Trustmark Corp (TRMK) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Trustmark Corporation's Second-Quarter Earnings Conference Call. At this time, all participants are in listen-only mode.

(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. Please go ahead.

Good morning and thank you. I'd like to remind everyone that a copy of our second-quarter earnings release and 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 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, and our other filings with the Securities and Exchange Commission. At this time, I'd like to introduce Gerry Host, President and CEO of Trustmark.

Thank you, Joey, and good morning, everyone. Thanks for joining us. Also with us this morning are Louis Greer, our CFO; Barry Harvey, our Chief Credit Officer; Craig Tyler, President of our Mortgage Company; and Buddy Wood, our Chief Risk Officer.

We continue to build momentum, and experienced revenue growth of excess of 7% during the second quarter. We recorded solid financial results across our business line and various geographic markets. Let me cover with you some highlights of our second quarter of 2013. Highlights for the second quarter include net income of $31.1 million, or $0.46 per share, which produced a return on average tangible common equity of 14.09%, and a return on average assets of 1.06%. As you may recall, we completed our merger with BancTrust in February, and in March completed the operational conversion. The second quarter was the first full quarter that included the financial results of the merger. I'm pleased to report net income attributable to BancTrust totaled $6.1 million in the second quarter, which included $2 million after tax from recovery on pay off on acquired loans. Also, our Board declared a quarterly cash dividend of $0.23 per share, payable September 15 to shareholders of record on September 1.

Let's review our second-quarter accomplishments in more detail. First, the balance sheet. Average earning assets increased roughly $840 million in the second quarter, reflecting the first full quarter following the BancTrust merger. Average total loans increased over $400 million, while average investment securities increased more than $430 million. Average deposits increased approximately $940 million from the prior quarter. Loans held for investments, our legacy loan portfolio, totaled $5.6 billion at June 30, an increase of $46 million from the prior quarter. Growth was broad-based by type, as well as by geography.

Construction lending expanded $34 million during the quarter due to growth in our Texas, Mississippi, Alabama, and Tennessee markets. Commercial real estate loans increased $21 million, reflecting growth in Texas, Florida, Alabama, and Mississippi. Other real estate secured loans grew $18 million, principally due to growth in our Mississippi and Tennessee markets. Increased lending to public entities and school districts in Mississippi and Alabama was largely responsible for the $25 million growth in our Other loan category.

One to four family mortgage loans declined $15 million, as we elected to sell the vast majority of our quarterly production of these lower-rate, longer-term mortgages in the secondary market, rather than replace run-off in the portfolio. Commercial and industrial loans declined $38 million, as growth in Alabama was more than offset by declines in Trustmark's other markets during the quarter. We are seeing organic loan growth, and believe it will improve during the second half of the year. Our loan pipeline is encouraging. We have loans on the books that are beginning to fund -- primarily construction loans for multi-family and commercial real estate projects in Houston, Memphis, and Mississippi. Deposits at June 30 totaled $9.8 billion, down $92 million from the prior quarter. Much of this decline is a result of efforts to reduce pricing on single-deposit accounts, particularly in Alabama markets.

Turning to capital, Trustmark's total common equity was $1.3 billion at June 30, down $26 million from the prior quarter. The $15-million growth in retained earnings during the quarter was more than offset by the $44.5 million net of tax declined in value in our AFS securities portfolio, caused by rising interest rates. We continued to optimize our capital base during the second quarter, with the previously announced redemption of $33 million in high-cost, trust-preferred securities acquired in conjunction with the bank trust merger. Our solid capital base provides opportunity to support organic loan growth in an improving economy. Tangible common equity to tangible assets was 7.96%, and total risk-based capital, 13.89% at June 30.

Now turning to credit quality, we continue to experience significant improvement in credit quality, as evidenced by a reduced net charge-off and provisioning. Please note that the credit metrics I will discuss exclude acquired loans and other real estate covered by an FDIC loss-share agreement. At June 30, 2013, non-performing assets totaled $192 million, a decrease of 4.8% from the prior quarter. Non-performing loans totaled $74.3 million, a decline of 10.8% from the prior quarter, while foreclosed other real estate totaled $117.7 million, a decline of 0.6%.

