Gerard Host - President and CEO Louis Greer - Treasurer and Principal Financial Officer Tom Owens - EVP and Bank Treasurer Barry Harvey - EVP and Chief Credit Officer Joseph Rein - SVP and Director of Corporate Strategy.

Peter Ruiz - Sandler O’Neill Brian Zabora - Hovde Group Matthew Sealy - Stephens Inc..

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation’s Third 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 event is being recorded.

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

Good morning. I would like to remind everyone that a copy of our third quarter earnings release as well as the slide presentation that will be discussed on the call this morning is available on the Investor Relations section of our Web site at trustmark.com.

During the course of our call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

We would like to caution you 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 Gerry Host, President and CEO of Trustmark..

Thank you, Joey, and good morning, everyone, and thanks for joining us. With me this morning are Louis Greer, our CFO; Barry Harvey, our Chief Credit Officer; and Tom Owens, our Bank Treasurer. Trustmark reported net income of $35 million or $0.51 per diluted share in the third quarter.

I’d like to briefly provide you with an update on our strategic priorities which are on Page 3 of our presentation. We continue to make advancements regarding profitable revenue generations. Loans held for investments increased to 111 million or 1.3% from the prior quarter and 908 million or 12% year-over-year.

Revenue totaled 148 million, up about 1% from the prior quarter and 4.3% from the prior year. FTE net interest income totaled 109 million, up 1.8% from the prior quarter.

Efforts to manage expenses and improve processes were clearly evident in the quarter as core expenses, which exclude ORE expense and intangible amortization, remained well controlled. Core noninterest expense in the third quarter totaled $100.7 million and compares favorably to the $99.3 million in the prior quarter.

Credit quality continues to be a strength for Trustmark. Nonperforming assets decreased 6.5 million or 5.2% compared to the prior quarter. And recoveries exceeded charge-offs. I briefly spoke to loan growth but would like to ask Barry to add some color to both loan growth and credit quality.

Barry?.

Be glad to, Gerry. Looking on Page 4, you can see, as Gerry indicated, our loans held for investment increased $111 million during Q3 and that was $908 million year-over-year. Within there was categories, as you can see.

The CRE, a combination of construction, non-owner occupied, other real estate secured, those all accumulated to about $142 million worth of growth. And then you can see we also grew in other loans, about $41 million. Within the CRE growth, we had strong growth – continued strong growth in commercial construction in Mississippi, Texas, Alabama.

That’s a continuing thing for us and has been since 2014. Within the nonfarm, nonresidential which is non-owner occupied, you can see we had some migration out of construction on some stabilizing projects that were retail oriented as well as assisted living that migrated down from the construction portfolio.

Then also you can see that we had growth in other real estate secured. That’s going to be some multifamily projects that we’re getting stabilized, CO’ed [ph] and moved down into the existing category. And then on other loans, that’s going to be a combination of healthcare, some gaming.

These are going to be advances on existing facilities as well as some new business. As it relates to the CRE, our levels of CRE remain well within the regulatory guidance of 72% on the construction and development and 210% of the 300% on total CREs. So we have plenty of opportunity and room to continue to grow in that category.

Our energy book, while modest, we did experience a reduction in exposure this quarter of about $15 million. We’re very pleased with that. We continue to see that our oilfield service customers are challenged in today’s environment and we continue to monitor those carefully.

On Page 5, criticized, classified, past dues, net charge-offs, all remain at historical low levels and very positive. We do continue to focus in on our nonperforming assets and we did see some nice reduction this quarter of $6.5 million but that is a focus we continue to monitor carefully and address as we’re able to.

Provisioning levels were in line with our expectation, except for the fact that we had $1.1 million that we provisioned specifically for Hurricane Harvey of our $3.7 million worth of provisioning for the quarter. And then looking on Page 6, you can see the acquired portfolio totaled $284 million or continues to work its way down.

We had a reduction this quarter of $31 million. The yield is a combination of the coupon rates as well as recoveries we are fortunate to receive. That yield is going to be 8.78% overall with 1.8% of that relating to the recoveries that we had during the quarter.

And then typically what we’re going to expect to see starting in Q4 is going to be a 6% to 7% yield and that’s not considering any recoveries that may occur. We also expect to see a runoff in that acquired book during Q4 of around $25 million..

Great. Thank you, Barry. And we would be happy to answer any additional questions that you might have during the Q&A session. But right now, I’d ask Tom Owens, our Treasurer, if he would discuss our deposit base and our net interest margin..

I’d be happy to Gerry. Turning to Page 7. Total deposits decreased 192 million or 1.8% during the quarter, primarily due to growth in personal deposits being offset by seasonal declines in public funds. We have a favorable mix of deposits with 29% in noninterest-bearing and roughly 58% of deposits are in checking accounts.

Our cost of deposits rose 5 basis points during the quarter to 25 basis points while the cost of interest-bearing deposits rose 6 basis points representing a beta of about 25% relative to the Fed rate hike in June. Turning to Page 8.

