Trustmark Corp (TRMK) 2012 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Trustmark Corporation's fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation this afternoon, 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 afternoon, and thank you. I'd like to remind everyone that a copy of our fourth quarter earnings release and supporting financial information is available on the Investor Relations section of our web site, at Trustmark.com. During the course of our call this afternoon, 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 earning release, as well as in 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 afternoon, everyone. Thank you all for adjusting your schedules for this late afternoon call. We would anticipate that our next quarterly conference call will be back on normal schedule. But we appreciate you staying with us this late. Joining me, in addition to Joey Rein, is Louis Greer, our Chief Financial Officer, Barry Harvey, our Chief Credit Officer, and Mitch Bleske, our Chief Investment Officer and Treasurer. And they will all be available at the end of my comments to answer any questions that you might have.

Let me start out, first of all, by reviewing a couple of the highlights of 2012, which for us was a year of significant achievement, particularly in light of the economic conditions we've all faced. Profitability of our mortgage banking group reached record levels. We increased profitability of our wealth management and our insurance businesses. We showed significant improvement in credit quality, and we completed the merger with Bay Bank in Panama City, and we announced plans to acquire BancTrust in Mobile, which we expect that transaction to close later this quarter, pending regulatory approval. We also continued making investments in technology to increase revenue long term, and to improve efficiency within the company.

Our 2012 net income available to common shareholders totaled $117.3 million; diluted earnings per share of $1.81, which is an increase of 9%; return on average equity of 1.2%; and return on average tangible common equity of 12.55%. I may have said return on average assets of 1.20, not return on average equity. So excuse me for that. Fourth quarter 2012 highlights, if I cover a few, please, posted solid performance in the fourth quarter, with net income available to common shareholders of $27.7 million, diluted earnings per share of $0.43, up 13.2% from a year earlier. Our return on assets for the quarter was $1.12, and our return on common equity was $11.51. At today's Board meeting, our Board declared a $0.23 quarterly cash dividend that will be payable on March 15, 2013.

But let's take just a minute and discuss the quarter in a little bit more detail. First, a review of the balance sheet. Our total loans, including held for investments and acquired loans, increased $51 million from the prior quarter to total $5.7 billion. From a category standpoint, our other loans category increased $56.8 million, due in part to increases in public finance activities the quarter. This growth occurred in our Mississippi, Tennessee, and Texas markets. Our construction land development loans increased $7 million during the quarter. We experienced a $15 million increase in growth in Mississippi that was partially offset by declines, primarily in the Florida market.

Our commercial and industrial loans experienced a $4.4 million increase. There was a good bit of new loan activity that was partially offset by unexpected payoffs resulting from the sale of four different businesses, two in Texas, two in Mississippi. The total payoff from the sale of those four businesses was approximately $55 million. Our one- to four- family portfolio loans declined by $13.6 million, less than 1% from the prior quarter. However, our mortgage loan production in the fourth quarter totaled nearly half a billion dollars. That was down about 4% from the prior quarter; however, it was up 17.5% compared to levels one year earlier.

For the entire year, mortgage loan production totaled $1.9 billion which was an increase of nearly 50% from levels one year earlier. As we have stated before, we have elected to sell the vast majority of these mortgages, primarily because of the low rate environment and the longer term nature. We've sold them into the secondary market, rather than replacing run-off. So this run-off was not unexpected.

The consumer loan portfolio declined by about $10.2 million, and this reflects our continued run-off of our discontinued indirect auto portfolio. That portfolio, which hit a peak of $880 million in the fourth quarter of '07, is now down, at year end 2012, to only $25 million, and it no longer is a significant part of the loan portfolio.

Now let me turn to the credit quality. And as a precursor, the metrics that I'll give you exclude acquired loans and covered ORE, since they are carried at fair value. And I will say that virtually any way you look at credit quality, we continue to experience significant improvements in terms of classified criticize loans, in terms of nonperforming assets, and provisioning and net charge-offs. During the fourth quarter, classified loans declined $20.6 million, or 7.5%. Criticized loans fell $21 million, or 6% relative to the prior quarter. And compared to figures one year earlier, classified loan balances decreased $61.5 million, or almost 20%, while criticized loan balances decreased $72 million, or 18%.

