Good morning, ladies and gentlemen, and welcome to Trustmark Corporation’s Second Quarter Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce Joey Rein, Director of Investor Relations at Trustmark.

Good morning, and thank you. I would like to remind everyone that a copy of our Second Quarter Earnings Release, along with 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 other filings with the Securities and Exchange Commission. At this time, I'll turn the call over to Gerry Host, President and CEO of Trustmark.

Thank you, Joey, and good morning, everyone. We appreciate you joining us on the call this morning. Also with us are Louis Greer, our Chief Financial Officer; Barry Harvey, our Chief Credit Officer; and Mitch Bleske, our Treasurer. First of all, let me start with a couple second quarter highlights. We experienced continued strong performance in the second quarter, with revenues exceeding $130 million. That revenue performance was broad based across all business lines in the company; banking, wealth management, mortgage and the insurance businesses. Our credit quality continued to improve significantly during the quarter. Net income available to common shareholders was $29.3 million, during the second quarter of 2012. We had diluted earnings-per-share of $0.45, return on assets of 1.2%, and return on average tangible common equity of $12.74. On a year-to-date basis, the diluted EPS was $0.92, ROA of $1.23, and return on average tangible common equity, just over 13%. Our board, in their meeting yesterday, declared a $0.23 quarterly cash dividend that will be payable on September 15. Let's look at a little bit more detail at the quarter. First of all, our balance sheet. Total loans during the period declined about $140 million. Broken down between acquired loans it declined $15 million, as a result of pay downs and collection efforts. Loans held for investments declined about $125 million during the period. With the exception of Houston, quick comment on loan growth; with the exception of Houston, our loan growth remains relatively flat, and we believe that is very much a function of a still very anemic economic environment. Our construction and development portfolio during the quarter, was unchanged. The growth that we experienced in Texas in that portfolio, was primarily offset with paid up -- pay offs, in both Mississippi and Florida. Our 1-to-4 family…

[Operator Instructions] Our fist question is from Brian Klock with Keefe, Bruyette & Woods.

Just a quick question to kind of follow up on your comments on the margin outlook, Gerry. I'm not sure if Louis has -- how much was the accretable yield impact on net interest income, first, in the second quarter?

It was about $2 million, but Louis, any other color you want to add to that?

Yes. Brian, I think Gerry hit the number right on the head. The adjustment for the accretable effective yield related to acquired loan, was actually about $2.1 million that's in the margin.

Okay. So in the first quarter was that number, I think it was $2.4 or $2.5 million.

I think the number was about $3.8 million in the first quarter. Or did you say the fourth quarter?

The first quarter.

The first quarter, I think there was accretable yield of about $1.3 million.

Okay. Got you. I guess thinking about then, the guidance that, Gerry, that you gave for to be closer to a 4% NIM for the second half of the year. What kind of accretable yield are you kind of estimating it to be then, closer to that $1.3?

Brian, I would estimate it would be fairly similar to the second quarter. That's all I could tell you there, I would expect it to be between $1.5 and $2 million.

So then I guess Gerry, are you thinking that there's going to be more pressure on the loan yield, as those reprice and just from the competitive pricing environment?

Well, Brian, we've seen that all year long. We've seen some other competitors come out with some specials, with extremely low yields. We've been able to maintain, what I would say is a relatively flat portfolio. We are growing, pipelines look relatively good. The issue continues to be the lack of demand in the most part, by businesses to expand, given the economic climate and the uncertainty surrounding -- at least what our customers are telling us; uncertainty surrounding the November election. So whether or not there's any significant movement, once that issue is resolved, we don't know. But it would appear, just based on the conversations that we have with our borrowers that they are reluctant to expand. We haven't seen a lot of businesses aggressively go out and add new jobs. Most of the lending is replacing worn out equipment or is done as a matter to add technology that helps improve productivity. Many customers we're finding continue to de-leverage their balance sheet to improve overall profitability and margins, and it's because they've just cut back on just about everything. So as we mentioned, we are cautiously optimistic about where growth is headed forward. We're trying to be realistic about it, given the economic climate we're in. That's pretty much where we are, and as I think we've seen some improvement, and we've stated this before, we will continue to pursue new opportunities. The one bright side that I would tell you is Houston. That economy seems so different than anywhere else that we're experiencing in the southeast. It's the combination of energy, the port activity, and technology that all seems to be driving growth both in multi-family projects and opportunities, single-family commercial projects, and commercial real estate.