Recoveries exceeded charge-offs during the quarter, resulting in net recoveries of $771,000 in the second quarter, compared to net recoveries of $1.1 million in the prior quarter. Provision for loan losses for the second quarter was a negative $4.8 million as a result of the net recovery position and improved credit quality within our loan portfolio. Allowance for loan losses totaled $72.8 million, and represented 1.48% of commercial loans, 0.84% of consumer and home mortgages, 1.31% of total loans held for investments. This represents 158.8% of non-performing loans, excluding impaired loans.

Looking at the income statement, net interest income totaled $103 million in the second quarter, an increase of $10.3 million, or 11.2% from the prior quarter. The net interest margin was 4.02%, or 4 basis points higher than the last quarter, due to a significant increase in average acquired loan balances from the BancTrust merger, as well as the favorable decline in the cost of interest-bearing liabilities. The yield on acquired loans totaled 8.48% for the quarter, and included recoveries of $6.5 million for loan pay-offs, approximately 50% of which were attributable to BancTrust. These recoveries represent approximately 2.66% of the total acquired annualized loan yield in the second quarter. Excluding the impact of acquired loans, the net interest margin compressed 11 basis points from the prior quarter to 3.55%.

Given the current interest rate and competitive lending environment, we would expect the pace of decline in the net interest margin excluding acquired loans to slow and then flatten. Looking ahead, we could expect the net interest margin, excluding the impact of acquired loans, to decline roughly half as much in the third quarter than we experienced in the second quarter -- or approximately 5 to 7 basis points. Non-interest income totaled $43.7 million, and included a contribution attributable to the BancTrust merger of $3 million. Mortgage banking production in the quarter totaled $424 million, up 8% from the prior quarter, part in due to refinance activity from the Home Affordable Refinance Program. Mortgage banking revenue in the quarter totaled $8.3 million, down $3.3 million from the prior quarter, due principally to lower gains on secondary marketing loan sales, caused by tightening spreads and reduced positive hedge in effectiveness.

We would expect refi volumes to decrease over time as mortgage rates move higher. However, we are experiencing market share growth in many of our legacy markets, in addition to opportunities provided by the recent BancTrust merger. We are adding additional mortgage loan officers in selected markets, and have fewer mortgage broker competitors. We also have a positive traction through our corporate referral initiative. Mortgage banking continues to be a very important earnings contributor for Trustmark.

Insurance revenue for the quarter totaled $8 million, an increase of 10.7% from the prior quarter, and an increase of 11.6% relative to the prior year. This organic growth is due in part to increased commercial insurance sales, as well as the continued firming of insurance rates. Wealth management revenue during the quarter totaled $6.9 million, and included a $1.1-million contribution from BancTrust. Fee income attributable to our banking business posted significant growth during the quarter. Service charges on the positive accounts totaled $12.9 million, up 10.7% from the prior quarter, and included a $1.2-million contribution from BancTrust. Bank card and other fees income totaled $9.5 million, an increase of $1.6 million, or 19.7%, from the prior quarter. Other income decreased $954,000 relative to the prior quarter, due primarily to increased write-off of the FDIC indemnification asset, resulting from the re-estimation of cash flows and loan pay-offs.

Non-interest expense for the quarter totaled $107.2 million, and included expenses of $11.4 million, reflecting the first full quarter of operations following the BancTrust merger. It also included non-routine litigation expense of $4 million, related to our previously announced proposed settlement concerning overdraft fees for debit card purchases and ATM withdrawals. Salaries and employee benefits expense totaled $55.4 million in the quarter, and included BancTrust-related expense of $5.7 million. Excluding BancTrust-related expense, salary and employee benefits totaled $49.7 million in the second quarter, up $1 million from the prior quarter. Excluding ORE expense, DDI amortization, and non-routine litigation charges, core non-interest expense totaled approximately $95 million in the second quarter. We would expect a similar level during the next quarter.

To enhance productivity and efficiency, we continue to realign our branch network. In April, two of our Houston offices were consolidated into one new office. In May, five overlapping offices in the Florida panhandle as a result of the BancTrust merger were consolidated. Year to date, we have opened three new offices and closed or consolidated eight offices. We have an ongoing market optimization process to identify opportunities to refine our delivery channel, which will enhance shareholder value. We anticipate completing our previously announced purchase of two branch offices in Oxford, Mississippi, later this week. In addition to the branch offices, we will assume selected deposit accounts of approximately $12 million from Southbank.

