Trustmark Corp (TRMK) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's Second 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, this call is being recorded.

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

Good morning and thank you. I'd 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'd 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'll turn the call over to Jerry Host, President and CEO of Trustmark.

Thank you, Joey, and good morning, everyone, and 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 of second quarter highlights. We experienced continued strong performance in the second quarter with revenue 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, diluted EPS was $0.92, ROA of 123 and return on average financial common equity just over 13%.

Our Board in their meeting yesterday declared a $0.23 quarterly cash dividend that will be payable on September the 15th.

Let's look at a little bit more detail of the quarter. First of all our balance sheet, total loans during the period declined about $140 million broken down between acquired loans that declined $15 million as a result of pay downs and collection efforts and loans held for investments declined about $125 million during the period.

With the exception of Houston, a 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 payoffs in both Mississippi and Florida.

Our one to four family mortgage loans declined, and this is the most significant decline of all categories, declined about $105 million during the quarter. It was a result of many customers taking advantage of the opportunity to refinance their existing mortgages at historically low rates.

Our mortgage production in the quarter exceeded $465 million. That's up 12% from the prior quarter and nearly 85% from levels a year earlier, so you can see we are experiencing significant production growth in the mortgage area.

We elected -- the reason for such a significant decline in the mortgage portfolio was that we elected to sell nearly all of these lower rate mortgages into the secondary market rather than replacing the runoff that we've experienced in our portfolio.

Our mortgage company is extremely profitable with second quarter income of just over $11 million, up 53% from the prior quarter, and we'll take a close look at that in a moment. But the bottom line on our mortgage portfolio is that we can make more money selling production at this point in the cycle with the current rate spread environment than we can in booking them on our balance sheet.

Non-farm, non-residential loans declined about $33 million during the quarter. Texas was the bright spot with growth of about $8 million. We continue to experience significant pay downs in other areas.

Commercial and industrial loans were basically flat as growth in Houston was offset by declines in other markets. We continue to experience new loan growth but it's being offset by pay downs and payoffs. Specifically the sale of two businesses in the Mississippi market resulted in a payoff of over $35 million for the quarter.

Consumer loans declined 15%. Much of that is attributable to the continued runoff of our discontinued indirect auto portfolio and at June 30th the indirect portfolio totaled about $50 million.

Other loans increased by $26 million primarily as a result of increases in the public services lending area. Our pipelines although stronger than they've been in the last several years, have become -- have flattened relative to where we were at year end and the first quarter.

Let's turn now to credit quality. The metrics I'll discuss here exclude acquired loans and covered ORE, as they're carried at fair value. We continued to experience significant improvement in credit quality during the quarter. We had $20.7 million or 6.7% decline in classified loans and a $35.2 million or an 8.8% decline in criticized loans relative to the first quarter.

Compared to figures a year earlier, classified loan balances decreased $68 million, or 19%, while criticized loan balances decreased $80 million, or 18%.

Our non-performing assets fell to the lowest levels since the end of 2008. Non-performing loans declined 5.8% from prior quarter and 17.6% from prior year to just under $100 million.

ORE declined 2.7% from prior quarter and 18.1% from prior year to $73.7 million.

Net charge offs during the second quarter totaled $6.7 million. Five loans in the Florida market accounted for over 70% of those charge offs. So other than the continued clean up of Florida and real estate loans there, portfolio quality continues to improve significantly.

Our provision for loan losses totaled $650,000 for non acquired loans. We had previously established sufficient reserves for both impaired and other substandard credits, net loan risk rates upgrades and balance reductions on criticized credits.

Our provision for loan losses on acquired loans totaled $1.7 million as a result of the decline in estimated cash flows on two specific loan pools associated with the Heritage Bank transaction.

Our allowance for loan losses totaled $84.8 million. That's 181 basis points on commercial loans, 81 basis points on consumer and home mortgage loans, 150 basis points on total loans, 186.5 of our non-performing loans excluding the impaired loans.