Okay. Then, maybe just one quick follow-up to Louis, thinking about the indemnification asset write-down to $2.3 million for the quarter, is there an offset in that? Is that part of why the accretable yield increased, or is there some other offset that you're going to increase the accretable yield in future quarters? I'm just wondering where does the offset go, or is it just because you think that overall losses are coming down, so it wasn't necessarily because there were more cash flows coming in this quarter?

Let me just mention 2 things to you, Brian. That IA asset; we basically estimate the IA asset right now based on the estimated losses on all the covered loans. So we do that as we re-estimate cash flows, whereas you think about the net interest margin. As cash flows get re-estimated, we adjust the effective yield after we do that, and we change the effective yield prospectively. So there are 2 separate components there. They're really independent of each other. As you look at the second quarter, the $2.1 million in the interest margin is to basically get an effective yield on those acquired loans. The IA asset is to match up the IA, which is 80% of the basically expected losses in the future. So those change as we re-estimate cash flows.

Brian, this is Barry. One thing I will mention, just not from the accounting side of this, but just from the collection of the Heritage loans, we've been very pleased with how that's gone so far. We've had numerous situations where we've bettered the mark on the collections and the liquidating of both loans as well as collateral. So we're very pleased with how that's gone thus far, and I think that's resulted in some of the increase in accretion that we've seen so far in the process.

The next question is from Steven Alexopoulos, JPMorgan.

This is actually [indiscernible] in for Steve. It seems like you opted to build cash in the quarter. Should we expect the securities portfolio to get bigger here, particularly if loan growth remains soft, and then maybe what re-investor rates look like on the portfolio?

This is Mitch. The general driver of a pickup in cash over the quarter is really driven by the increase in our public deposits, which are generally a seasonal increase that we experience every year. So what we did instead of going out and buying a bunch of securities, knowing that those deposits are temporary in nature, we grew the portfolio modestly. But what we'd expect to see in future quarters is really that cash position go back to normal levels. Essentially, no excess reserves with the Fed and us, continuing to use the portfolio to kind of supplement minimal loan growth at this time.

Okay and then reinvestment rates on the portfolio?

Probably talking just under 2%. Obviously, the Treasury yields right around $140, $150. Ten-year Treasury yield is posing us some challenges there, and we continue to believe that taking undue risk with longer duration securities is not the right direction long-term for Trustmark. So we're looking right around $180 to 2% yields right now on the portfolio.

Okay, that's very helpful. Then, have you looked at what your what your Tier 1 common ratio looks like under the Feds new MPR?

We are working through that analysis as we speak. The challenge for some of us smaller banks, relative to some of the larger banks that have done economic capital or Basel II, is we don't have some of that data at the tip of our fingers, in terms of some of the LTV and high volatility commercial real estate, and so on. So what we're doing right now is accumulating the data to try to evaluate that impact.

The next question is from Jennifer Demba, SunTrust Robinson Humphrey.

I'm just curious on the operating expenses. It sounds like that $1 million in software installation and professional fees is going to be nonrecurring. Is that a fair characterization?

It is. To be specific, we are upgrading our general ledger system, accounts payable, certain internal expense requests, fixed assets systems, as well as upgrading our HR systems. The upgrades, part of the process in planning for these upgrades, Jennifer, is looking for cost reductions. Like other businesses and I mentioned earlier, we're not exempt from trying to be creative and come up with new ways on how we can improve productivity and use technology to do that. So we do not expect the reoccurring. These are expenses associated with consultants that we have in that are helping us to implement these processes and we expect that there should be some future benefit from putting these in place.