As I said at the beginning of our call, we continue to build momentum in the second quarter. Revenue increased 7% to $143 million. Credit quality continued to improve. We have expanded our market place in Alabama, and that provide significant opportunities for growth. We continue to be optimistic about opportunities going forward in all of our markets. At this time, I would be happy to take any questions.

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

(Operator Instructions)

The first question comes from Kevin Fitzsimmons with Sandler O'Neill. Please go ahead.

I appreciate the outlook on the core margin. Can you give us some help in how you are looking at the reported margin from here? Should we just be thinking about this pace of accretion income as declining over time, and take the reported margin down by similar or a greater amount? If you could just give us your best sense on that? Thanks.

Kevin, what I would tell you is that we would anticipate the add-back from the acquired loans to continue for at least a couple of quarters; although that, as you know, is very unpredictable. But there certainly are loans that we are working on, well in process of moving through either the court system or working with customers that we believe will continue to add some value.

As far as the margin relative to our core loan portfolio and our investment portfolio, we feel as though, as we just gave guidance, that we will see some continued tightening, primarily due to a very competitive loan environment. Obviously, a re-pricing of asset run-off, roughly $600 million per year, a pace of $600 million a year, into lower-yielding securities. But we do believe that the decline we've seen the last two quarters of 11 basis points each in that core margin, has slowed, and will continue to slow and flatten.

Okay. That's helpful, thanks. One quick follow-up.

Just in terms of the loan growth -- when you mentioned the decline in C&I, you mentioned how growth in Alabama is getting offset elsewhere. Can you just give us a sense on why we are seeing negative growth elsewhere? Is that a matter of pay-downs? Other people are taking loans from you? Or is that something that is deliberate that you are pulling back? Thanks.

It actually is primarily pay-downs online. Loans are not going away, but we saw in the second quarter about six specific companies that had significant pay-downs relative to the C&I portfolio. Again, as those companies utilize those lines, we feel like we will see that volume come back. The pipeline for C&I looks good, but it's probably one of the most competitive categories we are seeing out there.

We are maintaining relationships, ensuring that we keep those loans, certain transactions. We are winning some and we are losing some. The public market -- I saw a list of six we competed on last week -- and we won four of the six. The ones we did lose were at rates that we just didn't want. Very competitive market. We are in the middle of it. We did experience a pay-down, primarily due to people reducing their line balances, and we would expect to see those utilized in the future.

Okay. Thanks very much.

Our next question comes from Catherine Mealor with KBW. Please go ahead.

Based on the provision, how should we think about the provision going forward? And how much lower you might be comfortable taking the reserve to one ratio? Could we see another couple quarters of negative provision? Or do you think we may be past that, and we will see flat or maybe even zero provisioning to maybe very modest provisioning as we move forward?

Catherine, I will ask Barry Harvey to respond to that question.

Okay, thank you.

Catherine, I would think as we move into the second half of the year, we may see some continuation of negative provisioning. What's driving the provisioning -- or the negative provisioning -- is a result of our -- when you look at our quantitative part of our loan-loss reserve, we've got a 12-quarter rolling average of historical losses. As you look back and see the quarter's worth of losses that are rolling off back from 2010 are going to be fairly high in terms of our loss experience versus what we are experiencing today.

As we roll on a quarter with limited losses, we roll off older quarters with much higher losses. Then there will be a natural progression for the reserves to move downward, just based upon the way the model is defined. From that perspective, I would anticipate maybe some negative provisioning over the next few quarters, and then maybe some flattening out. And it just depends on what the economy does after that.

Okay, great. That's helpful, thanks.

Thank you, Catherine.

Our next question comes from Steven Alexopoulos with JPMorgan. Please go ahead.

Hello, everyone. This is actually [Frisi Vixis] on for Steve. Just want to ask, with the TC ratio sitting around 8%, do you feel like you have capacity to do another deal here, or will it be more of these one-off branch deals? Maybe some color on what the opportunity set looks like would be helpful?

