Trustmark Corporation (TRMK) Q4 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Trustmark Corporation’s Fourth Quarter Earnings Conference Call. [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’d like to remind everyone that a copy of our fourth quarter earnings release, as well as supporting financial information, 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, I’d like to introduce Jerry Host, President and CEO, Trustmark.

Thank you, Joey, and good morning, everyone. Thank you for joining us for the call and thank you for your interest in Trustmark. Also with us this morning are Louis Greer, our Chief Financial Officer; Mitch Bleske, our Treasurer; Barry Harvey, our Chief Credit Officer; and Buddy Wood, our Chief Risk Officer. I’d like to begin, if I could, by covering some of the annual highlights from 2011 and then I’ll focus on the fourth quarter results. Trustmark recorded strong financial performance in 2011, particularly in light of the current economic and regulatory environments. 2011 net income available to common shareholders was $106.8 million. Diluted earnings per share of $1.66, an increase of 5.7% year-over-year. Our return on average tangible common equity was 12.25%. Our return on average assets was 1.11%. During the year, we experienced significant improvement in credit quality as reflected by a 17.5% reduction in non-performing assets, a 40% reduction in provisioning for loan losses, a 43.6% reduction in net charge-offs relative to the prior year. Total loans, including held for investment and covered loans, declined $126 million during the year. Construction and land development lending declined $105 million, indirect auto loans declined $120 million. Excluding these planned reductions, our other loan portfolios increased approximately $100 million during 2011. Some deposits increased approximately $522 million or 7.4% during the year. Non-interest-bearing deposits increased 24% and represented approximately 27% of our total deposits. We also remained active on the M&A front during 2011. We completed an FDIC-assisted transaction in April. We experienced seamless integration. We generated after-tax income of $4.6 million as a result of our bargain purchase gain and an additional $1.9 million of net income from operating in the 9-month period. We anticipate closing of our Bay Bank merger in Panama City, Florida in the first quarter of this year. It’s an in-market transaction that creates the second largest deposit market share in Bay County, with $220 million deposit base, half of which is in checking accounts, including 30% in non-interest-bearing DDAs. The cost of our interest-bearing deposits is roughly 50 basis points. We purchased the bank for approximately $22 million, which is 85% of tangible book value. It’s a relatively small transaction. We see it neutral to Trustmark’s earnings for 2012 and then accretive, going forward. Now let me turn to the fourth quarter results. There is some noise which we will attempt over the next few minutes to clarify for you. Our net income available to common shareholders was $24.3 million; diluted earnings per share of $0.38. We declared yesterday at our Board meeting a quarterly cash dividend of $0.23 per share that’s payable March 15, 2012. Just a note that Trustmark has continuously paid a quarterly dividend since the inception as a holding company in 1968 and we think this is very appealing to our investors. Our total loans increased $71.5 million on a linked quarter basis to total $5.9 billion. The C&I loan portfolio expanded approximately $57 million linked quarter. That includes an increase in Texas of $35 million, in Mississippi up $20 million. Our 1-to-4 family residential mortgage loans increased approximately $43 million linked quarter and other loans increased $21 million. Indirect auto lending declined $22 million linked quarter, and at year-end our indirect portfolio is now at $87 million. Our construction and land development lending declined just over $7 million, linked quarter. We’re starting to see slowing in that portfolio in terms of the run-off, and we continue to replace it with other high-quality loans. When we exclude our planned run-off in indirect and construction and land development portfolios, our loans increased $101 million, linked quarter. We feel like fourth quarter was a turnaround for us in terms of loan growth and we’re very pleased with the results. Turning to deposits; our total deposits were flat linked quarter at $7.6 billion, but there was a favorable change in our composition. Non-interest-bearing deposits increased 8.7%, and represent almost 27% of total deposits. Looking at credit quality, we experienced continued improvement in credit quality on a linked quarter basis. Classified loans declined $30 million or 8.7%. Criticized loans declined almost $18 million or 4.3%. Our ORE levels declined $10.5 million. Net charge-offs totaled $6 million and represented 40 basis points of average loans. Non-performing loans increased about $11 million or 10.9% linked quarter to totaled $110.5 million or 1.82% of total loans. This increase is principally attributable to 2 credits in the Texas market, which we’re very well secured on based on current appraisals. And as we get into the question-and-answer session, we’ll be happy to answer any questions you would have and add a little more color to that. Other real estate decreased $10.5 million linked quarter or 11.8% and now total $79.1 million. Our non-performing assets totaled $189.5 million. During the last 12 months, NPAs have decreased $40 million or 17.5%, including $33 million reduction in our Florida market. Net charge-offs totaled $6 million and represent, as I said earlier, 40 basis points of average loans. Our provision for loan losses totaled $6.1 million. Allowance for total loans of $89.5 million represents 1.9% of commercial loans, 