Let's take a look at deposits. Our average total deposits increased about $224 million or just under 3% on a link quarter basis to nearly $8 billion. Our average non-interest bearing deposits increased almost 7% to $2 billion and now represent 25% of our total deposits, a very strong core deposit makeup.

Our period end deposits, just to give you a sense for the change in composition, our period end deposits decreased about $95 million on a link quarter basis. That was a result of our non-interest bearing deposits increasing almost $55 million, but a decrease in public funds of about $93 million and a decrease in CDs of about $56 million.

So our focus remains on non-interest bearing core deposits while allowing run off of public deposits and CDs as we continue to experience the payoff in loan portfolio.

Turning to the income statement, our net interest income totaled $89.9 million in the second quarter, down about $750,000 from the prior quarter. Our net interest margin in the second quarter remained extremely strong at 415 but nonetheless down four basis points from the prior quarter. The margin reflected downward reprising of fixed asset loans and securities but was partially offset by improvements in the accretive yield on acquired covered loans and modest declines in the cost of interest bearing deposits.

We expect the margins to maintain a level of around 4% through the remainder of the year.

Non-interest income totaled $43.8 million and represents just over a third of our total revenue. Mortgage banking posted another great quarter, as I mentioned, with income of $11.2 million, up $3.9 million or 53% from the prior quarter.

Our production, as I mentioned, for the second quarter totaled $465 million, up 12%.

Stable mortgage servicing income came in at $3.9 million, significant marketing gains during the second quarter of $6.3 million. The hedge was effectively neutral, as we hope it would be based on our efforts to hedge the mortgage servicing rights. It came in at a positive $172,000 for the quarter.

These results include $3.1 million in mark-to-market adjustments on mortgage loans held for sale due largely to an increase in refinance activity resulting from the lower interest rate environment.

Our insurance revenues increased 8.7% from prior quarter to $7.2 million. That increase was a result of additional new commercial business and a continued firming in the over all insurance rate market environment.

Wealth management revenues totaled $5.8 million, up 4.7% from prior quarter. During the quarter we announced the sale of our proprietary mutual fund business, the Performance Fund. We've had those funds for about 17 years but we made a determination about a year ago that we were better off in the distribution than in the production business. That sale will allow us to fully embrace an open architecture environment and focus on additional resources for managing our client relationships.

Service charges on deposit accounts totaled $12.6 million, an increase seasonally of 3.3% from prior quarter. Bankcard and other fee income totaled $8.2 million, up 11.1% from the prior quarter and almost 20% for a year ago due in part to increased debit card usage and other bank fees.

Other non-interest income declined $4.9 million relative to the prior quarter principally due to acquisition related activities. The Bay Bank acquisition had a bargain purchase gain of $2.8 million in the first quarter. During the second quarter we finalized the fair values, which resulted in an additional bargain purchase gain of $881,000. Link quarter basis this represents a decline of approximately $1.9 million.

The FDIC indemnification asset on acquired covered loans from Heritage transaction was reduced by $2.3 million as a result of the re-estimation of the cash flows and loan payoffs.

Turning to non-interest expense, during the second quarter of 2012 Trustmark updated its quarterly analysis of mortgage loans and our repurchased -- the mortgage loan repurchase exposure. We worked with the GSEs on this process and the analysis, along with the recent trends of increased mortgage loan repurchase activity in the industry as a whole, resulted in Trustmark providing an additional reserve of approximately $4 million in the second quarter. So, as of June 30th the reserve for mortgage loan repurchases totaled just over $9 million.

Notwithstanding significant changes in future behavior and the demand pattern of investors, Trustmark believes that it is approximately reserved for potential loan repurchase requests from the GSEs.

Non-interest expense totaled $88 million in the second quarter, up to $2.2 million or 2.5% from the prior quarter. Remember that the first quarter included $2.6 million of acquisition expense related to the Bay Bank merger. Excluding these first quarter merger related expenses, non-interest expense in quarter two increased $4.8 million from the prior quarter and, as I had mentioned previously, $4 million of that increase was due to the provision set aside for mortgage repurchases. That approximately $1.5 million of the increase reflects the first full quarter of expenses related to the Bay Bank transaction, which occurred on 3/15 of this year.

