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Trustmark Corporation (TRMK)

Q1 2008 Earnings Call Transcript

April 23, 2008 11:00 am ET

Executives

Joey Rein – Director of IR

Richard Hickson – Chairman, President and CEO

Barry Harvey – SVP, Chief Credit Administrator

Buddy Wood – Chief Risk Officer

Bob Hardison – Chief Commercial Credit Officer

Jerry Host – President and COO

Analysts

Barry McCarver – Stephens Inc.

Kevin Fitzsimmons – Sandler O'Neill

Charlie Ernst – Sandler O'Neill

Arran Jacobson – KBW

Peyton Green – FTN Midwest Securities

Operator

Good morning ladies and gentlemen and welcome to the Trustmark Corporation's first 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, today's call is being recorded.

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

Joey Rein

Good morning and thank you. I would like to remind everyone that a copy of our first quarter earnings release and supporting financial information is available on the Investor Relations section of our Web site at trustmark.com by clicking on the News Releases tab.

During the course of our call this morning, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We would like to caution you that these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties which are outlined in our earnings release and our other filings with the Securities and Exchange Commission.

At this time, I would like to turn the call over to our Chairman and CEO, Richard Hickson.

Richard Hickson

Good morning. Thank you for joining us this morning. I have with me this morning Jerry Host, our Chief Operating Officer; and Louis Greer, our Chief Financial Officer; plus other members of our management team in order that we can cover all the questions that you might have. I will follow -- outline our news release and stat sheets. We have endeavored to give you maximum transparency into a number of areas of the company. We will surely be pleased to answer any questions and discuss any areas that you might want to discuss after my comments.

We had recorded net income of $26 million or $0.46 a share. I think from your perspective and ours, there were three significant items that affected earnings for the quarter. First, we provisioned approximately $14 million for loan losses primarily the Panhandle of Florida and we will discuss that in depth. That amounted after-tax to I believe about to $0.16 a share, our provisioning, and you can surely reflect that when the provisioning goes back, Trustmark's earnings will look superb because they look good today even with that level of provisioning.

We had a superb quarter in mortgage banking with our volumes up, the value of mortgaged assets remains stable, while yields on treasuries declined, therefore we were a beneficiary. We were a beneficiary in the management of our MSR mortgage banking portfolio of approximately $7 million. And at the proper point, Buddy Wood will surely comment on that and give you some insight to that.

As most all other financial institutions, we had a $1.5 million recapture and gain from the Visa settlement. Our return on tangible equity was about 17.5%, our return on assets a very, very solid 1.19%. We are seeing our efficiency ratio work down now in the 56% range. Our profitability increased our tangible internally generated equity and we have seen a strong increase from a year ago of approximately 8%, around the $50 million range. That's giving us some significant financial flexibility to take advantage of opportunities, whether they'd be lending or other in the marketplace.

I'm very pleased with the diligence and attitude of all of our people in the company, particular those in Florida and our special assets and loan review teams that put a significant amount of effort into Florida in a continuing way over the last quarter. Our non-performing assets jumped up to 1.21 of total loans.

If you will take a look at page three, we've given you some transparency there in the stat sheet. You will see that number is still very manageable for us. Non- accrual loans at around $78 million, up around $12 million, most of which was in the state of Florida. That was principally tied back to one loan that is a town house project of around $8.5 million that is completely finished, well built. It's about 60 town houses in seven or eight buildings. A number of them are under contract to sell in the $130,000 range, $140,000 range, five or six of those.

We have recognized and we are in process of a full impairment on them, but we recognized what we consider the borrower's inability to market the project on a timely basis. So, even though it is not past due at this point, we went ahead and put it on accrual. We're working on our appraisals, but we try to come back and look at it before we get our appraisals and have everything to do with full impairment analysis. We took a look at it and tried to look at it as if it were an apartment and we've reserved approximately a third of the value of the loan. We think that will be sufficient when we actually get our impairment analysis.

It's a quality product, it was built for people who work on the Gulf Coast, not vacation there. It's off the coast in one of the close-drive towns where even a number of our people with our insurance company and bank, and we think they will move out. I think once we can get some control of the project, we'll see it move through rather rapidly.

On the non-accrual side, there was nothing else of any significance that I would bring to your attention. The Tennessee was one builder loan. We're on top of it. We see nothing of significance there with any laws. Texas is one loan that was an acquired loan, it's not a real estate loan, it's a C&I loan. We have the owner occupied real estate and the equipment. It's been reserved for -- we don't see anything that will move the needle on the company on that.