76 basis points on consumer and home mortgages, 1.53% of total loans, and 194% of non-performing loans, excluding the impaired loans. If you look at our income statement, there are a number of notable income statement items that I’d like to bring to your attention. During the fourth quarter, we re-estimated the expected cash flows in the acquired loans from our Heritage acquisition, as required by SAPHO 33 {ph]. This analysis resulted in improvements in the estimated future cash flows of the acquired loans that remain outstanding, as well as lower expected remaining losses on those loans. Required loans subject to loss share agreements, improvements in loan values due to increased expected cash flows may also reduce the expected loss share receivables from the FDIC. The net result between the quarter’s improved loan values and the lower loss share receivable resulted in a charge during the fourth quarter to Trustmark’s pre-tax net income of $935,000 and was included in several different line items in our income statement. Thus, the noise. Our net income included $3.8 million of recovery and accretion resulting from investment basis recovery on paid off loans and prospective yield adjustments for loan pools with improved cash flows. Our provision for covered loan losses includes $624,000 for impairment on the recorded investment on certain pools. Other income included a write-down of the FDIC indemnification asset of $4.2 million on covered loans as a result of loan pay-offs and improved cash flow projections and lower loss expectation for loan pools. In addition, accretable yield increased $9 million due to the re-estimated cash flows on the acquired loans. The increase in accretable yield will be recognized as interest income over the remaining life of the acquired loans, which is estimated to be 19 months. Now all of this information is outlined in Note 1 of our financial segments that we have released, and then the question is, so what this really mean? If you look at net interest income, it totaled $92.7 million for the fourth quarter, an increase of $3.4 million from prior quarter. And that resulted in a net interest margin of 4.28%, which was an increase from the previous quarter. As we just discussed, the net interest income during the quarter included this $3.8 million of recovery and accretion. And if you exclude that from our numbers, the net interest margin for the quarter was an adjusted 4.10%. Looking ahead, we’ve continued to expect some compression in net interest margin over the course of 2012, and our focus is going to be on the absolute dollar amount of net interest income. Now turning to the non-interest income, it totaled $32.8 million for the fourth quarter, a decrease of $11.5 million from prior quarter. As previously mentioned, a significant portion of that decline occurred in the non-interest income and it was attributable to $4.2 million write-down on the FDIC indemnification asset. We’ve also experiencing increase in partnership amortization of $1.3 million related to tax credit investments, which reduced the Corporation’s effective tax rate during the quarter by approximately 3.5%, and our effective tax rate for the quarter was about 24.5%. In addition, our mortgage banking performance included a reduction in the net hedge ineffectiveness of the mortgage servicing rights of $3.1 million. Insurance revenue experienced a seasonal reduction of about $1.4 million. And collectively, these items reduced non-interest income by approximately $10 million. Our mortgage production during the quarter exceeded $420 million, and that’s an increase of about 24% on a linked quarter basis. Mortgage banking income totaled $6 million in the quarter, which reflected very stable servicing income and increased secondary marketing gains. We also continued to achieve solid performance in other lines. Insurance revenue totaled $6.1 million for the quarter. It did reflect a seasonal decline from prior quarter as well as the continued consequences of a soft insurance market. Wealth management income totaled $5.2 million during the fourth quarter. And as we look at non-interest expense, we show a decline of $2.5 million or 2.9% linked quarter, principally due to a $2.9 million reduction in ORE and foreclosure expenses. We continued during the quarter to make investments and re-allocated resources to support future revenue growth and profitability. Some of these investments include a new mortgage office in the Birmingham, Alabama marketplace; a new banking center in Starkville, Mississippi to serve the needs of students of Mississippi State University; a new corporate office in Tupelo, Mississippi, which consolidated an existing retail operation, commercial, mortgage banking, wealth management and insurance services that were in multiple locations into a very convenient location that complements our other Tupelo locations. Our capital base provides flexibility to support organic growth as well as acquisition opportunities. Our tangible common equity totaled $900 million -- almost $910 million. It represents 9.66% of tangible assets. Our risk-based ratio increased to 16.67%. In closing, let me state that we are pleased with our performance in 2011, particularly in light of the economic and regulatory environment that we all face as banking organizations. We enter 2012 with momentum and from a position of strength. We’ve taken intentional steps to maintain a fortress balance sheet. We have the benefit of a strong and diversified revenue base. Our credit processes have served us well and continue to improve. We maintained solid profitability through the cycle and have an attractive dividend. We have a talented team in place to serve our customers and plenty of capital to take advantage of growth opportunities. We appreciate your interest in Trustmark. And at this time, I’d like to open it up for questions.