Okay. Okay. So if you combine that with the mortgage repurchase cost you had, I mean it seems like your expenses should be coming down in a material way in the third quarter before going up again with BankTrust.

That is something that, yes, we feel comfortable with, and the mortgage expenses specifically. We did an in-depth review with the GSEs to determine how large a provision we needed based on the most difficult period in the mortgage business, that period from 2005 to 2008. So we did an in-depth analysis and the results were that this $9.2 million should be a sufficient reserve to deal with future buybacks out of our servicing portfolio. So the answer is yes. We do believe these expenses will come down fairly significantly. We do have the full run rate from Bay Bank in there now, and that should add somewhere in the $1.2 million range. So that may bring our operating somewhere up in the $81 to $81.5 range.

That's true, Gerry, but that does exclude our overall re-credit call. So that $81.5 is a run rate excluding ORE, Jennifer.

Just one other question, with revenue growth being so challenging for the industry, I've got to think you're getting more phone calls from potential sellers. When might you be interested in reentering the acquisition game, and what type transaction would you be looking for at that point?

A lot of dynamics around that, the question earlier about capital levels, we're with BankTrust. We're taking on the largest acquisition that we've done in this company, and our focus remains there. But certainly, as you know the way the industry operates around acquisition, you continue to have conversations and stay in touch with what's going on with other organizations. But I would tell you as we enter the second half of the year, much of our focus and efforts are on the successful execution of the transaction with BankTrust, and continued focus on dealing with this anemic loan portfolio. I don't think we're significantly different from other organizations. We've chosen not to cannibalize our net interest margin by being overly aggressive on pricing, just to grow the balances.

Our next question is from Kevin Fitzsimmons, Sandler O'Neill.

Gerry, just can you give us a sense for the dynamic you had this quarter of electing to sell a lot of these low rate, low fixed-rate mortgage loans off into the secondary market? Is that more of like, that was a buildup and this was more of a kind of one-time thing? Or is this a dynamic we're going to see for a number of quarters as long as the refinance volume remains strong, that that remains a drag on the bottom-line loan growth? If that's so, do we see a higher pace of mortgage revenues perhaps than we see today? If you can just touch on that, thanks.

Very good question and it also is one that is very much a function of the dynamics of the spread environment. Mitch mentioned we're seeing the 10-year Treasury at a 140 today, yet spread relative to mortgage pricing remains high. What that does for us and other organizations in the production business, it creates fabulous production opportunities going forward. We would expect it will continue to take advantage of that. The runoff in our servicing portfolio was about $80 million. The balance of about $25 was out of the held-for-sale changes in that work in process portfolio. To answer your question, Kevin, we're probably experiencing a net decrease of somewhere around $10 million or so a month, at least between now and year-end. Tough to make that call, simply because we want to reserve the right to be flexible and change that, but if we had to take our best guess effort, we might see a net reduction. Not like we saw this quarter, but somewhere more in the $10 million a month range.

It seems like, what you said before, you expect mortgage revenues to remain strong and maybe even be higher.

Well, I think we expect them to remain strong, driven so much by volume. As that volume remains high, we would expect that profitability to remain there as well.

Okay. One final one. Can you -- obviously you guys had the very low provision level for the legacy portfolio, recognize the increase provision on the acquired portfolio? That's probably a tough thing from our seat to model or to forecast, because that's based on, I guess your cash flow analysis. As far as the legacy portfolio goes, if you can help us out in how to think about that provisioning level, and relative to where your reserve-to-loan ratio is today?