Our nonperforming assets totaled $160.6 million. That is our lowest level since year end 2008. Our balance has decreased 1.6% from the prior quarter and 15.3% from a year earlier. Our nonperforming loans increased $1.7 million, or 2.1% from the prior quarter, to total $82.4 million. This increase is primarily due to $5 million in Fannie Mae repurchases that took place during the quarter. Our ORE decreased $4.3 million, or 5.2% from the prior quarter, to total $78.2 million.

Our net charge-offs during the fourth quarter totaled $4.3 million, or 29 basis points of average loans. Total net charge-offs for 2012 were just $17.5 million, and that is about half of the 2011 levels. Our provision for losses totaled $1.4 million for the fourth quarter. Of that amount, $1.9 million was related to acquired loans and was the result of a decline in estimated cash flows due to downgrade risk ratings on loans within a certain pool. A negative $535,000 provision for loans held for investment was a result of improved credit quality within Trustmark's loan portfolio.

During the quarter, we revised the quantitative portion of our allowance for loan loss methodology for consumer and residential loans. We converted them from a 20 quarter to a 12 quarter net charge-off rolling average, along with developing a separate reserve for junior liens on one- to four-family loans. These two changes resulted in additional provisioning expense for the quarter that totaled approximately $2 million. Our allowance for loan losses totaled $78.7 million and represented 1.59% of commercial loans, about 1% of consumer home mortgages, and 1.4% of total loans held for investment. This represents approximately 175% of nonperforming loans, excluding the impaired loans.

Now turning to deposits, our period-end deposits increased $92.5 million on a link quarter basis, to total $7.9 billion. The positive mix shift that we experienced during the quarter resulted in non interest-bearing deposits increasing $135.4 million, while our interest-bearing deposits decreased about $43 million. At year end, non interest-bearing deposits represent nearly 30% of our total deposits. These increases were offset by a decline in our CDs, which declined $62 million, and public funds, which declined $9 million. And I'll ask you to remember that we made a conscious effort and decision to stay under the $10 billion in total assets at year end. So part of the decline in CDs and public funds was a function of that strategy.

Now, turning to the income statement, our net interest income totaled $86 million in the fourth quarter. That is a decrease of $2.9 million, or 3.3% from the prior quarter. The net interest margin was 3.94%, or 12 basis points lower than the prior quarter. The decline is primarily attributable to the continued downward repricing of loans and securities, only partially offset by the declines in the costs of interest-bearing deposits. We have consistently stated, over the course of the last year, our expectation of margin compression as a consequence of the lower interest rate environment and sluggish economic condition. We would expect a decline of net interest margin going forward, similar to that experienced during the last two quarters, and that is in the 8 to 10 basis point range. Loan growth in the future will depend on some economic expansion. While we've experienced an uptick in loans during the fourth quarter, customers are hesitant to initiate significant expansion projects during this time of economic uncertainty.

Non interest income totaled $42.8 million, a decrease of $2.1 million, or 4.6% from the prior quarter. The decline was due mainly to two main factors which are included in the other non interest income category. First, a $1.2 million gain on the disposition of the corporation's proprietary mutual funds, which took place in the third quarter of 2012. And secondly, an increase in partnership amortization of approximately $900,000 related to tax credit investments that reduced the corporation's effective tax rate during the fourth quarter by approximately 3.6%, to a rate of 23.8% for the quarter. We would expect our tax rate to average approximately 27% during 2013.

I mentioned mortgage banking and mortgage banking income for the fourth quarter totaled $11.3 million, reflecting increased mortgage servicing income, increased secondary marketing gains, and a decrease in mortgage servicing hedge ineffectiveness. As previously mentioned, mortgage loan production in the fourth quarter was $495 million, down 3.9% on a link quarter basis, but up 17.5% from levels a year earlier. In looking at the composition of our mortgage volume, approximately 68% of our volume was refinance activity, while 32% of that volume was new money. Our mortgage servicing income for the quarter was $4.4 million. Secondary marketing gains of $12 million, as I mentioned, a net hedge ineffectiveness of approximately $700,000; and then also the results include a mark-to-market expense of about $1.8 million on mortgage loans held for sale.