FTE net interest income totaled 109 million in the third quarter, up 2% or 1.8% from the prior quarter, which resulted in a net interest margin of 3.47, a decline of 2 basis points from the prior quarter. Excluding acquired loans, the net interest margin was 3.34, down 3 basis points from the prior quarter and down 4 basis points from the prior year.

Now Louis will provide an update on noninterest income..

Thanks, Tom. Also on Slide 8, you can see our diversified noninterest income and totaled about 44.5 million in the third quarter, a decline of about 5.5 million from the prior quarter. While insurance revenues increased 6.7 from the prior quarter to 10.4 million, mortgage banking revenues declined right at $4.5 million.

That decline was the result of negative hedge ineffectiveness in the third quarter of approximately 2.6 million and a negative fair value adjustment for loans held for sale of about 450 included in the other net and mortgage section.

Looking at noninterest expenses on Page 9, you can see that they remain well controlled with core expenses, as Gerry mentioned earlier that exclude ORE and amortization, totaled about $100.5 million in the third quarter, in line with our guidance from the prior quarter.

We remain focused on expense management and expect core expenses to remain in line in the fourth quarter with the third quarter. We will continue to realign our branches, our delivery channels and make investments to enhance our customer experience. Also on Page 10, you can see our capital position, very strong.

We have ample capital to support growth and are focused on most attractive methods to deploy that capital. Gerry, I’ll turn it back over to you..

Thank you, Louis. I am going to correct one thing I think I heard you say that total noninterest expense totaled 100.5 million a quarter..

145 million; excuse me. Thank you. I apologize..

No problem. That’s it. A very short presentation this morning and I do trust though that this format’s a little bit better for those of you listening. And that concludes the discussion portion of our third quarter financial results. And at this time, I would be happy to address any questions that you have..

Ladies and gentlemen, we’ll now begin the question-and-answer session. [Operator Instructions]. Our first question today comes from Brad Milsaps from Sandler O’Neill. Please go ahead with your question..

Good morning, guys. It’s actually Peter Ruiz on for Brad..

Good morning. Thanks for joining us..

Yes. I guess maybe just looking first at the NIM, obviously core NIM was down just a little bit this quarter. It seems like maybe deposit costs are kind of accelerating a little bit.

Just kind of wanted to get an idea of what you guys are seeing in the market and if you guys are specifically making any changes?.

Hi, Peter. Good morning. This is Tom and thank you for the question. So a couple of observations I would make. First of all, the linked quarter decrease of 3 basis points in the core NIM is actually more like 1 basis point when you consider just normal volatility of loan fee income as well as day count difference between the quarters.

And when you look at it year-over-year, core NIM off 4 basis points is actually more like 3 basis points. In the year-ago quarter, we had some yield maintenance payments that we received on the investment portfolio. And so thinking about it on a year-over-year run rate basis, the core NIM compression now is down to 3 basis points.

If you think about the guidance that we gave coming into the year of mid to high single digit compression in core net interest margin with some potential upside depending on the pace of Fed tightening and our realized versus model deposit betas, that’s pretty much the way that the year is played out.

We’re now down 3 basis points core NIM on an apples-to-apples basis year-over-year and we’re expecting that that continued decline in compression and margin will continue.

And so I would say currently in terms of guidance, if you think in terms of continued compression, very modest compression at that pace again with potential upside depending on as we go into '18 the pace of Fed tightening and industry reaction in terms of deposit re-pricing.

But in terms of our deposit betas, best we can tell we’re kind of middle of the pack. There’s different ways to measure that. But if you look at our interest-bearing deposit betas year-to-date relative to the change in the Fed funds rate, we’re in the neighborhood of say 18% to 20%. And so that’s below what’s modeled.

I would expect that would probably continue. If you look at second quarter, interest-bearing deposits up 6 basis points. That’s the same rate of increase as – I’m sorry, the third quarter rate of increase is 6 basis points. That’s essentially the same rate of increase as we had in the second quarter.

So there’s not really evidence there or an acceleration in the increase of deposit betas. As you dig into it deeper and look at the composition of the deposits, there’s been some change between personal, non-personal and public, but we’re not seeing a very significant acceleration in the rate of change on deposit betas..

Okay, that’s great.

And maybe is there any opportunity maybe with the loan to deposit ratio in the mid-80s? The slight core NIM compression, maybe some additional upside there with the possibility of driving that a little bit higher or --?.

Well, there is. I would expect that that ratio will go higher but as you can imagine, the cost of deposits is only one aspect of relationships with our customers.

And so as I said earlier, particularly with public fund depositors and some of the larger corporate depositors, that’s where you’re going to see your higher betas and we’re going to do what we have to do to remain competitive in the marketplace and retain those relationships..

Okay. That’s it for me. I’ll step back for now..

Thank you, Peter..

[Operator Instructions]. Our next question comes from Brian Zabora from Hovde Group. Please go ahead with your question..

Thanks. Good morning..

Good morning, Brian..

Just a question first on the nonaccrual that you had last quarter, I think $14 million you put on nonaccrual, any update on that? And just any thoughts around timeline as far as potential resolution?.