[Operator Instruction] And our first question comes from Steven Alexopoulos of JP Morgan.

Maybe I’ll start on the margin. Could you give us color on why you saw so much pressure on the securities yield, particularly the taxable securities? And then at what level do you see that bottoming, given where you’re reinvesting?

Okay. Steve, I’m going to let Mitch Bleske, our Treasurer, address that.

Yes. The securities portfolio, as you know, we’ve seen some modest growth in that portfolio throughout the last couple of years as loan growth has cycled through this current environment and obviously have relied on the portfolio for some of the pickup in earnings. The current drop in investment security yield is driven really by two things. First, an August, repricing of the cash flows and some of that portfolio rose off, which is up and down $50 million, maybe $70 million a month. We’re seeing a replacement of those cash flows, and obviously lower yielding securities – like light securities but lower yielding securities than where we had purchased the original investments. Secondly, as rates have fallen and expectations and actually realized faster prepayments have come through that portfolio, the premium related to those securities, the purchase premium that we have on the books is being amortized more quickly than what we generally would expect. In terms of where this bottoms, as the prepayment cycle takes its course or runs its course through, we would expect that pre-amortization slowdown and some of the yield declined too, in that portfolio to slowdown as well.

So, are we getting close to a bottom at 3% then on the securities yields? Like where do you...

We’re clearly in the mercy of the interest rate environment. And obviously, it depends [ph] on how they’re trying to drive long-term rates down and mortgage refinancing quicker. We do have some exposure, if in fact they’re successful. On the flipside, if we tend to see a turnaround in economy or steeper yield curve, we definitely would see a slowdown in those pre-payment expectations and a return on some of that premium amortization, or at least a slowdown.

And just one question on loan growth. I want to follow-up on your comments that fourth quarter was a turn, period end loans were up, I think it’s roughly 5% annualized. Do you think this is now sustainable turn and should we expect similar growth in 2012, sort of mid-single-digit?

Steve, that, as Mitch mentioned relative to his reinvestment rates, is also a function of what happens in the economy. What we saw in the fourth quarter was, I think, some real positive sentiments in business. And what we saw in terms of growth in our portfolio was more of the larger companies were back in the market. We saw a number of capital investment projects that have been put on hold that started up again. Sectors that we saw improved in the quarter were in the medical area, nursing home, general industrial type, energy-related, especially on the coast and especially in the Houston market. So it was a fairly broad sector, but it was the larger customers that we saw borrowing again. We still see sluggishness in the small business side of it. So sustainability, I think, is a function of how well the economy goes. But at this point, as we look at our pipelines, we feel good about where we are and where we’re heading.

Do you feel confident that at least the balances have stabilized looking at that pipeline?

Well, again, tough call, but as businesses plan and plan out for the year, what we’re seeing appears to be very positive. One of the other things we’ve had, we’ve been fighting this riptide, if you will, of pay-off of the indirect portfolio and the commercial land and development portfolio. And that has really reached levels, I think, of stabilization. So, as we put new products on, we’re not having just to replace the run-off from the other planned reductions.

And our next question comes from Kevin Fitzsimmons of Sandler O’Neill.

Just wondering if you could give a little more color on the two loans you mentioned in Texas that are very well reserved and what kind of credits there are, but probably more importantly, if you can give us a sense for what -- whether those are just very unique situations or what you’re seeing more on the early indicator -- early indication front? I know there’s a lot of data in the deck on Florida. And you did that whole breakout on criticized loans in Florida, but I don’t know if we’re reaching a point in a cycle where we need to look into the other markets or look at it on a consolidated basis, but just watch list, criticized early stage delinquencies, what you’re seeing in Texas. And if you can remind me again on what you guys have in accruing TDRs, I don’t see that disclosed? Is that a meaningful number for you guys or not?