We know that our focus right now is on expanding the opportunities afforded in Alabama because of the $2 billion acquisition there. We continue -- as most other banks that are in an acquisition status -- we continue to look at opportunities out there. It would depend on the size of the transaction as to whether or not we felt as though we would have adequate capital. To do transactions that we have done in the past in the $500 million range, we think we will be building capital and would be sufficient to handle those. Should we see something larger, we have to look at our options that would be available to us.

Okay. That's really helpful. Could you give us more color on the higher mortgage production this quarter? Maybe how much is coming from refi versus purchase? Also, your outlook on volumes and the gain on sale margin would be helpful. I think your margin was about 180 basis points this quarter?

Sure, Breck Tyler will answer that.

Yes, this is Breck.

As you indicated, our first-quarter volume was $392 million. That was about 66% refi. In the second quarter, the $424 million was 54% refi. We are very encouraged by the purchase activity. About 55% of our monthly volume is retail, internally generated. That gives us opportunities as rates move higher to spend a little bit more emphasis on the third-party side to make up that volume -- in fact, when rates go up and the volumes go down overall.

Again, as Gerry indicated, we are very encouraged in terms of the BancTrust opportunities to expand the Alabama footprint in some very significant markets, back-filling the Florida markets that we've been in previously. Over the last five years or so, we've been in a holding pattern in the Memphis market just due to the challenges there of housing. Now we are aggressively expanding our origination platform. We see a continued Houston opportunity to expand our retail production.

As Gerry indicated, we're seeing market share growth in our legacy markets. A lot of that's due to the market share we have on the banking side, a significant servicing portfolio to leverage off of a pretty strong referral process. Yes, as Gerry indicated, gain on sale margins do decrease as rates move higher and refis go lower. Those are challenges throughout the industry. But we are encouraged by the opportunities that Gerry indicated that I have alluded to.

That's helpful. Is there a long-term gain on sale margin we should think about for you guys?

We are really not sure what the new norm is going to be, with the changes in the market place and the different players that are there. We feel like the new norm will be higher than what we've experienced over the last 15 years, but we are just not certain. We probably will continue to see some decrease in gain on sale margins from here as rates go up and refis decrease and competition continues to tighten.

Okay, great. Thanks for taking my questions.

(Operator Instructions)

Our next question comes from Michael Rose with Raymond James. Please go ahead.

Mr. Rose?

We will move on to our next question from David Bishop. Please go ahead.

Turning back to the mortgage side -- obviously, not portfolioing production right now. Are you getting closer to the point, or does there become a point here pretty soon, where you would start to think about portfolioing that production?

Great question, thank you. Yes, we are.

We became a little bit leery about booking 15-year production once rates dropped below 3%. Now that we are back above those levels, we believe that this production coming out of the mortgage company presents some opportunity to put some of this product back on the balance sheet. We feel when you compare this, even though we've had a very high quality mortgage loan portfolio, when you compare the changes that have taken place in the industry over the last couple years, that we are booking much higher-quality paper. Now that the yields are back up again, it does provide us an opportunity to put some of this back on the balance sheet.

Got it. I think in the earnings preamble you talked about growth in the pipeline in terms of multi-family and commercial real estate. Which markets were those again? And maybe some color on those individual markets in terms of those opportunities?

Well, we are actually seeing growth in the Texas market, in the Alabama market, in Tennessee -- would rank third -- and then Alabama next. We are actually, of course -- we're early into that market. We are working with our new group of lending officers over there. We have a number of senior credit officers that have gone into that market, as well as a few lenders to work with our new Alabama associates. We are starting to see deals that they may not have been able to look at in the past, available to us. They have just not yet come to fruition.

The other thing I would say is that we talked two quarters ago about feeling good about some of the construction projects that we were involved in, and that had come through the pipeline as booked. Well, we've not really seen the benefit of that because our programs require that -- as most banks -- that the lenders utilize their cash in the projects first before they start borrowing down on their lines. As the markets have tightened, we have also seen a requirement, at least from our perspective, for a higher percentage of cash into the transactions that we are doing. The effect has been to delay when these loans draw down. I think during the third and fourth quarter this year, those projects are at a point where we'll start to see increased utilization on those lines.

Barry, are there any other comments you think should be added?