Our other real estate did not move. There is an issue that you probably heard about and that is it's taking a significant amount of time in the state of Florida to address for closure. We're seeing some deed in lieu of foreclosure in the marketplace. We have not experienced that ourselves at any level at this time. We have had some properties move in and some small amount of properties sell.

If you take a look at page five, I will address net charge-offs and provisioning. We tried to give you the transparency of going in by area and you can see that our charge-offs in Florida, the only ones of any significance in our company were about $10 million, $9.7 million. This was principally the four of five loans that we mentioned to you, that we recognized in the third and fourth quarter of last year, reserved for them then. Did our impairment analysis and overall it came in fairly close to our impairment analysis to where we were in our reserving.

We sent our loan review team back into Florida. They were there in late February on up through the middle of March. They covered 85% of the dollar volume. There were a number of individuals, six or seven of them. These are experienced individuals. Most of them were bank examiners before. It was principally the same team that did due diligence when we purchased the bank in Florida four years ago. They've been back into that market a number of times.

They spent a significant amount of time going over the entire loan portfolio. As I said, there was 85% coverage. They were complimentary in saying that our loan officers know their credits, we know the relationships. They had some good debate and we are all in agreement with what they did on the grading. We now have classified in Florida approximately $100 million in loans. As you would expect, it is primarily centered in our construction and land development portfolio.

In our portfolio in Florida, there are about $70 million in past due loans. Approximately $50 million of that $70 million is already all non-accrual. So, I think we are putting a fence around this issue and that we have now classified 25% of it. We put half of that on non-accrual and we, I believe, have $21 million. That's 30 days past due that's not all non-accrual and I assure you, we're all over those credits with our workout people, our officers and our credit administration people.

If you take a look at the portfolios on page five, by geographic region, there was no real change. We are in a process at this point of seeing fairly good loan growth in Houston, some loan growth in our larger commercial areas in the Jackson market, covering the Mississippi Gulf Coast, Central Mississippi.

We have taken a hard look at our Auto portfolio. We don't see anything systemic there that -- coming at this time. Losses are up marginally, still below peer median, but we have let our auto paper run-off about $50 million in the quarter, where we were normally underwriting about $50 million a quarter, we dropped it down it to the $20 million range. We anticipate seeing this auto portfolio slowly move down. We have not set a target, we are just going to be prudent.

We have put higher requirements on profitability and credit on that portfolio and that's why we're seeing it and we would come in at around the $20 million range and we feel that $20 million is fine and we are not expecting, at this time, any deterioration in that portfolio that I would expect to be here talking with you about.

Let's take a look at losses for the quarter on page five. Net charge-offs around 9.8 million. Mr. Host reminded me and wanted me to tell you that we're seeing some movement in properties and our losses and we're not missing it by far. And what we're seeing and what we're saying is going to be there. We had a property moved, I think it was right at $3 million, 15 lots or so and we were dead on. We have seen other lots sell to individuals.

We don't believe we are seeing, at least not with us, any wholesale bottom feeders in our properties. We do have those 17 homes that over in Panama City that we talked with you about, with that developer we expect that foreclosure to finalize and we believe we reserved well against that. And those were those homes, that I believe, sell at around the $300,000 level, something in that range.

I'm going to leave the credit issue for a minute and go to a couple of other things and we will come back and open it for questions.

I am so pleased with the performance of a couple of thousand people who had anything to do with deposits in our company. They have really worked well together to control our deposit cost. Call it dominance in our markets, call it willingness to negotiate, but they have brought our deposit cost down and they've all done a very good job of doing that. Because of that, we were able to sustain what I think is a superior net interest margin, and I was in our asset liability meetings day before yesterday. I pose the question again, we've re-run our margin models and I see stability in our margin for the remainder of this year.

We were in a position with a much improved yield curve to make a few bond purchases. These were GSE very attractive bonds and yielding about 480, and that's going to be a positive improvement for us. We don't expect to see us go back anywhere up with peer at this time of 15% or 16% or 17% or 20% bonds. We had gotten down into the single digits there, and I think the bad medicine we took of giving up some earnings by deleveraging the company over three years is now really coming back and paying some dividends for us. And the spreads that we have in these bonds is not really going to have any negative impact on our margin at this time.

We recognize that Federal Reserve will likely lower rates a couple of more times and we're modeling for that. Expense management is something that is a hallmark here and our people are really doing a great job in controlling headcount which is essentially flat after being down 100 last year. We are still reworking contracts, vendor programs. We've addressed our healthcare plans, they seem to be doing much better, I congratulated our employees yesterday on the management of that. We feel comfortable with where we are with expense control and it is a very positive for our company.