In the insurance business, our revenues for the fourth quarter totaled $6.9 million. This is a seasonal decrease of 8.6% from the prior quarter, but an increase of 13.3% relative to the same period a year ago. For 2012, insurance revenues totaled $28.2 million, an increase of 4.6% from the prior year.

Our wealth management revenue during the fourth quarter totaled $6.2 million. That's an increase of 10% from the prior quarter and an 18.3% from a year earlier. The growth was due primarily to increased sales within the investment services area and improved profitability within the trust management business.

Service charges on deposit accounts totaled $12.4 million, reflecting a 5.7% decrease from the prior quarter and a 6.6% decrease from the prior year, and are due primarily to a reduction in NSF and overdraft fees. During the fourth quarter, we initiated changes in our posting order in response to competitive conditions. These changes resulted in a decline in overdraft fees of approximately $750,000 for the quarter and translates to about $3 million annually.

Our bank card and other fee income totaled $8 million, an increase of $1 million, or 15.2% from the prior quarter, principally due to increased commercial credit-related fee income and interchange income from debit cards. From one year earlier, we've increased it $866,000, or 12.2%. Other non interest income decreased $2.5 million relative to the prior quarter, which as mentioned previously, resulted from two main factors, the $1.2 million resulting from the sale of the mutual funds group and the $900,000 tax-related partnership amortization.

During the fourth quarter, there was also a write-down of the FDIC indemnification asset associated with Heritage Bank, and that amount was $743,000. This is the result of loan payoffs and improved cash flow projections, as well as lower loss expectations.

Now looking at non interest expense, during the fourth quarter, non interest expenses totaled $87.3 million. That is an increase of $3.8 million from the prior quarter. Excluding ORE and foreclosure expense, non interest expense increased $2.4 million. Salary and employee benefit expense increased $2.3 million, or about 5% from the prior quarter. This increase reflects incentive accruals and commissions of $1.6 million, and an additional $643,000 contribution to our self-funded medical plan, a portion of which was used to support wellness health care activities that include our new medical clinic here in our corporate office that is available free of charge to associates who are part of our medical plan.

ORE foreclosure expense increased $1.5 million from the prior quarter total $3.2 million, which was due to additional write-downs on foreclosed real estate. Year-end totals for 2012 showed a $5.1 million reduction when compared to figures a year earlier.

Touching on capital briefly, our capital base remains extremely strong. Tangible common equity to tangible asset ratio of 10.28%, total risk-based capital of 17.22%, and our capital base provides the flexibility to support organic growth as well as acquisitions.

And speaking of acquisitions, let me give you a quick update, if I could, on the BancTrust merger. We continue to remain extremely excited about the combination of the two organizations. And it's a very important transaction for Trustmark, and we look forward to closing the transaction, pending receipt of final regulatory approval. Candidly, we believe regulatory approval has taken much longer than we would like, and we believe that the holidays, in some ways, may have slowed things down. But we would expect to receive final approval in time to complete the transaction, as intended, by the end of the first quarter.

Finally, let me say that we're extremely pleased with our financial performance in the fourth quarter. We continue to be cautiously optimistic about loan growth opportunities going forward. As I mentioned before, a lot depends on some improvement in the economy and the resulting impact on loan demand. We maintained a solid, conservative balance sheet and had the benefit of a strong and diversified revenue base. We are well positioned to serve our customers and gain new ones. And I would be happy, at this time, to take any questions that you would have.

We will now begin the question-and-answer session.

(Operator Instructions)

And our first question is from Steven Alexopoulos of JPMorgan.

Hello, everyone.

Hello, Steve.

I wanted to start, with net interest income declining around 4% or so in the second half of 2012, it's staying around $4 million, given your margin guidance, which is down 8 to 10 basis points a quarter, should we expect similar pressure on net interest income for the full year 2013, sort of down around 4%, or are there any offsets of that we should be thinking about?