Okay. Kevin, this is Barry. Let me just kind of step you through how the quarter went, and maybe that will give you some insight going forward. The reduction in our provisioning level was really a function of 3 parts. One is going to be the reserves that we had on impaired loans that were revalued this quarter. We had about $29 million worth of balances that were impaired that were revalued this quarter. We had specific reserves on a lot of those credits, and ended up with about $2.3 million worth of excess specific reserves after we got updated values. Then, we've got another group of loans that we will typically have substandard credits that were uncertain as to whether or not, based upon events that's going to occur at likely the following quarter, or an appraisal that we've gotten ordered that will get the following quarter. We've gotten some substandard loans that, they are accruing today. We feel like there's a possibility they may not going forward, and we may need to impair, so we will set aside specific reserves on substandard credits. We did so to the tune of about $4.3 million going into the quarter, and we actually ended up with about $1.85 million of that, that turned out not to be needed. So that was released reserves as well coming from substandard credits that had specific reserves assigned to them, but were not impaired. Then we had a situation where we had several payoffs and pay-downs on some criticized loans, as well as some net upgrades on loans in general that all resulted in about $1.8 million worth of reserves released. So in total, from those 3 components, it's about $5.9 million worth of reserves that ended up being released in the process. I will tell you, though, that we did go, as we always do, and set aside about $3.9 million worth of specific reserves on impaired loans for future revaluations. We also set up a $1.35 million worth of reserves on substandard credits that we feel like may be migrating toward impairment in the next quarter or 2. So we are looking forward and continue to try to make sure our reserve is adequate and is forward-looking. That's kind of how we ended up with the provisioning level of $650,000. I think on a go-forward basis, in mind I would look more back to the first quarter, as to how things transpired there. I think you'll continue to see net charge-offs materially outpacing the provisioning requirements, strictly because of the reserves that we have assigned today, both from a pool and from a specific standpoint to those criticized loans.

Our next question is from Michael Rose, Raymond James.

Actually, that was my last question, the one that was just asked.

[Operator Instructions] Our next question is from Abe Bishop [ph], Stifel, Nicolaus.

Hey. A question in terms of the 10-year loan growth mentioning Texas, specifically Houston, seeing some pockets of strength there, given the challenges in the rest of the footprint, does that prompt you to potentially be more aggressive in looking at lifting out lending talent or personnel teams from some of the competitors down there? Just curious in terms of the velocity there sort of going forward.

Well, you're always looking to maintain the best talent that you possibly can. I don't necessarily believe that lifting out some specific individuals can result in a significant change in your portfolio. I know that's a strategy of a number of other organizations. What we focus on is what kind of capacity do our existing officers have in determining whether or not we need to add more staff. At this point in time, the focus is on existing relationships. How can you grow line usage? How can you grow new opportunities? At the same time, out there making prospect calls. It's just a difficult market environment to operate in. So I would not anticipate any significant increases in lending staff other than in areas where we would have the opportunity to take advantage of market growth.

The next question is from Blair Brantley, BB&T Capital Markets.

I had a question on the securities book in terms of how much prepayment amortization was it at this quarter versus last quarter.

He's grabbing his detail, Blair. This will be Mitch.

For the quarter, we saw about an average of close to $75 million a month in combined pay downs and maturities. Going forward, we're really looking closer to probably $50 or $60 million per month, is our current expectations.

Okay. Then, what is the strategy going forward with the securities book, given where the rates are and obviously with those cash flows coming off? I see here that you kind of increased some of the asset-backed and structured product somewhat during the quarter. Is there any change there in terms of looking now to different products?

There is, obviously in this extremely low-rate environment. We're looking at traditional securities that we've been buying in let's call it a front-end sequential CMO that gives us good structure. That type of a security would yield maybe between $1.75 or $1.80, and 2% right now, whereas we've looked now in a very small space. We're not going to do anything aggressive at this point. Generally diversifying some away from that type of product and moving to a triple A type CLO or asset-backed security product, that gives us a similar yield but an interest rate risk profile that obviously benefits as rates go up uncapped through [indiscernible] floater.

Having no further questions, this does conclude our question and answer session. I would like to turn the conference back over to Gerard R. Host for any closing remarks.

Thank you, operator, and thank you all for joining us today, your interest in Trustmark. We remain confident with a very strong balance sheet, strong capital, a fabulous customer base, and great associates that we will be able to continue to drive the value of this company into the future. We look forward to talking with you at the third quarter conference call.

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