Trustmark Corp (TRMK) 2012 Q3 法說會逐字稿

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, 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 third-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, we 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 as well as our other filings with the Securities and Exchange Commission.

At this time, I'd like to introduce Jerry Host, President and CEO of Trustmark.

Thank you Joey. Good morning everyone. Also joining us this morning and available to ask -- answer questions after the presentation is Louis Greer, our Chief Financial Officer, Barry Harvey, our Chief Credit Officer, and Mitch Bleske, our Treasurer.

First of all, let me cover a couple of highlights for the third quarter of 2012. There's not a lot of noise or nonrecurring events to explain, so I think our numbers are fairly straightforward. The performance in the third quarter was very solid with total revenue exceeding $130 million. We experienced strong revenue performance across the board, particularly in our Mortgage Banking and Insurance businesses. Our credit quality continued to improve significantly during the quarter. Our net income available to common shareholders was just shy of $30 million. Our diluted earnings per share was $0.46, a very strong return on assets at 1.21%, and our return on average tangible common equity was 12.61%.

Yesterday, at our regular board meeting, our board declared a $0.23 dividend payable as a cash dividend and is payable on December 15.

Let's look, if we could, at just a little bit more detail. First of all, an update on the balance sheet. Total loans during the period declined $135 million; $126 million of that was planned runoff. Otherwise, we would say that loans were basically flat for the quarter.

We are encouraged by growth in the C&I portfolio, including Houston, Memphis, and across the Mississippi market. We remain very active in calling on customers and prospects, and continue to maintain our credit and pricing disciplines in what we have seen to be a very competitive marketplace throughout our footprint. So far in the fourth quarter, we are experiencing good activity as loans booked in prior quarters are now beginning to fund.

Let's take a look at a few of the specifics for the third quarter, especially regarding the $126 million planned runoff. The one-to-four family mortgage loans declined by $113 million. During the quarter, many customers continued to take advantage of refinancing existing mortgages at these historically low rates. Our mortgage production in the quarter exceeded $514 million; that's up 10.7% from the prior quarter and up nearly 51% from levels just a year earlier. Trustmark has elected to sell the vast majority of these lower-rate longer-term mortgages in the secondary market rather than replacing the runoff in this portfolio. We feel we can make more money selling production at this point in the cycle with the current rate spreads than we can booking the loans on the balance sheet and adding liquidity and interest rate risk.

Consumer loans declined $15.4 million, which reflects continued runoff of $13.6 million in our discontinued indirect auto portfolio. And as of the end of September, the indirect portfolio totaled just $36.2 million.

The construction and development portfolio was flat during the quarter. We are encouraged by the broad-based $25 million linked-quarter increase in loans in the Memphis market. Our non-farm, non-residential portfolio remained stable during the quarter. Memphis experienced growth of $10.8 million. However, it was offset by declines in other markets.

As I mentioned, our Commercial and Industrial loans grew just over $20 million for the quarter. Texas was up about $10 million, Mississippi about $7.5 million, and Tennessee about $5.5 million. In the flat interest rate very competitive environment that I've mentioned, it's important to remember that not all loan growth improves profitability, and we, as I have said, remain disciplined in our credit process as well as in the pricing of loans.

Our loan portfolio has migrated through this economic cycle. We have capacity and ability to increase exposure to certain asset classes, including construction and land development projects, as market opportunities become available to us.

Now let's turn a minute to credit quality, which is, again, a very positive read for the Company. The metrics that I will discuss exclude acquired loans and covered ORE as they are carried at fair value. We continue to experience significant improvements in credit quality. During the third quarter, Trustmark experienced a $15.9 million or 5.5% decline in classified loans, and a $15.2 million or 4.2% decline in criticized loans relative to the prior quarter. Compared to figures a year earlier, classified loan balances decreased $71.1 million or 20.6% while criticized loans decreased $69 million or 16.5%.

Nonperforming assets totaled $163 million, our lowest level since the year-end 2008, and a decline of 36.4% from the peak of $256.7 million at March 31, 2010. Nonperforming loans declined 19.1% from the prior quarter to $80.7 million. ORE increased $8.8 million, or 11.9%, from the prior quarter with approximately $7 million of this increase due to the migration of one nonperforming commercial loan to ORE.

Allowance for loan losses totaled $83.5 million and represented 174% of nonperforming loans, excluding the impaired loans.