Well, I think, to answer your question, we would anticipate, if we remain in this low interest rate environment, that we'll continue to see pressure on the margin. We have in the past been able to maintain floors on many of our loans. As those loans are being repriced, it's become more and more challenging to keep those floors, just because of competitive reasons. And as you know, you can take a look at the investment portfolio, see the run-off in the investment portfolio, and understand that this $65 million to $75 million a month is being reinvested in the 1.75% to 2% range. And then on the deposit side, you can take a look and see that where we are with overall deposit costs, extremely low levels. We're not able to, because of that compression, squeeze a significant amount more out of that. And so you're going to get the squeezed margins.

So what we're looking for is some -- if we see improvement in the economy, you're going to see two thing happen. You're going to see, I think, loan growth increase as the economy improves. And you're going to see a yield curve that may steepen a little bit. And when that happens, the benefit is the core deposit base that this company has, I think, really starts to kick in to improve the margin.

Okay. And maybe one other question. I wanted to follow up on comments in the release regarding the efficiency opportunities that you talked about. One, is there anything you could share with us today in term of cost saving initiatives for the new year? And then second, do you see enough of a cost saving opportunity to at least drive positive operating leverage in 2013? Thanks.

Thanks, Steve. First I'll start, and then Louis, you certainly can fill in, since you are the driver of efficiency. There has become very much focus in the company on revisiting where we might find additional efficiencies. We put some new technology this year, in both our HR area and our finance area, that we believe will help drive efficiencies in terms of people costs overall. Secondly, we'll be looking at ways that we can improve efficiencies through our branch configuration network, areas where we can look at reducing the number of branches, other areas where we might need to expand our footprint or do two-for-ones. So there's a couple of areas that we'll look at. And Louis, if you want to add any color to that, please do.

Jerry, I think you're exactly correct. You know, we've been looking at a run rate, I think, on a core basis, on a quarterly basis somewhere around that $80 million to $81 million. Of course, when you look at our expense base for 2012, it's had some peaks and some valleys. So we're going to try to get back to that core run rate of somewhere around $80 million to $81 million for 2013. And that would be through some efficiencies, certainly through technology, as well as branch consolidation.

Okay. Thanks for the color.

Thank you, Steve.

Our next question is from Catherine Mealor of KBW.

Good afternoon, everyone.

Hello, Catherine.

Maybe a little bit more on the margin. Maybe first, can you give us the accelerated accretable yield for this quarter, and any guidance for that going into the first quarter of next year?

Yes, Catherine. I think the accretable yield that we have for the quarter is about $2.3 million.

Okay. So down a little bit. And then, any thoughts on that going into next quarter?

It's hard to predict, just because of the fair value accounting and reestimating cash flows and those type things. It's hard to predict. But I would say we've been fairly consistent for the year at around $2 million a quarter.

Okay. All right. Thanks. And then, you mentioned that you changed your posting for your checks. Did you do that early in the quarter, or kind of mid-quarter? Did we see a full impact of that in the lower service charges this quarter, or do you think we'll see another decline, aside from just the normal seasonal declines you see in the first quarter, next quarter?

We think that the annual impact -- first of all, yes, we did put it in early in the quarter. Secondly, we think that the annual impact is going to be somewhere in the $3 million to $3.25 million range.

Okay. All right. Great. Thank you very much.

Thank you, Catherine.

And our next question is from Jennifer Demba of SunTrust Robinson Humphrey.

Thank you. Can you talk about M&A opportunities an the flow of opportunities you're seeing now versus maybe three to six months ago and what your interest level is in the very near term, given that you're about to close BancTrust sometime during the first quarter?

Jennifer, first of all, I think that the level of activity relative to where we were six months ago, in terms of conversations and contact that we're receiving is fairly consistent. I will tell you that our focus right now is on getting BancTrust closed, consolidated, ensuring that we have a smooth transition so that their customers are impacted in a positive way. And you know, it's one of those things where even though you have a -- for us, a sizable transaction -- you've got to stay aware of other opportunities that are out there. The fact that we have the strong capital position, I think, puts us in a position that as those opportunities come up, we find something that works at a good price, we certainly will be prepared to take advantage of it. But our focus right now is on closing BancTrust and a smooth transition.