I’m going to let Barry get into more detail, but just in general. Yes, we see the situation has been somewhat unique in relative to these 2 loans involving a common borrower. As far as trends, we feel good about the overall credit trends. We’re not overly concerned about anything in the Texas market. I will let Barry comment a little bit more detail about those 2 loans.

Okay. Kevin, back to the 2 credits in question, as you said, it is one borrower or 2 separate projects in the Texas market. One is about $8.3 million, the other is $3.8 million, and combined it’s about $12.1 million worth of debt to that borrower. On the smaller credit, both loans are participations. And on the smaller credit, the one that’s $8.3 million, the Bank Group is working with the borrower, developing a strategy to work out the credit. And once that strategy is put in place, then the larger credit, the one that’s $8.3 million, will move forward to renew that debt and we’ve been working with a borrower there. We’re in agreement as to the terms of working out the larger credit. It’s just a matter of -- it’s kind of pecking order situation. We need to get the smaller credit resolved, which had several other participants involved. And once we do, then we can move forward to renew the larger credit. The smaller credit is $3.8 million. We’ve got a very reasonable loan to value on that credit. It was substandard before we started the quarter, we moved to non-accrual and we impaired it. There was no write-down due to the fact that we had more than adequate collateral. On the larger credit, the one that’s $8.3 million, it was a substandard credit, prior to the quarter. We did move to non-accrual. It has had a very low loan to value in the 50% range. And we do have reserves there that we decided not to release just to be on the conservative side of it. But we do in fact feel like the larger credit will get renewed once we resolve the smaller credit. I don’t see either one of these credits posing any additional credit risk to Trustmark, simply by moving to the non-accrual status. They were both sub-standard before. The only real difference is just the accruing of interest in terms of the risk to the bank. As to your TDR question, TDRs are, as of 12/31, we’ve got 39 relationships, $34.2 million in TDRs. There is very, very, very few of those credits that are accruing. Almost every one of our TDRs are non-accruals. So it’s kind of a chicken and egg type situation with TDRs, but we really have virtually no TDRs that are accruing at this time. As it relates to your past due question, just to run it down through a couple of numbers for you, looking at a linked quarter and year-over-year, when you talk about 30 days past due plus non-accruals, as of 12/31/2011, we’re going to be about 2.48% compared to linked quarter where we were 2.64% compared to year-over-year where we were 3.03%. So we don’t see, as Jerry mentioned earlier, we don’t see any type of systemic change in what we’ve been experiencing for the last 7 or 8 quarters, which is a gradual decrease, and our criticized classified, a decrease in our overall and our non-performing loans, non-performing assets, as well as charge-offs and past dues. So we don’t see the one borrower two notes that moved -- actually moved into non-accrual during the fourth quarter. That’s something that just won’t work itself out in the normal course of business hopefully during 2012.

Can you just -- were those projects -- were they construction, so they were construction projects I assume?

They’re both commercial property, raw land and the Texas market. And there is, like I said, both projects are participations, some different participants in each of the 2 projects, but they’re both commercial projects. Well, they are commercial raw land and with encoding [ph] with the intent to sell, if not developed.

Kevin, let me just comment too that during the quarter we did have a significant sale in Texas, land hold as an ORE project and we took about $1.7 million recovery on that. So it gives us some sense of comfort that where we have these things marked is at an adequate level, so that if it ever turned around -- we’ve reached that stage, which we don’t think we will on these 2 at all. We are adequately covered, more than adequately covered.

Our next question comes from Michael Rose of Raymond James.

Just had a question on expenses. I think last quarter you said your goal was to get a quarterly run rate of about $75 million, ex-ORE costs. Is that still kind of a realistic goal for this year and kind of how do you think about managing the expense base in light of some headwinds here on the revenue side?

Yes. Well, expense base and managing it is something that remains on the forefront and it’s something we have to be disciplined about. We talked about some of the specific noise, unique things in here as non-recurring, I’m going to ask Louis if he would address maybe a few other things that we anticipate are non-recurring that were in this quarter.