Net charge-offs during the quarter totaled 46 point -- totaled $4.6 million, or 31 basis points of average loans. There was one large commercial charge-off during the quarter that totaled $4.2 million, and it represents 91% of the net charge-offs for the quarter. This is the same loan that drove the increase in the ORE balances.

Our provision for loan losses totaled $5.5 million. Of that amount, $3.4 million was related to loans held for investments and $2.1 million was related to acquired loans. The provision for acquired loans was a result of a decline in estimated cash flows due to downgraded risk ratings on loans within certain pools.

Now, let's take a quick look at deposits. Our period-end deposits decreased $191.8 million on a linked-quarter basis. But there is an explanation for this, and this also was planned. Our seasonal public funds declined $205 million. Our CDs declined $50 million. But our non-interest-bearing deposits increased about $50 million. We continued to experience improvements in the mix of deposits as non-interest-bearing deposits represented approximately 27% of total deposits. Our cost of interest-bearing deposits declined 4 basis points to 0.39%.

During the quarter, we received the 2012 deposit market share data, and I am very pleased to say that Trustmark increased our deposit market share in 23 of our 37 markets served. And Trustmark has top three positions in 68% of the counties served and top five positions in 84% of the counties that our footprint covers.

Now, moving on to the income statement, net interest income totaled $88.9 million in the third quarter, and the net interest margin remained strong at 4.06%. A nine basis -- it's nine basis points lower than the prior quarter. The accretable yield on purchased loans was $2.8 million for the third quarter. That's up $700,000 from the second quarter. The margin reflected downward pricing of loans and securities partially offset by modest declines, as I mentioned earlier in, the cost of interest-bearing deposits. We've consistently stated during the course of the year that we expect the margin to continue to compress as a consequence of this prolonged low interest rate environment and sluggish economic conditions. In the fourth quarter, we would anticipate a similar decline in the margin as we've experienced in the third quarter.

Our noninterest income totaled $44.9 million, representing almost 35% of total revenue. Mortgage Banking was the star during the quarter with income totaling $11.2 million, reflecting stable mortgage servicing income and increased secondary marketing gains.

As I mentioned earlier, production in the third quarter totaled $515 million, up 10.7% from the prior quarter. Of that, 40% came from our retail production operation and 60% from our wholesale operation. Approximately 70% of the total volume was refis at 30% new money.

We had very stable mortgage servicing income of nearly $4 million, significant marketing gains of approximately $9 million, partially offset by the net MSR hedge loss of $1.8 million. Our results for the mortgage company include $2.6 million in marked to market adjustments on mortgage loans held for sale due largely to the increased refi activity resulting from lower mortgage rates.

The insurance area also had a strong quarter, with revenues increasing approximately 5% from the prior quarter to $7.5 million. This is due primarily to both increased commercial business and a continued firming of insurance rates.

Wealth Management revenue for the quarter totaled $5.6 million. During the third quarter of 2012, Trustmark completed a reorganization of the $930 million of assets managed by Trustmark Investment Advisors for the performance funds. This transaction allows Trustmark to fully embrace an open architecture in the Wealth Management business and focus additional resources on managing client relationships.

Service charges on deposit accounts totaled $13.1 million, reflecting a 4% increase from the prior quarter. Bankcard and other fee income totaled $6.9 million, down $1.3 million from the prior quarter, principally due to lower fee income on consumer interest rate swaps and in line with levels one year earlier.

Other non-interest income increased $1.7 million relative to prior quarter and includes $1.2 million resulting from the sale and reorganization of our proprietary mutual fund family, as I had just previously mentioned. There were offseting transaction expenses related to the reorganization of approximately $300,000 that were recorded in other services and fees.

Now, on the expense side, we continue to work diligently to control expenses. During the third quarter of 2012, noninterest expenses totaled $83.5 million, down $4.5 million from the prior quarter and $2 million from levels one year earlier.

Salary and employee benefit expenses remain well-controlled, increasing 0.9% from the prior quarter to total $47.4 million. The increase was due in part to commission expenses associated with mortgage loan production during the quarter.

Service and fees as well as equipment expense declined relative to the prior quarter. Our occupancy expense totaled $5.4 million, an increase of about $400,000 from the prior quarter. This is due largely to a write-off of some leasehold improvements associated with some property that is part of a pending branch office consolidation.

ORE and foreclosure expense continued to reflect positive trends. ORE foreclosures totaled $1.7 million, a decline of almost 30% relative to the prior quarter, and almost 70% when compared to figures one year earlier.