Our ORE and foreclosure expense declined $1.5 million to $2.4 million in the second quarter. Services and fees increased $1 million during the quarter reflecting costs associated with the installation of new computer software systems and expenses related to the realignment of certain business units, that specifically being the sale of the performance loans.

To give you a quick update on our previously announced BancTrust merger update, as you recall we recently announced our plans to acquire BancTrust Financial Group in Mobile, Alabama. We have been diligently working on the conversion and integration plans and are making solid progress. We remain very excited about the potential benefits of this merger. But while the transaction is subject to approval by BancTrust shareholders and regulatory authorities, we anticipate that the transaction will close during the fourth quarter of this year.

In closing, let me say that we are pleased with our financial performance in the second quarter, particularly in light of the decline in our legacy loan portfolio. We continue to be cautiously optimistic about loan growth opportunities going forward. We've maintained a solid balance sheet and have the benefit of a strong and diversified revenue base.

We are well positioned to serve our customers and gain new ones, as the economy and the demand for credit improves.

I'd like to open it up for any questions that you might have at this time.

Thank you. We will not begin the question and answer session. (Operator Instructions). Our first question is from Brian Klock, Keefe, Bruyette & Woods.

So just a quick question, kind of follow up on your comments on the margin outlook, Jerry. I'm not sure if Louis has the -- 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 Jerry I think Jerry hit the number right on the head. The adjustment for the accretable effective yield related to acquired loans was actually about $2.1 million. It's in the margin.

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

First quarter I think there was accretable yield of about $1.3 million.

Okay, got you. I guess thinking about then the guidance that, Jerry, that you gave for -- to be closer to a 4% [nem] 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 to 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.

Okay, so then I guess, Jerry, are you just thinking then that there's going to be more pressure on the loan deal that those re-priced 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 warn out equipment or is done as a matter to add technology that helps improve productivity. Many, many customers we're finding continue to deleverage 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 so that's pretty much where we are. And, as I think we see 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 and it's a 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 and then maybe just one quick follow-up to Louis, thinking about the indemnification asset write down to $2.3 million for the quarter.

Correct.

Now is there an offset in that? Is that part of why the accretable yield increased? And then -- or is there some other offset that you're going to increase the accretable yield in future quarters? I am just wondering how does the -- where does the offset go or is it just because you think that overall losses are coming down and so it wasn't necessarily because there was more cash flows coming in this quarter?

Let me just mention two things to you, Brian, that IA assets, you know, we basically estimate the IA asset write down based on the estimated losses in 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 perspectively so there are two separate components there. They're really independent of each other so, 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 and 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.

And, 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, I mean 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 and so we're very pleased with how that's gone thus far and I think that's a resulted in some of the increase in accretion that we've seen over so far in the process.

Okay great. Hey, thanks for the color, guys.

Steven Alexopoulos, JPMorgan.

Hi, everyone. This is actually [Tracy Vicks] is on 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 reinvestment rates look like on the portfolio?

This is Mitch. The general driver of a pick up in cash over the quarter was really driven by the increase in our public deposits, which are generally a seasonal increase that we experience every year and 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 yield right around 140, 150, 10-year Treasury yield is posing some challenges there and if we continue to believe that taking undue risk with low integration securities is not the right direction long-term for Trustmark so yes we're looking right around 180 to 2% yields right now in the portfolio.

Okay that's very helpful and then have you looked at what your tier one common ratio looks like under the Fed's new MPR?

We are working through that analysis as we speak. You know, 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.

Okay great. Thank you so much.

Jennifer Demba, Suntrust Robinson Humphrey.

Just curious on the operating expenses it sounds like that million dollars in software installation and professional fees is going to be non recurring. Is that a fair characterization?