Michael, just on a run rate basis, I think our total expenses for the quarter were around $83 million, the last quarter they were around $85 million. We did mention in the previous quarter that we have about $2.5 million of non-recurring. If we back out, ORE expenses, it would come down to about $77 million for the previous quarter, about $79.5 million on a linked quarter. As you mentioned, we do try to manage expenses to a specific run rate. That is about $75 million to $76 million. However, for the quarter, we did have a little bit of noise, not much as we did in the previous quarters, only about $500,000 as it relates to compensatory fees and some legal matters. So, we’re up $2 million on a linked quarter basis if you back out the ORE expenses. Some of that were basically salary benefits, as Jerry said. We expanded in some new markets and also just some general accruals related to salary and benefits. And also, an additional increase on some loan expenses as it relates to mortgage business. So, I think, as you pointed out, we’re shooting for that $75 million, $76 million run rate, excluding ORE and that’s our goal.

And your next question comes from Brian Klock of Keefe, Bruyette & Woods.

Just actually two follow-up questions on Steven’s questions about loan growth. Jerry, you talked about some energy-related growth in the C&I book. I mean, can you talk about as any of that club deals or syndicated deals or are those your main relationships?

Most of it is existing relationships that we’ve had either while we have been part of Texas or some here in Mississippi, or they are relationships, longstanding relationships with some of our lenders in our Texas market. They are primarily growth with existing, there is very little new relationship there. Energy is just one of the sectors. As I mentioned, we’ve made some inroads in some of the medical area, several nursing home projects with borrowers that we have done business with for years as they expand. So most of what we’re seeing is really projects that have been on hold for a period of time that these larger companies are feeling better about the overall economic environment and climate and have moved forward with some things that have been on hold. Barry, any additional comments you’d like to make?

I think just to your point, Jerry, on these -- the situations on the energy side where we do have some participations. There are occasions when the borrower is just looking for a larger facility and we maybe just taken our pro rata share of where we are and where we’re in the credit. And that gives us an opportunity to add a little bit to the loan volume as well.

So, Barry, I guess can you quantify a little bit, you think it’s 10% of the growth from energy could have been participation-related even though it is relationship?

It’s probably going to be even -- that’s probably a fair question. It’s not a lot of energy. We don’t have a large energy portfolio. We’re working to build that portfolio up to a reasonable level. And -- but today, our energy exposure in Houston is no larger than it is in Mississippi. And it’s just basically going to be mostly service-related and no EMP or anything of that nature, it is no reserve base as well at this point.

Okay. Maybe another follow-up question on the expense side. Louis, I know that salary, the benefits went up a little bit, the FTE head count went down a little bit. So, is there any sort of a true up for accruals in there for the fourth quarter that we shouldn’t expect to see going forward?

There wasn’t any true up. I’ll address that. We have a very, very good year and there are some incentives and some anticipated bonuses that are part of that true up process, Brian.

Okay, and then just one last question. I’m not sure if you have the assets under management, but it looks like the wealth management revenues were down. They were the lowest as they’re been in a while, is there anything that you’re seeing in there, is there any sort of one-time issues related to the wealth management?

Maybe a one-time transition, assets under management and administration are about $8.4 billion. And we actually moved brokerage platforms. We moved from UVEST to LPL during the second half of the year. And as you might imagine, there is little bit of disruption when that takes place, there is, as you can imagine. You had to have every single customer sign a new agreement and then transfer the assets over. Our brokers are the ones that go through and actually do that process in contacting our customers. It can be a bit of a distraction. We experienced some of that starting the second half and the fourth quarter and would anticipate that should -- that noise should go away.

[Operator Instructions] And our next question comes from Jennifer Demba from SunTrust Robinson and Humphrey.

My question is on the net interest margin, which you said is about at core level of 4.10% now. You said you’re expecting pressure this year. With the additional accretable yield that you mentioned, will that actually boost the margin here in the near term? And what are the offsets you’re expecting, if you’re expecting the margin to go down on an absolute basis next quarter?

Jennifer, this is Louis, yes, because of the soft accounting, the re-evaluation, there is an additional accretable amount of money of about $9 million as we disclosed in our notes. Specifically, note one to our stat sheet. Originally we had fair value of loans of about $107 million with an effective yield of about 7.5%. Those balances at year-end are somewhere around $90 million. This additional amount of accretion expected from next year is somewhere between $2.5 million and $3 million of lower balances, so incrementally I don’t know if there’s a replacement, but it does not seem to be, in my opinion, have a pickup in the first quarter of the amendment [ph] , itself. Mitch, you might want to comment there, I think we kind of worked together on the forecast for next year.