Other expense totaled $10.4 million in the third quarter, a decline of about $4.5 million. This decline is directly attributed to Trustmark's additional $4 million reserve for mortgage repurchases in the second quarter of this year.

Now let me give you a quick update on our announced acquisition of BancTrust in Mobile, Alabama. The BancTrust shareholders overwhelmingly approved the merger and associates of both organizations are diligently working to ensure a smooth customer transition. We recognize that regulatory approvals may not be obtained in time for the merger integration process to be completed prior to year-end. So we extended the closing date of the merger to the first quarter of 2013 and revised the timeline to minimize potential disruption to the customers of BancTrust during the holiday season.

We recently revalidated our previously disclosed credit marks and our findings were inconsistent and in-line with our previously communicated expectations -- consistent, excuse me. What did I say? Inconsistent? I'm sorry. Our findings are consistent. Thank you.

We are very pleased with the progress made thus far to combine our organizations, and believe that this transaction is a great opportunity for Trustmark. As a consequence of adjusting our transaction timeline, we now anticipate that Trustmark will be under $10 billion in assets at December 31, which would postpone the effective implementation of the Durbin amendment until July 1, 2014. We view that as a real positive.

In closing, we are pleased with our financial performance in the third quarter. 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 demand for credit improves.

I would be happy at this time to take any questions that you might have.

(Operator Instructions). Kevin Fitzsimmons, Sandler O'Neill.

I appreciate the outlook you've given on the margin, except from what I heard it sounds like you expect a similar case of compression in the fourth quarter. And I think what you guys have said in recent quarters is you are targeting more the dollars of net interest income as opposed to the percentage margin. So with that being said, certain amount of loans are still running off, we are hearing from a lot of banks about the pace of loan growth slowing and the margins coming in. What is your outlook for those dollars of net interest income? Is it achievable to, in the near term, to actually grow NII, or is that going to be a challenge over the next few quarters? Thanks.

Thanks Kevin. I think it will be a challenge and I'll ask Mitch if he'll add some color. But the reality is when the Fed implemented QE3, it had a direct impact on that area of the curve and the specific products that most banks use in their investment portfolio. So obviously the lack of loan growth will have to be translated into the investment portfolio. And as we made those projections earlier in the year, it was without the benefit of QE3. So obviously it's going to be a challenge to hit that absolute dollar amount.

But I think the good news is we have worked to position the Bank through the decrease in the indirect portfolio of the runoff from a peak in 2008 of about $1.3 billion in construction and land development to now about $480 million. We've positioned ourselves, as we see these opportunities arise, we can take advantage of them. We have the capacity.

So Mitch, any additional color you would like to add to the portfolio? Investment portfolio?

I've got a little bit more, Kevin. As we've communicated before, you're right. We probably will continue to utilize the investment portfolio to maintain some adequate level of earning assets. But as you all are aware, the ability to earn the similar yield on those assets to our loan book is just not there.

We are approximately 28% of assets in our investment portfolio. We do, however, see the mortgage portfolio, that 15-year product that we're letting roll off, really be a surrogate bond portfolio for us. So as that continues to run off, we are not really taking any undue interest rate risk by accumulating some higher investment portfolio assets to replace that. So I would expect to see some of that increase. The challenge there, though, is trying to maintain the same level of yield without taking undue interest rate risk or credit risk. And we're really not in position or do not feel that's prudent for us at this point in the cycle.

Okay, great. Thank you. Can you also just -- I know you mentioned a couple moving parts within expenses. If we look at your core noncredit expenses, I think they were about 81.7 for the quarter. Is that a decent run rate to think about going forward, when we look at some moving parts going into fourth quarter?

Yes, Kevin. I think that 81.5 number, we've got a little bit of some expenses related to this acquisition here and there, not a lot. So I'd say 81.5 to somewhere right in there is about the right run rate for expenses.

Okay, great. Thank you very much.

And that's excluding ORE expenses.

Right, right. Okay.

Thanks, Kevin.

Michael Rose, Raymond James. (Operator Instructions).

We'll move on to the next question.

David Bishop, Stifel Nicolaus.

Good morning, gentlemen. I hopped on late on the call, so I apologize if you did cover this. But in terms of the margin outlook, following up on the question before, obviously you've got the BankTrust acquisition coming on here. And I know it's early in the accounting process, but any sense in terms of offset, what impact the accretable yield accretion could have their in terms of bolstering the margin?

I don't have the number with me right now, but certainly I think we disclosed in one of our earliers that we expected their margin to be somewhere in around the 3.70% range based on the acquired assets at fair value.