Brian, this is Barry. I’ll give you a quick update on that. We continue to work through. As you know that was a Chapter 11 that we’re working through. And we’ve gone through the process of getting updated values on all the collateral because it is collateral dependent.

We’ve also took charge of the appropriate amount of additional reserve that was needed based upon those updated values and that’s reflected in our provisioning and in our reserves as you see as of Q3. So we’ve gone through that process. We continue to work through the bankruptcy court and to some type of plan coming out the other end.

Hopefully we’ll get there in Q4 and be able to update you then. But what we have done is we’ve made sure that the reserve on that impaired loan is appropriate at this point based upon updated collateral values. Otherwise, it’s just kind of business as usual working through the bankruptcy process..

Okay.

And then just wanted to see if there was any additional impact from the storm regarding loan fees or loan production or anything along those lines beside that provision that you took?.

Brian, this is Barry again. At this point I think it’s a little too early to tell. Obviously there’s a reduction in the borrowing activity to some extent. There’s a couple different aspects of it.

We have seen – obviously when we surveyed our customers to check on them first and foremost and then also to see where they were as it related to our collateral and any potential damage and whether it was covered by insurance or not that was applicable. Beyond that, we have seen some of our areas within the marketplace improve as a result.

For example, multifamily is one where you see a lot of leasing up of excess capacity. I think they reported there was around 70,000 units available going into the storm and there was roughly 60,000 units damaged during the storm.

So obviously those people migrated to some of – and took up some of the vacancy as well as individuals in their homes where they had damage and it’s going to take a while to repair. And they’ve had to make other living arrangements.

So we are seeing positives and negatives as it relates to the storm outside of our assessment of any damage to our collateral value. So I think it’s a little bit of a mixed bag at this point.

We continue to be actively calling with our customers and potential new customers in the marketplace as well as calling throughout the state of Texas with our Houston lending group both in Dallas, Fort Worth and Austin; we’re very active from a CRE perspective there..

This is Gerry. I’ll comment on the deposit side of this and that is that Harvey really was the one storm that affected Houston. Our deposit base there is one that is more business than retail oriented, so we really don’t see much impact at all on deposit fees associated with the Houston base.

And as far as the other three storms, most of which affected the East Coast, we see very little as any impact at all mainly because our deposit base there is primarily in the Florida panhandle which was, for the most part, unaffected by any of the storms..

That’s very helpful. And just lastly, C&I was down a little bit.

Did you see line utilization or was it seasonality, just any thoughts around the C&I loan book?.

Brian, this is Barry again. I think it’s a combination of those things. There’s some seasonality there and we did have a couple of paydowns and payoffs that were not anticipated specifically. So we don’t expect that to be an ongoing trend.

We’ve got a very experienced group of C&I lenders throughout the corporation actively calling the amount of opportunities in the C&I space, specifically during 2017 has diminished from what we saw in '15 and '16. Obviously what opportunities there are, are very competitive and we understand that. So we’re just aggressively calling.

I think the opportunities will kind of come intermittently.

We have seen some opportunities here locally in the Jackson market to move some noncustomers that we’ve been calling on for a number of years into the bank and that’s been very exciting and that’s full service type of customers where we’re moving in deposits, treasury management and other type of services where we can generate some good fee income.

So there are bright spots but it is a very tough environment today..

Thanks for taking my questions..

Thank you..

[Operator Instructions]. Our next question comes from Matt Olney from Stephens Inc. Please go ahead with your question..

Good morning, guys. This is Matt Sealy on for Olney..

Good morning..

So looking at next quarter as this public fund start to come back on, do you expect any sort of material upward pressure on funding costs as those come back?.

Tom?.

Hi, this is Tom. Because of the mix change, you will see some increase from that. But that’s about all and so when you think about the math on that, I would not expect that to be a significant contributor. This is just normal seasonality I think.

Again, talking about the betas and the realized beta in the third quarter versus the second quarter and sort of the changing dynamics there, the second quarter was very much driven by public, less so in the third quarter, still the primary driver but more of the large corporate starting to kick in a little bit.

And so I don’t think that the seasonal inflows into the fourth quarter here and into the early part of next year will be all that material in terms of driving up deposit costs. But clearly that is a factor..

Okay, great.

And on expenses, is 3Q a good run rate and do you guys still expect the core expense number to be kind of that $100 million to $101 million range you’ve outlined in the past?.

Matt, this is Louis here. I expect that run rate for the fourth quarter be very consistent with the third between $100 million and $101 million..

Okay, great. That does it for me. Thanks, guys..

Great. Thanks, Matt..

[Operator Instructions]. And in showing no additional questions, I’d like to turn the conference call back over to management for any closing remarks..

Thank you very much. Thank you for being with us this morning everyone. We appreciate your interest in Trustmark. And we look forward to sharing our fourth quarter and our full 2017 year results in January of 2018..

Ladies and gentlemen, the conference call has now concluded. We do thank you for attending today’s presentation. You may now disconnect your lines..