Yes, Jennifer, in terms of just general trends in the margin, and I think as Jerry had touched on, we really expect, given the current environment, see some continued movement down in our net interest margin percent. It’s really just driven by the replacing of a large component of our balance sheet, fixed-rate assets within our mortgage, investment portfolio and fixed-rate loans. And unfortunately, we only get a portion of that offset through our liability side as deposit side that anchored on the short-term, part of the yield curve just has few opportunities to further reprice downward.

[Operator Instruction] And our next question comes from Ebrahim Poonawala of Morgan Keegan.

Just a question in terms of -- I was looking at deposit growth, you had pretty solid non-interest bank deposit during the quarter and then the seasonal run-off in the public fund. How should we think about that, next quarter in terms of was there anything year-end related in the non-interest bank deposits and will some of the public funds come in the interest-bearing side in the first quarter?

Good question. Mitch works directly with all of our community bank presidents in terms of our strategy relative to public deposits, and I’d like him to answer that question.

Yes, we’ve seen and what we see is, we’ve quoted average balances and I think we recognized an increase or a decrease in average balance on the public side during the fourth quarter, which is very much expected. From period-over-period, really what we saw was, we saw large increase in the non-interest bearing quarter-over-quarter really completely offset by the interest bearing categories at the same time period. The non-interest bearing increase over the quarter, really we expect to be somewhat temporary. And our models really anticipate most of those dollars to leave the banks in the first quarter. And it’s a combination of actually non-interest bearing public money that came in at the end of the year as well as large commercial deposits. And we see this every year, just some placements of deposits with the bank that have already left the bank as we speak here. On the interest-bearing side, we continue to be very disciplined on the CDs and continue to be cautious about our pricing there and are willing to let go some of the non-relationship, high cost CDs. We’ve also saw some movement in our brokered money market accounts reduction of approximately $60 million and that was planned where we targeted one of our higher cost brokered CD account -- our brokered money market accounts and push that out of the bank. Going forward, we expect to see our continued cycle of interest-bearing public money coming in, and that’s just general outstanding contracts or terms that we have in these public entities that will see growth through the first half of the year and it will peak at some time probably April, May, June, and then we’ll tend to see that decline through the remaining half of 2012 in the normal course. We’re very cautious to not overprice any of those public deposits, but we still see it as a very valid business for us and good relationships and we get good fees on those accounts.

Got you. So I guess when you look at that and there are some signs of loan growth, should we expect the securities portfolio to remain flat or probably a slight turn off in the near term?

We’re obviously looking at loan growth on a continuous basis. And you’re right, the investment portfolio will probably continue to play a role to supplement any limited demand in loans that we might have. I think, going back to the question about the margin, and why the securities portfolio is falling from a yield basis is, we’re still very cautious to grow this portfolio, given the current rate environment we’re in. And we could stretch on credit or stretch on duration, but we don’t feel it’s prudent to do that from a long-term perspective.

Got you. Okay. And I’m sorry if I missed it. Obviously, most of the loan growth this quarter came from Texas. Going forward, do you see any improvement in any of the other markets where you see signs where you might have Texas growth and some of the other markets kind of joining in, in terms of land loan growth?

Well, Texas was the major contributor, but so was Mississippi in the corporate sector here. We would anticipate those markets where we have larger relationships with borrowers or larger borrowers. Like Memphis, like the corporate area here and like Texas too, all contribute to that loan growth. That’s basically what we’re seeing in our pipeline. The only exception really is the Texas market -- excuse me, the Florida market. And we would anticipate some continued shrinkage there. So we’re still, as most banks are experiencing a soft consumer market, although we work to supplement that with some heal off lending, simply because -- especially here in Mississippi, we did not see the significant decrease in housing values. So there’s still a lot of capacity and equity for people to do some loan consolidation. And we’re working to take advantage of that.

Our next question comes from Blair Brantley of BB&T Capital Markets.

Question on the M&A front. Could you just give us any update as to what you’re hearing, what you’re seeing in terms of expectations in possible deal flow for your target markets?