Got you. Then in terms of -- just overall in terms of the competitive environment, as it relates to loan pricing, just curious in terms of what you're seeing out there across the various markets.

I would say that it's fairly consistent across all markets -- Florida, Mississippi, Tennessee and Texas -- that competition for high-quality loans has hit two fronts -- one pricing, the other structure. We've held very firm to our disciplines relative to structure. We have, where the relationship warrants, have worked to maintain the customer by adjusting pricing.

So, a very competitive environment. The fact that, despite the planned runoff in the one-to-four and the commercial -- and excuse me, in the indirect portfolio -- that we've been able to hold loans flat, we've had a number of large real estate transactions that have been in a mini-perm state that have paid out and gone to long-term financing in this low-interest-rate environment, especially since there's some larger insurance carriers that have been putting on those term loans again. So we feel we have done a really good job in just maintaining this level. And as we mentioned earlier, we really have adjusted our mix to allow for increased capacity as the market begins to recover.

Great, thank you.

(Operator Instructions). Michael Rose, Raymond James.

Sorry about before. Just wanted to get a little sense on the C&I loan growth this quarter. We've seen from a lot of other banks a little bit of a slowdown, and I just wanted to see if, from first to second, it's kind of flattish, and then from second to third you had a nice ramp-up in growth. Was that just a timing issue, or are you not seeing the reticence that some other banks are seeing, might've -- fiscal cliff and upcoming election, etc.?

Good question. We continue to see healthy activity in the pipeline that obviously isn't what it was three, four, five years ago. But there are certain businesses, for instance auto-related, shipbuilding-type businesses, energy support-type businesses, that we've seen good activity, and we've actually seen somewhat of a rebound in the Texas market in the construction and building business.

So -- and as I mentioned earlier, we're very cautiously optimistic that this will continue, but very aware of where we are so close to the election. And there's the fiscal cliff issue that has to be dealt with. And that is one of the main reasons we've held so strong to our credit quality disciplines.

Thanks for taking my question.

(Operator Instructions). Brian Klock, Keefe, Bruyette & Woods.

Good morning, gentlemen. Jerry, maybe you can I guess talk about the mortgage pipeline. You had a good quarter out of the mortgage banking. So I guess maybe what are your expectations, I guess, fourth and first quarter as far as the production compared to where you were in the third?

Well, it's purely a function, Brian, of maintaining a low-interest-rate environment, the primary spread, because that drives our ability to produce the secondary marketing gains. The capacity is there in terms of people and process. And I think the Mortgage Bankers Association has projected a downturn of about 20% to 25% next year. We are still seeing very strong demand.

The other thing I would tell you is that we feel like, because the strength of our mortgage operation that includes the retail production, the ability to price and sell on the secondary market, and the servicing part of it, that once we close the BankTrust transaction, there's going to be significant opportunity, given the fact they have 50 locations, a strong referral base. So, again, a lot of it is dependent on what happens with interest rates. But with the Fed maintaining an influence there and buying the product, we would anticipate that we would continue to see success in that particular business unit.

Thanks for that color. And maybe a follow-up question for Louis. On the accretable yield, it seems like the trend has been that it's been increasing the past few quarters. One, is there any accelerated accretable yield impact in that? And I guess two, with Jerry's guidance about maybe continued margin pressure at the same pace for this quarter, should we -- what kind of accretable yield are you expecting to be in the next quarter, I guess, and I guess relative to that guidance?

Well, Brian, as you know, as you re-estimate cash flows, you reset the effective yield every time you do that. And as a result this last quarter, we had about a 2.8 accretable, up from about 2.1 in the second quarter. I would -- I can't predict it, because every time we re-estimate cash flows, there's a lot of moving parts in there. But I would say it's somewhere between 2.1 and 2.7 on a quarterly basis, I would expect in the fourth quarter.

Okay. And I guess Jerry, there was 9 basis points of NIM compression just on a reported basis. So is that the kind of pressure we should expect in the next couple of quarters?

I think the trend is maybe what you should expect. I think earlier in the year, Brian, we had said that we felt like by year-end we would be around a 4% net interest margin. So somewhere in that range is what we are thinking. We dropped 11 basis points from last quarter. So we are somewhere in that -- excuse me, 9 basis points from last quarter. So we think somewhere within that range.

All right, great. Thanks, guys.

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

Thank you very much, operator, and thank you all for joining the conference call this morning. We look forward to covering our fourth-quarter and year-end results with you in January at that conference call. Thank you so much.

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