Trustmark Corp. in Jackson, Miss., says it is looking to improve earnings by tightening its belt.
After reporting a 12% drop in first-quarter net income, the $8.8 billion-asset company said last week that its focus would be turned to controlling expenses, at least until the interest rate climate improves.
Specifically, chairman and chief executive Richard G. Hickson said that Trustmark would close some branches, hold off on filling vacant posts, and instruct employees not to spend money unless "it's absolutely essential for business development or improvement in efficiencies."
Trustmark, like many banking companies, is feeling the effects of the inverted yield curve. Though loan growth was strong in the quarter, thanks largely to its August purchase of a Houston bank, its net interest income was flat, as deposit costs soared and income from its securities investments fell while it reduced its securities portfolio.
Meanwhile, noninterest expenses rose 9.3%, to $69.4 million, due primarily to a branch expansion and the purchase of $654 million-asset Republic Bancshares of Texas Inc.
The result: Trustmark's March 31 efficiency ratio was 61.89%, more than 230 basis points worse than in the previous quarter and its highest in any quarter in four years.
"It was not a good quarter on the numbers," Mr. Hickson said in a conference call Wednesday, the day after the earnings announcement. "However, I felt that we had during the quarter a strong realization in the company that we need to do something about expenses."
His goal is to bring Trustmark's efficiency ratio back into the 50's, Mr. Hickson said.
As part of what he called its Pathway into Efficiency initiative, Trustmark has established a team of three executives — its chief financial officer, chief risk officer, and chief technology officer — who are "moving through the company with all of our managers, methodically looking for areas of efficiency and reengineering."
Mr. Hickson said Trustmark would not lay off employees but would be in no hurry to fill vacancies.
"We're … taking a look at non-customer-sensitive areas where we have turnover and delaying replacing those people until we see the yield curve change," he said in the conference call.
The company is also will close three in-store branches in its hometown "with limited growth opportunities."
Trustmark has no plan, however, to put the brakes on expanding in what it sees as growing markets. Last year it opened seven branches in Houston, Jackson, Memphis, and along the Mississippi Gulf Coast. It opened a branch in Houston during the first quarter and will open two more this quarter.
In an interview Friday, Mr. Hickson said that Trustmark has shrunk its bond portfolio to limit its exposure to the yield curve and that net income has suffered because its insurance and wealth management businesses, while providing steady streams of noninterest income, have narrower spreads than traditional banking products.
Expenses are higher "not because we went to sleep at the wheel," he said, "but because we've diversified this company."
James Schutz, an analyst at Sterne, Agee & Leach Inc., attributed the company's flat net interest income to its deleveraging strategy.
"What they have been doing is that they have not really been reinvesting in investment securities as they run off," he said. "And they haven't had enough loan growth to absorb all of that runoff. They've just been paying off liabilities."
Bain Slack, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., said that Trustmark's decision to focus on expenses is not unusual in light of recent trends.
"Like several banks in the industry, they are running up against some revenue headwinds, and they are just looking [for] any way to continue to get some earnings growth," Mr. Slack said. "Options are limited on the revenue front, so they are trying to look inward to see what efficiencies they can get within the company."
Peyton Green, an analyst at First Horizon National Corp.'s FTN Midwest Securities Corp., said the successful integration of Republic has given the company the opportunity to focus on controlling expenses.
"They had their focus on making sure that they got Republic nailed down," he said. "Now that Republic has basically stabilized, they can say, 'OK, let's go back to see where we've got things really right and where we need to get them right.'"