No, other than the fact, Gerry, that I think when we talked about competition and how competitive it is on the C&I side -- and it's very competitive on the CRE side as well. But there may be one or two less players just because there are several banks who still have quite a bit of CRE that they are trying to work down from to the levels they currently are. It does present an opportunity for us to be in there among a few less banks from deal to deal looking at it.

We have focused on some very strong developers who are, as you said earlier, putting, in many cases 30%, 35%, 40% of their own money into the deal before we get an opportunity to fund. So it has delayed our funding, which will eventually occur, and will come quicker when it does. But it has put us probably six months behind when they would normally begin to fund on those projects we have on the books.

The only other thing I'm going to add, Dave, is that we have remained extremely disciplined as the economy has begun to recover relative to our lending practices, both with structure, quality, and pricing. Where we, from time to time, are getting looks and criticism about slow growth, we remain disciplined. We are comfortable with what we are doing. We are growing in the categories we have the capacity to grow in and have the opportunities. We are not chasing deals outside of our markets and outside of our experiences. As a result, we continue to fight that battle of pay-downs on these acquired loans. Without that we have seen growth this quarter. We do feel good about where the pipelines are, but we will continue to be disciplined in our lending practices.

Great. Thank you for that color.

Thank you.

(Operator Instructions)

We have a question from Blair Brantley from BB&T Capital Markets. Please go ahead.

Had a quick question about the operating expense run rate going forward, and how we should think about it in terms of how much more cost savings are for BancTrust and what your targeted number might be for the near term?

Great, Blair. Thanks. Louis Greer will answer that.

Hey, Blair. How are you doing today?

Good Louis, how are you?

(inaudible - multiple speakers) expense run rate going forward, as well as the cost saves from BancTrust. I think as Gerry mentioned in his comments that we had roughly $11 million worth of business from BancTrust. We annualize that and you are looking around $44 million to $45 million. If you remember, BancTrust had a run rate of somewhere between $58 million and $60 million, so we've accomplished somewhere between 23% and 24% of cost savings than their original run rate that we were looking at when we acquired BancTrust. I think we are almost there on BancTrust on cost savings. Their run rate is going to be about $11 million a quarter.

When you look at Trustmark, I think Gerry mentioned in his comments, when we look at core expenses, which are total expenses less ORE expenses, less CDI -- I think CDI on a quarterly basis is roughly 2.5 -- and I think this quarter we had about $5 million. Hopefully, we won't expect that going forward. To reconcile that, I think Gerry mentioned about a $95 million run rate for core expenses. But remember, that includes ORE expenses, as well as CDI.

Okay. In your ORE bucket, how much is BancTrust for this quarter?

I'm sorry, I didn't hear that.

In your ORE bucket, how much is BancTrust's for this quarter?

You're referring to the expenses or the balances?

The balances, I'm sorry.

It's going to be about $45 million of the ORE.

Okay. Then a question on CRE. Are you guys seeing any increase in the non-bank competition for those credits from insurance companies, or anything else like that?

It's limited. When we do, it's in our Houston market, but predominantly it is still going to be traditional banks are the majority of the competition, even in the Houston market that we see. Outside of Houston, we see very little competition from non-banks for our CRE projects.

I will add that one of the things we are seeing in some of the larger participations -- and we do not have that large a book -- we are seeing that some of the larger lead participants are taking more of a particular deal at renewal, and squeezing out some of the smaller participants. That, I guess, is another area of competition for volume.

In terms of rates, have you seen any real change in rates at this point with the [steeping of the u-curve] or anything like that? Or is competition still pretty tough?

On the C&I side, we really haven't. What we do see that we haven't chased is, there are some banks that continue to provide lower rates and longer terms. Those are deals we are not chasing. From the standpoint of most floating-rate products, it still remains extremely competitive.

In terms of some of the fixed-rate CRE stuff, have there been any changes there?

I think Barry mentioned, there aren't quite as many players, so our ability to get slightly higher yields than where we have been over the last several years has been good. As far as committing to those deals, we are actually working with customers on swaps, and are very competitive there.

Okay. Thank you very much.

Thank you.

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

Thank you, Operator, and thank you all for joining us today. We feel like we've got good momentum going. We are pleased where we are relative to the BancTrust transaction, and believe we will see continued momentum and opportunities in that market. Again, we appreciate you joining us today, and look forward to our third-quarter conference call.

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