Thank you.

Thank you.

(Operator Instructions)

And our next question is from Kevin Fitzsimmons of Sandler O'Neil.

Hello. Good evening, guys.

Hello, Kevin.

I know there was a question answered earlier on expenses. And Louis, you mentioned how you're trying to work back down to that $81 million quarterly run rate. Can you talk just on personnel expenses? I know you guys mentioned a couple lumpy items that caused that to be higher. Is this really the new run rate for personnel expenses, or are these kind of seasonal items that are going come down next quarter?

Go ahead, Jerry.

Let me start, and then Louis add to that. Kevin, three things. One, there's been expense associated with a general incentive accrual. Our earnings for 2012 were very strong and included some significant milestones relative to some goals we had set at the end of 2011. So we have accrued incentives in order to pay our people. In addition, because of the record volume in the mortgage company, we've seen a significant increase in the accrual for commissions on originators. So these are two things that I would say, if there are not the same levels that we've seen last year, wouldn't be -- those aren't necessarily ongoing run rates. The other thing I'll comment on is we did some hiring in the fourth quarter in anticipation of BancTrust, to prepare for including -- to ensure that we have consistency in service levels. And that's a bit of an abnormality. Those are the main reasons. And then, Louis, you want to touch on some of the medical expense?

Yes. We have a self-funded medical plan and we like to keep a targeted balance in there. So we put an additional $650 million in that plan to come up with what we think is an adequate balance for funding. That was a one-time fourth quarter event of about $650 million. So, Kevin, if you back out the stuff that Jerry mentioned plus this, we'd expect a run rate similar to the first three quarters of 2012, on average.

Okay. Great. That's very helpful. And just a quick follow-up on credit. I know you had the slight negative provision on legacy loans this quarter. But how should we think about provisioning going forward? Seems like the allowance to loan ratio down a little over 1.4% is more toward a normalized pace. Should we think about provisioning in line with net charge-offs going forward?

Kevin, this is Barry. That's kind of hard to say at this point, because we continue to see a trend in net upgrades, and therefore, some release of provisioning as that occurs. We're continuing to work through our problem loans. And as we do so, we've got, in many cases, if they're impaired, we've got specific reserves on those. And as we're able to settle that debt or revalue that debt on any given quarter, the revaluations seem to be less of a drop than we've seen previously. So at some point, the specific reserves we have are going to substantially outpace the actual write-down, at which point we'll know we don't need those going forward. But at this stage, we've still got them on the credit. So as I would see '13, I would see the net charge-offs continuing to outpace the provision, just looking forward.

Okay. All right. Great. Thank you, guys.

Thank you.

Next we have a question from Michael Rose of Raymond James.

Hello. Good afternoon, everyone.

Hello, Michael.

Just wanted to circle back to the margin guidance, because I think you said 8 to 10 basis points of compression a quarter. In the first quarter, at least layering in BancTrust, it seems like the margin would be a little bit lower. Can you, at least from a pro forma standpoint, give us what that impact might be?

Well, I guess first quarter -- well, first of all, I think we hope to have the transaction closed by first quarter. And I don't know that the impact on BancTrust in the first quarter is going to be significant. Once we get it done, there will be some noise in the following quarter from expenses that we will take relative to the transaction. But as far as the overall margin, we feel like what they will add, margin wise, will be fairly consistent with our margin. They've been able to obtain good yields on their loans, and we think there's some benefit in some of their deposit pricing that we can help just by reconfiguring the mix. Mitch, you've got any color you want to add to that?

I mean, if you were to run rate the margin for BancTrust, we'd estimate about $14 million a quarter. So depending on when they come in in the first quarter, we might see some impact, and of course, the net interest income from them. In term of net interest margin percent impact, it's hard to tell, partly because we'll obviously use purchase accounting, depending on what the discount cash flows we use is really going to drive what the total market percent impact is for us.