It is. To be specific, we are upgrading our general ledger system accounts payable, certain internal expense requests, fixed asset systems and then on the -- and as well as upgrading our HR system. 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 so if you combine that with mortgage repurchase costs 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 BancTrust.

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 just 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 sufficient, sufficient reserves to deal with future buybacks out of our servicing portfolio.

The one thing -- 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 their now and that should add somewhere in the million two range so that may bring our operating somewhere up in the 81.5, 81 to 81.5 range.

That's true, Jerry, but that does exclude our ORE credit cost so that 81.5 is a run rate excluding ORE, Jennifer.

Okay. And just one other question, I mean with revenue growth being so challenging for the industry I've got to think you're getting more phone calls for potential sellers. When might you be interested in re-entering 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 where with BancTrust 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 acquisitions you continue to have conversations and stay in touch with what's going on with other organizations. But I will tell you that, as we enter the second half of the year, much of our focus and efforts are on the execution and the successful execution of the transaction with BancTrust and continued focus on dealing with this anemic loan portfolio and 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 to grow, just to grow the balances.

Thank you.

Kevin Fitzsimmons, Sandler O'Neill.

Jerry, 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 build up 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 net loan, the bottom line loan growth? But, and 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 is it produces -- and other organizations in the production business -- it creates fabulous production opportunities going forward and we would expect that we'll continue to take advantage of that.

The runoff in the -- in our servicing portfolio was about $80 million. The balance of about $25 million 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.

And the -- 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 and as that volume remains high we would expect that profitability remain there as well.

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

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 three parts. One is going to be the reserve, 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 and we ended up with 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.

And then we've got another group of loans that we will typically have substandard credit that we're uncertain as to whether or not based upon events that they're going to occur likely the following quarter or an appraisal that we've got and order that we'll get the following quarter. We've gotten some substandard loans that they're accruing today. We feel like there's a possibility they may not going forward and we may need to impair them so we will set aside specific reserves on substandard credits and 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 turned out not to be needed so that was released to reserves as well coming from substandard credit that had specific reserves assigned to them but were not impaired.

And then we had a situation where we had several payoffs, 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 three 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 and, as we always do, and set aside about $3.9 million worth of specific reserves on impaired loans for future revaluations and 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 two, so we are looking forward and continue to try to make sure our reserve is adequate and is forward looking but that's kind of how we ended up with the provisioning level of $650,000.

I think on a go forward basis I would, in my mind I would look more back to the first quarter as to how things transpired there and 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.

Okay great. That was very helpful. Thank you.

Michael Rose, Raymond James.

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

(Operator Instructions). David Bishop, Stifel, Nicolaus.

A question in terms of the tenor of loan growth mentioning Texas, specifically Houston, seeing some pockets of strength there. Given the challenges in the rest of the footprints, 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? I am just curious in terms of the philosophy there sort of going forward.

Well, you're always looking to maintain the best talent that you possibly can. I would -- I don't necessarily believe that lifting out some specific individuals can result in a significant change in your portfolio and I know that's a strategy of another -- 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 and 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?

And 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.

Great, thank you.

Blair Brantley, BBT Cap Markets.

I had a question on the securities book and in terms of how much prepayment amortization was there this quarter versus last quarter?

He is grabbing his seat tail, Blair. This will be Mitch.

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

Okay and then what is the strategy going forward with the securities book, given where the rates are and obviously what this cash flow is coming off? I see here that you kind of increased some of the asset backed and structured products somewhat during the quarter. Is there any change there in terms of looking out at different products?

There is. Obviously in this extremely low rate environment and we're looking at traditional securities that we've been buying and let's call it a front end sequential CMO that gives us good structure. That type of security would yield maybe between 135 or 180 and 2% right now, whereas we've looked now in a very small space and we're not going to do anything aggressive at this point but 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 goes up uncapped through a (inaudible) floater.

Okay thank you very much.

Having no further questions, this does conclude our question and answer session. I would like to turn the conference back over to Jerry 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 and 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.