Well, the update I would give you, Blair, is this, that as our capital continues to grow and we have the capacity to do more, we talk a lot about the organic growth and finally starting to see some movement and improvement there. At the same time though, we stay very focused on continuing to search for opportunities that would enhance the franchise. We’ve stated before that we’ll look at FDIC transactions. There have been several deals so far in January, but fewer than last January. We’ll continue to look at opportunities like we saw our Bay Bank where there is a strong bank situation where ownership in the bank was ready to sell, and it was an in-market transaction and improved our position there and allows for improved profitability through consolidation. And then finally, should any significant opportunity present itself, we would be positioned and prepared to take advantage of that. So, our priorities are that organic growth and acquisition as utilization of the capital, we certainly keep in the back of our mind that we also have opportunities to do either share buyback or look at increasing our dividends. Right now, we feel good about where our dividend is relative to the payout ratio and relative to other peer banks. So, I think that’s the color I can give you relative to M&A and use of capital.

Okay. And then a couple of questions on the fee income side. Could you just kind of speak to where the mortgage pipeline is looking and if the hedging issue you had this quarter is that something that was just tied to the rates falling or is it something that we can expect going forward?

Well, it’s tied to the tightening of the spreads, the change in the hedge and effectiveness and what we’ve seen in prior 3 quarters. Mortgage volume continues to look very good so far this year and we would anticipate fee income associated with it as well as secondary marketing gains. The hedge is one that is a lot less predictable, simply because there is no control that we have. And if you think of its biased nature, it should be some neutral situation relative to our mortgage servicing rights. So we’ve done very well with it over the last several years, but there again, it was affected in the fourth quarter by the tightening of spreads. So, Mitch, any other comments you want to make or advice?

I think you summarized it well.

And then a question about deposit service fees. Is there any issues with pending changes or other changes with the regulators possibly? Do you see any issue there?

Well, we continue to watch where we are, relative to any upcoming regulation. We have made some modifications in our overdraft protection programs already. And depending upon our primary regulator is the OCC. Waiting for some final clarification on the overdraft protection rules from the OCC. Depending upon what they come out with, it could require some additional modification in our plan that could affect our overdraft revenues. We did, last year, go through in the second half of the year some changes in both business and consumer deposit programs and changing some of the fee structures there. As we cycle through this next year, we hope to see some improvement there that would help to offset any changes that we might see in the NSS side.

And we have a follow-up from Brian Klock of Keefe, Bruyette & Woods.

On the margin and net interest income, Jerry, I know you talked about trying to keep the NII levels flat, being more consistent verses looking at where the NIM was going. I guess when you take out the accelerated accretable yield on the fourth quarter numbers, you’re at, on a non-T basis somewhere around $85 million. So that’s sort of what you guys are thinking about as maintaining that, given the securities issues and the tightening loan yield? Is that sort of target you guys are trying to look for?

Well, that or depending upon, if we keep this pipeline going of loan growth, we would hope that we could improve on that. But I think your number is fairly reasonable.

Okay. And then sort of a housekeeping item for Louis. I know that you have the tickup in the amortization of these tax credits, the partnership tax credits. That did have a little bit of an impact on your effective tax rate as well, right? So, the effective tax rate was lower in the fourth quarter than normal. I guess, what should we be thinking about for 2012 as a more normal effective tax rate?

Brain, we’ve had a team together looking at tax credit strategy to be able to lower our tax rates. If you look at our tax rate, 3 years ago we were above 32%, last year was at 29%, and this year it’s right around 28%. So, I think our strategy is to continue to invest in these tax credits whether in new markets or low income housing and try to maintain a 28% or lower. We look at these on an ongoing basis. So I think right now we’ve got a good investment on those, and I think you could look at a run rate for next year of amortization on a quarterly basis somewhere around $1.6 million. But again, if we go in and reinvest in a new tax credit, it will change that number respectively as we invest in those tax credits. So, to answer your question, I’d say, a 28% effective rate on an annual basis is what we’re looking for.

And let me just add, just so everyone on the call understands, these projects are projects within our market and they are with borrowers that we are familiar with and they are with projects that we think add real value to the community. So, it’s not as if we’re stepping out, doing things out of markets that we don’t know, we don’t understand, it’s part of a very disciplined approach to reduce our overall tax rate by being involved in projects that we clearly understand.

This ends our question-and-answer session. I’d like to turn the conference back over to Jerry Host for any closing remarks.

Thank you, operator. And I’d like to say that we appreciate so much your interest in Trustmark and in the call this morning. We feel good about 2011. We feel like we had a very, very good year and we feel like we’ve positioned ourselves to continue this positive momentum through 2012, and we look forward to visiting with you on the next quarterly call. Thank you so much.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.