Certainly, the margin has come down from our original views when we did the announcement of the transaction. Certainly, loans have run off a little bit. So I think Mitch has hit the margin that we projected in on a quarterly basis fairly accurate. But again, there are a lot of moving parts in this fair value accounting.

Yes, and that's what I was trying to get at, because I think if you just take the third quarter numbers and smoosh the two together, it's about a negative 20 basis point. But I know there's put and takes. So thanks for the color.

Sorry, Michael, it's just a hard number to predict at this point in time, especially since we'll have to update our units day one, handling and all that.

Understood. Thanks.

Our next question is from David Bishop of Stifel Nicolaus.

Hello?

Hello, Dave.

Sorry about that. Hit the wrong button there. Quick question, following up on the credit side of things. You had mentioned in terms of the revamp in term of the reserve methodology, I think it was on the consumer portfolio, is that going to spread to maybe some of the other portfolios there and can that have an impact as we look forward in terms of the outlook for positioning the reserve, as well?

It was actually the result of working to become consistent relative to the commercial portfolio. And Barry, if you want to add to that --

Yes. I think that's pretty succinct, Jerry. I think that when we built the commercial portfolio during '08, we built it in '08, and we kind of built the three-year history, '08, '09,and '10. Then it became a 12-quarter rolling average at that point. We had always had a 20-quarter rolling average on the consumer side that we just maintained. But the more we've looked at it, the more conversations we had with third parties, the desire for the consistency between the two continues to be a subject of conversation. We took the opportunity and resulted in a provisioning of about $1.4 million that impact to the provisions. That's a one-time occurrence. Today, they're synched up. We don't see need to make further adjustments, either on the consumer or the commercial side as it relates to the length of the rolling average on the quantitative side.

Great. Then just in term of the outlook for loan demand there, you know that some pockets of growth this quarter on the public side there. Maybe talk about the loan pipeline entering this year relative to entering last quarter, and where you do see some opportunities. Is Texas still going gang busters like we've heard from others, what you're seeing in some of the markets there in Florida, as well.

Yes. Healthiest loan growth we've seen is in Texas, in some real estate-related projects, multi-family primarily in Tennessee markets and in the Mississippi markets. We're seeing some pickup in line usage in all markets, other than Florida. So the fourth quarter pipelines and actual production were as positive as they have been in several years. We're seeing pipelines continue to have that steady flow, although it is not robust. We're starting to see some of the projects that were done in the fourth quarter beginning to fund here in the first quarter. So as we stated in our comments, we're cautiously optimistic about loan growth, but we're certainly not back to levels that we were pre-2008.

Great. Thank you.

And the next question is from Blair Brantly of BB&T Capital Markets.

Good afternoon, guys.

Hello, Blair.

Had a couple questions on BancTrust. You had mentioned closing at the end of the quarter, or is that still the target at the end of February?

Well, we're hoping for the end of February, but we're still waiting on regulatory approval. And until we get that approval, we really can set a specific closing date.

Okay. And then secondly, it seems like conditions have kind of gotten worse for BancTrust. Is part of that just getting in preparation for the closing of the deal? Some capital's gone down, asset quality seems to have gotten worse. Obviously, some lines have run off. Can you comment on that at all?

Not really. We're not seeing that things have gotten worse. We're seeing that, you know, we are all working on -- in preparation of the merger. But I really couldn't comment on any conditions at BancTrust at this point.

Okay. I didn't know if something with -- when you first came out with the deal, in term of credit marks, if anything had changed there with conditions, with some things that may have popped up that maybe weren't caught beforehand or something like that.

No. I can say that Barry Harvey and his team have been in there before. We're not changing our credit marks at all. I think, obviously, like we have experienced some compression in the margin, they have. But it hasn't been significant. You look at growth, loan growth with their capital position. They're just waiting, as we are, to get this transaction completed so that we can move forward. But they continue to stay focused on serving the needs of their customers in all their markets.

Okay. All right. Thank you very much.

Thank you.

This will 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. Let me just say that we appreciate very much, again, you joining us late on this Tuesday afternoon for the call. We appreciate your interest in Trustmark and look forward to our call at the end of the first quarter of this year. Thank you all for joining us.

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