We have still at the same time opened branches, we've opened a couple this year. We also anticipate there will be four additional openings this year. Our retail group just reaches in and moved some folks into the new branch, and they work on handling service which we get great records in and they have great models in controlling their retail headcount. And as Mr. Host says, he continues to close branches that are not going to be productive, consolidate other branches. My expectation is that these four branches that we finished this year will likely put us in a position that in '09 we may go to a couple of branches rather than six or eight new branches. This will put our franchise.

We'll open another one out in West Houston in a place called Fry Road here in just another month or two, and I believe that puts our 16 to 18 retail sites extremely well placed in Texas and they are growing. And we're finding out that with great people, we can compete out there.

Also, we have another branch, a super branch is going to open on the Mississippi Gulf Coast. We've opened one on Poplar Street, which is an important business location in Memphis, and we'll open in downtown Panama City here in the next couple of months. And these are all positive. Now, the branches that we've opened here in Jackson, wow, they're going great guns, and they are beyond our expectation. We are able not only to defensively maintain, but to marginally growing our market share on deposits here in Jackson.

That will conclude my comments today. I would be very happy to open it for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And we'll go first to Barry McCarver with Stephens Inc.

Barry McCarver – Stephens Inc.

Hi, good morning, guys.

Richard Hickson

Good morning, Barry. Thank you for joining in.

Barry McCarver – Stephens Inc.

Thank you for taking my questions. First question, you mentioned – talked a little about the provisioning in the quarter. We're hearing a lot of -- in the news from other banks, from regulators, from auditors and the desire to potentially push provisions higher for the industry. Are you feeling any pressure to continue to that as well or was this quarter's move really just more a reflection of the asset quality moves there?

Richard Hickson

We follow the regs and guidelines, and I'm going to ask Barry Harvey if he wants to make any comment on that. Barry is in charge of compliance and regulation in the bank. Barry, do you have anything to add? We're not -- we visit with our auditors and regulators often. And Barry, you want to comment on it?

Barry Harvey

Barry, we strictly just follow the guidance which requires us to justify either through a quantitative or qualitative process what our reserve levels are. During the quarter, the $14.2 million, some of that was used to cover charge-offs of the $12.3 million, but part of the charge-offs were loans that we had provision for, as Richard indicated, in the third and fourth quarter of last year. So, we actually did provision about $7.5 million for downgrades during the quarter in addition to provisioning what was necessary for the charge-offs we took during the quarter. So, you really can't take the $12.3 million charge-offs and compare that to the $14.2 million in provision because we already had a large percentage of those charge-offs provisioned for previously.

Barry McCarver – Stephens Inc.

Okay. Second question, I am wondering if you can provide just a little bit more color on the hedging strategy for the mortgage servicing fees. Obviously, we're trying to get an idea of what that could look like in the second quarter since you had such a very strong first quarter.

Richard Hickson

Yes, not looking bad right now.

Barry McCarver – Stephens Inc.

Certainly isn't.

Richard Hickson

I'm talking about the second quarter. I am going to turn that thank you to Buddy Wood, and he's going to tell you what we're hedging and how, and I heard Buddy say yesterday, and maybe for the tenth time, we had historic volatility and we've seen these brands retrace. So, unless we see extreme volatility, we are not going to see any -- into the other direction, we are not going to see this just evaporate. Buddy, you want to talk about what you're doing and how more to tell you (inaudible)?

Buddy Wood

Would be glad to. Barry, the way that the hedge functions is to use only treasury indexed products, so that during volatile times like this, the futures and options that we use are highly liquid as you go to use mortgage related index items, went into a great deal of liquidity during the same period of time, so we add that point. The factors that relate to how we measure the profitability are primarily three.

The amount of volatility that Richard talked about causes options and futures to become very valuable. The second part is with the steepening in the yield curve that carry between the cost of funds and the mortgage product widens dramatically, and we end up with a nice additional positive spread in between the cost of funds on the carry. The third is the difference between the ten-year treasury securities and mortgages, the spread itself. Those three components as you know in this first quarter hit some very sizable and in the case of spreads record levels well into the 200 basis points between treasuries and mortgages, related to the flight to quality issues stability in mortgage products for credit reasons and the great attraction of the U.S. treasury market, which brought so much money into it and caused the yields to drop dramatically.

Half of that, the part related to volatility and carry, are the types of income levels as during business cycles this type of hedge will always be very favorable. It is a defensive hedge, the intent is to operate plus or minus zero. We will benefit in a positive yield curves and in volatile times with extra income. Those two along with the unusual spread, which accounts for probably half of the amount of dollars that you saw in the first quarter are the main events. If you look at how much impairments we would have experienced during the first quarter, you would have seen approximately $10 million negative, had we not been hedging. Instead the value of the hedge produced $17 million, which produces the net $7 million that you see in there. We can talk more about it but I think that that covers the essence, but I'll be glad to go further to anything else you'd like to know.

Barry McCarver – Stephens Inc.

Well, maybe we need to do this offline, but I'm having trouble getting my hands around the idea that you might have this type of income -- again, that's $7 million.

Richard Hickson

No, he didn't say that.

Barry McCarver – Stephens Inc.

Okay.

Richard Hickson

When we look at what we're hedging to -- Buddy, go into it if you would, but guys say you manage back to zero. There's a little bit beyond zero each way but not much.

Buddy Wood

Right.

Richard Hickson

Where are the spreads that come back to where now?

Buddy Wood

Okay. The spreads -- the spreads had gotten to where they are operating in the 180 basis point range and typically over a long period of time, they're in the 135 basis point range between the ten year treasury and mortgage-backed securities. So, let's go to your point. What can happen? What can happen in this hedge structure is that if we move slowly back to a normal spread marketplace? We will reposition the hedge constantly. We do it continuously everyday and we will retain a portion of this money. I can't tell you how much. But if it's -- the only way that we would lose all of it is if we went to a zero volatility and a flat yield curve in a very rapid move. Those conditions could bring us to zero.

If we have a slow movement tax from less volatile times that we are experiencing today and to a flatter yield curve, we will retain a portion. And I don't know what that exact number would be, but a couple million dollars is not a bad estimate in my mind of our ability to be able to manage that hedge over a longer period of time.

Richard Hickson

And this is an integral part of what is a very well run mortgage company. It's very competitive, strong and it's branding and in a position in our markets with the problems and issues that the large originators have had which are national and public is putting us in a good position, Barry.

Barry McCarver – Stephens Inc.

Okay. I think I'm following it now, that's very helpful. It's all right, I guess, just...

Richard Hickson

(inaudible) the moves and the spreads, I mean.

Barry McCarver – Stephens Inc.

Yes.

Richard Hickson

Going from 140 to 220 and this isn't something. This management of this MSR is a continuous process with highly professional people.

Barry McCarver – Stephens Inc.

So, it's how, I guess, we -- what you are saying there too is that the liquidity of the instrument there is, I would think there would be some risk in managing that and it sound likes right now the liquidity of the instrument prevents -- you feel pretty confident about it I guess.

Richard Hickson

I do and it is because we use only treasury futures and treasury options as opposed to mortgage products, which was ahead of that liquidity challenge.

Barry McCarver – Stephens Inc.

Okay. Alright guys, thanks a lot.

Richard Hickson

Thank you, Barry.

Operator

We will take our next question from Kevin Fitzsimmons with Sandler O'Neill.

Richard Hickson

Good morning, Kevin.

Kevin Fitzsimmons – Sandler O'Neill

Good morning, everyone. Richard, I was wondering if you can, I know you went into detail about the additions to non-performing and detail on the charge-offs, can you give us a little sense for the inflow into the watch list on the quarter and maybe -- I guess what I'm interested in is, depending on which competitor you are listening to Florida it sounds like imploding, and your exposures really focus on the Panhandle. And the Panhandle started deteriorating much earlier than these other parts, and I'm just wondering what inning you think we're in on that, what we expect to see some stabilization in that part of Florida earlier? Thanks.

Richard Hickson

Kevin, good question. Obviously, no one can predict that. As I said, our loan review team was in there, they're seasoned, they're told everyday to call them as they see them. This selling season is going to be very important in the Panhandle. It's just beginning. The sense is in my mind that people are beginning to see that prices have fallen and it's all over the board dependent on the property, as you would expect. There's nothing there -- are dependent upon when the last appraisal you did because that bubble was really running up in '05 and '06.

So, we think the prices -- this is not residential housing we're talking about, since the Panhandle was early, have likely reached a point. We're not expecting appraisals that we have done in the last three or four months, if we do one three or four months from now, that it's going to change very much. We are not seeing any really surge of buying. As you know, there was an auction there from a gentleman who passed away in Panama City. There was beach property sold, there were big like eight or nine acres of beachfront. It sold for an amount at auction that pleased everyone. There were a number of other individual properties that he owned, he was one of the larger developers in that area, and they moved off. That's given us some sense of comfort on some other exposures we have.

When I look at our exposures in Florida, I run a report every couple of weeks of every loan in Florida over $500,000 by grade, and so I can see that progression. And I think that progression, after all the work we've done this quarter, I'm not expecting some massive movement into it. If we have no sales down there this selling season, like last, if it doesn't turn somewhat, if buyers don't come in, then I think it is anybody's guess. We are doing global cash flows on all of these relationships of any size and they don't have as much liquidity as they had two years ago or last year, but they're still in there.

And we don't have -- we have some good-sized relationships, but we don't have any really large loans on any one piece of property, whatever. Most of our loans are $1 million, $2 million, $3 million, some $5 million, a couple of $10 million. We don't have $30 million against one piece of land that's going to hit us like that, Kevin. It's very difficult to answer your question. All I know to do is think aloud with you.

Kevin Fitzsimmons – Sandler O'Neill

No, that was very helpful. Separately, one of your competitors last night announced a goodwill impairment on the Florida operation. Is that something that is even been a conversation or that is possible for you all, and if you could share with us why?

Richard Hickson

That's a very good question. We paid $48 million for our bank in Florida. It was a situation where we did not buy a bank, we bought the loans and deposits -- and seven branches of the Emerald Coast Bank. With it, we acquired a great Board of Directors and eight or ten really good lending officers, who by the way, I don't think we've lost one. We've added a few. Our deposits are still there that we purchased. The relationships are still there.

A lot of our lending, our what we call we are going to bank at the end of this thing, the relationships are still there. We have not lost those relationships. Therefore, we are not considering any impairment of our goodwill in Florida, which I think is in the $40 million, $45 million range, and it seems well in line with what – we have seen no permanent impairment in that bank. Remember, it was about $250 million in deposits and about $200 million, $250 million in loans.

We have a very strong commercial relationship portfolio, which is somewhat over $100 million. They're not on the past due list, they're not on the watch list. They're cash flowing because they're in business for folks who come to vacation at the beach and it's crowded down there. So, it's just they aren't buying any real estate while they are there. They're still coming to the beach.

Kevin Fitzsimmons – Sandler O'Neill

Okay, great. Thank you very much guys.

Operator

We'll take our next question from Charlie Ernst with Sandler O'Neill.

Richard Hickson

Good morning, Charlie.

Charlie Ernst – Sandler O'Neill

Good morning, guys. Can you talk about -- was there any effort to sort of price down loans in order to get them ready to sell and attractively priced to sell this -- for the spring season is that – did that lead to any of the increase in the net charge offs?

Richard Hickson

We still have folks trying to sell and manage their own properties, Charlie. Our foreclosure is minimal. We just -- people have not walked their properties with us, so I'm sure the borrowers are doing all that they can to price and move their properties, and we have seen some move in the last couple of weeks. But from our perspective, no, we are not in a position to do that. We own very little property at this point. We will move it as quickly as we can once we got control over it.

Charlie Ernst – Sandler O'Neill

Right. And then, Richard, when your team is going down into the Panhandle, what are they doing in terms of thinking about appraisals and how you assess the current valuations of the properties?

Richard Hickson

We'll do that, Charlie. I'm going to let two people take a shot at that. I'm going to let Bob Hardison talk about process and what we're doing with that. He's our Chief Commercial Credit Officer. And then, Barry will listen -- Harvey and if Bob doesn't cover something in his comments, then Barry will chime in. Bob, do you to talk about that and the process?

Bob Hardison

Yes, due to the evident deterioration in the market down there, certainly the appraisal issue is one that has risen to the forefront over and above our normal appraisal process. And that we are -- on all our classified loans we have current appraisals that have been done. We say current if it's within a year or in most cases within six months. Certainly, we want that time frame to include that time in which the market has shown some deterioration. So, all our classified loans will have current appraisals.

At renewal, we will typically get a new appraisal. There will be some exceptions if the guarantors show such financial strength that we believe that we can primarily rely on the guarantors, we will do an internal type of valuation using data that our internal appraisal review staff has to come up with a revised value on the collateral. So, we are very sensitive to that and we are making some adjustments in our appraisal process with regard to loans that are not classified and we think would merit appraisals, either at maturity or renewal, or during the period of time the loan is in effect, if we think that that collateral has diminished in value, which in a lot of cases it has. But, we are sensitive to that and I know the regulators are too, and we are moving to make sure that we have appropriate appraisals in file to satisfy the carrying value of the loans.

Richard Hickson

We have a number of new appraisals and we have a number of new appraisals coming in.

Charlie Ernst – Sandler O'Neill

I guess, given the lack of sort of transactions down there, how do you know when you're charging something off that the appraisals anywhere near kind of the ballpark where it should be?

Richard Hickson

Let me tell you what I did and I learned an awful lot, Charlie. I called the senior appraiser in the company and I said, on our four loans that we took write-downs, I said, Steve, I want you to pull the four original appraisals, which were back in '05, and I want you to bring the new appraisals. And after you've spent about 30 minutes on each one of them, I want you to sit down and explain them to me. And I'm a lot more comfortable with the values today than I should have been in '05, Charlie. And I looked and we had banks copying other banks, lending in '05 and '06, and I'm looking today and I know this market extremely well. And when you have lots go from 300 to $82,000 that are fully developed, and you have some comps around, I don't think it's the value per se, although the value is this, it's not what it's going to sell for, it's when it is going to sell and you're putting about a four-year build-out in these things and a profit in there for the next owner.

So, I feel that these four or five major appraisers who are in the Panhandle of Florida, whom we know, are being realistic because I've had our senior appraiser go through the appraisers and the appraisals, and satisfy himself that they are following the guidelines and using reasonable comps. Jerry Host wants to make a comment too, Charlie.

Jerry Host

Charley, this is Jerry Host, and I would just comment that the market is not void of all sales. Over the last six weeks, we have seen a number of sales take place relative to lots, developments and specific one to four-family dwellings. So, we are starting to see some activity in the market. It certainly isn't anywhere near what we would like to see, but there are some levels being established for different types of property.

Richard Hickson

Charlie, you know that Panhandle fairly well. It's small, the development that's there -- there's a lot of product, but it's getting a lot of people looking at it. And I believe it's reaching a stage that these people feel they're getting a bargain. At least people here at Jackson that I've talked to are saying -- I'm having a number of people now say to me, tell me one of your people to talk to, we're going down to look at this, that and the other, or I've put in a bid on a house and I don't know if I'm going to get it, do you folks have any in foreclosure? I say no, but we can surely direct you to people. And that's not going to turn the market around, but that's a lot better than it was six months ago.

Charlie Ernst – Sandler O'Neill

Okay. And then, Richard, can you say if you have any ideas to, how big you are willing to take the bond portfolio or what we should expect maybe over the next couple of quarters?

Richard Hickson

I would expect -- well, that's going to depend on the yield curve. But, our ability to fund it is easy. Buddy, you want to comment on what you think based on the bond market and curves that we might do?

Buddy Wood

I think what we have been pleased with is being able to bring a four-year target to the investment portfolio using a strip of securities out of the agency CMO market, primarily, good spreads and an ability to fund them in the short run primarily on a short end, with an eye to moving some of that funding out. If you recall, we were asset sensitive when we began this process. This was very helpful to us in working with the asset-liability mix that we wanted to make some correction in. (inaudible) Charlie, and so the amount that we were targeting would be in the neighborhood of about $1 billion or a little bit more.

Charlie Ernst – Sandler O'Neill

$1 billion in total size, not $1 billion more?

Richard Hickson

No, $1 billion in total. And Charlie, our runoff is so fast that we'll have to buy a lot of bonds to get it to $1 billion, because of where it is. The maturity is about $30 million a month, $25 million to $30 million, and we don't feel any pressure to take it to $1 billion, but it will help our revenues. And that market I hadn't talked to anybody about in two days, it was 480 to 490 total asset yield on it. And our capacity, we're using principally downstream federal funds today and just a little bit of upstream. We were completely out of Federal Home Loan Bank. We went back in there the other today for a marginal amount $100 million, $200 million, just in very short duration. We have the ability to fix. So, we think this will be a positive for us. But, as Buddy said, I don't think you're going to see us back near peer with $1.5 billion bond portfolio.

Charlie Ernst – Sandler O'Neill

Okay, and is there any timing in terms of how quickly you think you get to that level?

Richard Hickson

I would say measured between now and the end of the year, we're not going to go out and do all of that immediately. I think we've bought in total $250 million in the first quarter and maybe another $150 million since quarter end when we saw things really improve in yield the other day. It's going to be totally dependent on the yield curve. Charlie, if I were going to plot it out, I would just do it on a measured straight-line basis because that's about the best we can guess right now.

Charlie Ernst – Sandler O'Neill

And Richard, you said that the margin you think it should be pretty stable even with a little bit of a build-out in the bond portfolio. That was a comment, right?

Richard Hickson

Yes, and we've tried to take all areas that feed into our ALCO model. Our projected loan growth, our runoffs in our auto, we are letting this pristine home mortgage portfolio, which I think is about $850 million, is running off around $15 million a month. Recall this was principally 15-year paper. It's seasoned five or six years. It's a different borrower that we cherry-picked the 15-year loans. The runoff rate is about 5.3% or 5.4% on that, but the spread is abnormally good on the bonds right now. Jerry, any additions you want to make on that margin discussion with Charlie?

Jerry Host

No, I think that's pretty solid. You commented the pristine quality of the one to four. We actually, as you know has been recovering this last month, net recovery out of that portfolio, and we still feel very good about that one to four portfolio.

Charlie Ernst – Sandler O'Neill

Okay.

Buddy Wood

The only thing I would add is that, we have been able to work with the deposit side as an offset to the loan re-pricing that we have been experiencing and our mix of assets has allowed us to keep the margins in our forecast in the general range of where we are operating today.

Richard Hickson

Our certificates of deposit are not wholesale, they are all retail. We don't have any wholesale debt in the bank. I think there's $50 million or something from (inaudible) or somebody that we can just keep our name in the market. We have not used our Cayman branch, haven't felt the need and we've got $200 million to $300 million in CDs maturing every month from like a 450 down to wherever it is now in the 2s. And we think that will cover this re-pricing of customers that are demanding that we lower their interest rates. We think those are balanced out fairly well with each other.

Charlie Ernst – Sandler O'Neill

Thanks a lot, you guys.

Richard Hickson

Thank you, Charlie.

Operator

(Operator instructions) We'll go next to Arran Jacobson with KBW.

Arran Jacobson – KBW

Good morning. Thanks for taking my question.

Richard Hickson

Thank you, Arran.

Arran Jacobson – KBW

You've answered a lot of my questions in your remarks in the questions you have answered, but I was wondering if you could talk about deposits. I know you just wrote that you saw some traction this quarter. I was wondering if you could talk to your hopes or expectations going forward through the year on volumes and pricing?

Richard Hickson

Well, I think that our answer would be the same as any depository financial institution. It's very competitive. We are fortunate to have a deep, rich core deposit bank. We have not -- we have led these Mississippi markets downward. We have the courage to do that in our home markets. We don't have the need to compete with those who don't have our liquidity and ability to fund, so we still pick and choose. We are putting ourselves in a very positive position. I think I said, we bought $400 million or something of bonds, and if we buy more, we are then able to use these bonds for pledging for our public funds. We had about $600 million in letters of credit at the Federal Home Loan Bank, which was costing us 12 to 14 basis points a year. So we are letting those run off in big batches and replacing that with public funds.

Public funds seem about at the same level as last year. We see them moving more to floating rates, anticipating, and we are winning public funds at that type with floating rates, as they appear, would be like three-year bids, and they probably think rates are going to move up during the end. So they are making their bets. I don't see any significant deposit growth.

Arran Jacobson – KBW

Okay.

Richard Hickson

Our marketplace is that we are the flight to quality spot in our market. We have had no questions at all anywhere in any of our markets about quality of deposits. Hope that helps you.

Arran Jacobson – KBW

That does. Thank you very much.

Operator

And we'll go next to Peyton Green with FTN Midwest Securities.

Peyton Green – FTN Midwest Securities

Yes, good morning, Richard.

Richard Hickson

Good morning, Peyton.

Peyton Green – FTN Midwest Securities

I was wondering if you could comment a little bit on just your interaction with customers and how their attitude is, and what you take from that now, versus say six to nine months ago?

Richard Hickson

Peyton, would you put a little more color on that, which segment of customers and where?

Peyton Green – FTN Midwest Securities

Probably where -- you can go by geography I guess. I mean, I would think Texas is in really good shape, Mississippi is in pretty good shape, and then Florida obviously feels a lot different. But just maybe, are you starting to see people try to take advantage of opportunities in Florida yet, or are people still kind of on a buyers strike?

Richard Hickson

They are looking and they are patient. I've had a couple of large developers here that are real estate owners go in. They'll visit with John Sumrall or Todd Siegel [ph], who know the markets very well. They will look at borrowers and centers. We know the markets, whether we are lending to these people or not, and they haven't been buying yet; they have been looking and I think they are really mulling it over to be sure that prices aren't going to drop again, and I'm talking shopping centers, smaller things, $10 million, $12 million, $15 million properties.

Now, on these houses, lots of people are looking and talking about condominiums. We have seen people buy in Destin and in Navarre and Orange Beach. But, I'm not sure that's going to move the market. It's going to have to be folks from Atlanta and Birmingham and Texas. Now, a real key is people are really pleased about that airport going down in Panama City. I think that's going to make a difference, but that airport is not going to be open for a couple of years.

Peyton Green – FTN Midwest Securities

No, I guess I was just trying to get a sense if there's one more down move after the …

Richard Hickson

I don't know, Jerry or I go to each Board meeting and we're holding their hands. There are – we are sort of fortunate in that most of our Board, but our losses to date are on folks that weren't from Destin and Panama City. We were lending to developers who came from Birmingham and Atlanta and Dallas, and they didn't know the markets and they bought properties, paid way too much for them in '05 -- essentially, when I look at our '04 or '05.

The group down there that has been there for 30 years, they tell us, this thing has been up and down so many times, I'm worried about it, I'm glad I didn't leverage up as much, but I've got all I can handle. They are professional at marketing it. We have customers that had condominiums where we didn't finance their condominiums. We are financing their other things and we are seeing them really work through these condominiums, but they are getting an overhang in it, and we are not financing the overhang for them. We're leaving it with those that brought them. I think there will be some overhang. We are seeing some creative work on the part of these people to package these remaining properties to make them appealing to retail buyers. We have not personally been in a lot of discussions with these people that want to come in and bulk buy, and we have not had the product nor do our customers have that bulk product. Mr. Host wants to add a little bit to that (inaudible).

Jerry Host

Let me just comment. Richard I think has covered for extremely well accurately as far as the Mississippi market, which makes up the vast majority of our portfolio. Let me comment that, first of all, we didn't see the dramatic appreciation in prices that we saw in that Florida Panhandle market, in the Mississippi market. Secondly, we have been working with seasoned developers over many years and as they began to see the market slow in mid '05, '06, they on their own began to cut back the production of new product and began working down their current inventory levels. So if you ask for a geographic flavor, I think you need to understand that Florida is very different from Mississippi, which is very stable, and then you have the Houston market, which by all accounts, if you talk to people in Houston, has not checked at all.

Peyton Green – FTN Midwest Securities

(inaudible) you been to Memphis recently.

Jerry Host

Memphis is, I would say, closer to Mississippi, where you did see developers slow their new product. I think the difference between Memphis and Mississippi was that there were a number of specific developments within the city that relied heavily on subprime paper for takeout of the homes. And so, there has been sporadic impact of the subprime market on the sale of certain projects in Memphis. But by and large, other than that, I think you would say it was very similar to what we're seeing in Mississippi, no real boom, and so we do not anticipate a major bust.

Peyton Green – FTN Midwest Securities

Okay, so I guess would it be fair to say that you would kind of expect double-digit loan growth in Texas, mid-single digit Mississippi, and maybe five to negative in Florida?

Richard Hickson

I think that's a good way to characterize it, but then you have to come back and say that we are reducing our auto portfolio and we are reducing our one to fours because the reason we aren't putting good solid one to fours on the books is we are getting the same yield out of these mortgage-backed securities that we're putting on the books. And so it's taking a lot less capital and freeing up capital for us for maximum flexibility.

We have been riding around Florida for two years, three years, talking about the sense of the slowdown, particularly since the middle of '06. That's at least two years. So, I would hope, if you go back to the beginning of the slowdown, hopefully we are reaching a halfway point down there. If you say it's going to take two years more for this thing to "normalize" to what normal should have been in Florida or was in '03 and '04, what happened down there we have about figured out. It's cyclical down there and every four or five years, you are going to have a downturn.

I think the lowering of interest rates in 2001 prevented that downturn and just added to pure greed and speculation, and an awful lot of folks are paying for that, including us. And we feel we are on top of it. We don't have eight new officers trying to introduce themselves to the customers who owe us the money. We know them, they know us, we are going to do about as well as anybody down there in working it out and working through it. We don't control the market.

I think non-performings will go up. I don't think we've seen the peak and we are on top of it. And the good thing about Trustmark is, the other nine cylinders of this company are hitting and doing well, and our earnings in there, even with a $0.16 per share reserve, we had a $1.20 ROA, and give us this (inaudible) a few buys at a time, we'll march right through it.

Peyton Green – FTN Midwest Securities

Okay. Great, thanks for the color, Richard.

Operator

And that does conclude today's question-and-answer session. At this time, I'd like to turn the call back over to Mr. Hickson for any additional or closing remarks.

Richard Hickson

Thank you very much for listening to us. I know it was a lengthy call. We are attempting to be as transparent as privacy of customers will allow us to be. We want you to know about us and we are available at any time to discuss issues of this nature with you. Thank you.

Operator

And once again, that does conclude today's call. We do appreciate your participation, you may disconnect at this time.

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Source: Trustmark Corporation Q1 2008 Earnings Call Transcript
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