as we close a branch or sell a branch where we've got high cost bases, we may experience like we did, I think it was the first quarter of this year, some one-time losses. But by and large you should see some steady decrease in the overall cost, the retail operations. Some of the things we've been doing to increase revenue in other areas, hiring people in the insurance area. We mentioned Breck Tyler and his team, is higher 10 mortgage producers in the Alabama, Florida market. So you don't see it immediately because we're really realigning resources in the Company to ensure we have a focus on profitable revenue growth.

And Gerry, as we point out in our (inaudible), you can see that our headcount has steadily come down quarter-over-quarter. So it is a longer-term effect versus the one-time event.

Got you. So there wouldn't be even in this quarter, there wouldn't be anything related to the lease terminations or severance and the expense number?

A very little severance in that expense number related to lease terminations at this time.

Okay. Thanks. And then just on Texas, I guess specific to be on the Houston market, it seem like up from a loan growth perspective, a little bit of mix trend in Texas, you noted Texas was up overall, but seem like maybe C&I was weak, could you give us a sense for what you think the growth trajectory is there just given everything that's happened with the energy complex? Thanks.

This is Barry. I guess, just to put in context, our exposure in the Texas market is about 18% of the total exposure for the bank, but what we're seeing is continued good opportunities coming out of that market, I'm sure they will, there has been and will continue to be some commercial real estate projects that will be either delayed or adjusted based upon what the investors believe, the outlook for the economy is obviously as the pace of growth from an economic standpoint has slowed, it very much is unique to the different sub-markets within the -- in this case within the Houston market for us. The sub-markets are different -- they're affected differently above the downturn. There are sections of the market there in Houston that are benefiting from the reduced energy prices, where they're [talking about] healthcare, technology, a number of different -- some manufacturing sectors are benefiting from it. So there are some areas that are benefiting from the downturn in the commodity price, but obviously the pace in which the economy was growing, which was very brisk for quite a while, has slowed in all indications on the forecast we look at, that slowdown will continue as long as we have these oil prices at this level. Now if they move back up some and become predictable and a little more stable, then I think you'll see a return of continued fast-paced growth in that market. But today, I think that, what we see is a slower pace than we've seen previously. But we do expect to continue to see good lending opportunities coming out of both the Houston market as well as the Texas market in general.

Great. Thanks a lot.

Thank you, Emlen.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Gerry Host for any closing remarks.

Thank you, operator. We appreciate it. And I'd like to thank everyone that's been on the call today. We appreciate your interest in Trustmark. And we look forward to speaking with you again at our third quarter conference call. Thank you all.

And thank you, sir. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines.