Trustmark Corp (TRMK) 2013 Q4 法說會逐字稿

Good morning, 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 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, Operator. I would like to remind everyone that a copy of our fourth 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, 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'll turn the call over to Jerry Host, President and CEO of Trustmark.

Thank you, Joey, and good morning, all, and thanks for joining us. Also with us this morning are Louis Greer, our Chief Financial Officer; Barry Harvey, our Chief Credit Officer; Buddy Wood, our Chief Risk Officer; Tom Owens, our Bank Treasurer; and Breck Tyler, President of our Mortgage Services Company.

Let me start with a quick review of our 2013 highlights. 2013 was a great year of accomplishments for Trustmark. We completed the largest acquisition in our history. We entered a number of attractive markets in Alabama, and strengthened our position in the Florida Panhandle. We also purchased two branch offices in the Oxford Mississippi market. Since that acquisition in July, deposits have nearly tripled, from $12 million to $34 million at year-end.

We increased our market position to the number one rank in deposit market share in Mississippi during the year. We continue to see improvement in credit quality. We optimized our branch network by consolidating 14 branches and opening 3 new branches.

We invested in technology to enhance future productivity and provide greater customer service. We continued to provide value to our shareholders. Any way you look at it, 2013 was a successful year. Our net income totaled $117.1 million, diluted EPS of $1.75, and we paid $0.92 a share in dividends during the year.

Our return on average assets was 1.02% and our return on average tangible common equity was 13.09%. If you were to exclude non-routine merger costs and litigation expense, net income in 2013 totaled $125.3 million, or $1.87 per diluted share.

Now, let's take a closer look at the fourth quarter performance. Net income was $28 million, or $0.42 a share. This represented a return on tangible common equity of 12.60% and a return on average assets of 0.95%.

Yesterday, our Board of Directors declared a quarterly cash dividend of $0.23 per share, payable March 15, 2014 to shareholders of record on March 1, 2014. We've consistently paid a quarterly dividend that has increased over time and has never been reduced.

Giving a quick balance sheet update, we posted our third consecutive quarter of growth in loans held for investment. That's our legacy loan portfolio. At year-end, loans held for investments totaled $5.8 billion, an increase of $102 million, or 7.2% annualized, from the prior quarter. This growth is diversified by loan type and by market.

Our other legacy -- our other loan category has growth of $50 million, which was due to increased lending to medical facilities and public entities in our Mississippi, Alabama and Tennessee markets. Construction, land and development lending grew by $25 million in the quarter, due to growth in our Texas, Alabama, Tennessee and Mississippi markets. Commercial industrial loans also increased $25 million, as both Alabama and Texas had significant increases.

Commercial real estate increased $7 million, as growth in Alabama and the Mississippi markets were offset by declines in Tennessee and Texas. We're pleased with loan growth during the quarter and believe it will continue in coming quarters. Our pipeline is encouraging and we booked loans that are beginning to fund, particularly in the commercial real estate and construction lending, in virtually every market we serve. Average securities during the period remained stable, at $3.5 billion.

Let me comment, if I could, on a couple of significant changes in the investment portfolio during the quarter. First, to mitigate the potential adverse impact of rising interest rates on tangible common equity, we transferred $1.1 billion of investment portfolio securities from our available for sale portfolio to our held to maturity portfolio. This was done during the month of December.

Second, during the fourth quarter, we sold $136 million of collateralized loan obligations, due to uncertainty related to the Volker rule. The remaining balance of these securities, $26 million, was subsequently sold earlier this month.

Now, turning to average deposits, our average non-interest bearing deposits increased $132 million in the fourth quarter, while average interest-bearing deposits declined $150 million. As a result, the composition of our deposit base was enhanced, as non-interest-bearing deposits representing 27% of average deposits. Our cost of deposits during the quarter was 20 basis points, comparing favorably to our peers.

Turning to credit quality, I'd like to first note that the credit metrics that I'll discuss exclude acquired loans and other real estate covered by FDIC loss share agreements. Net charge-off during the fourth quarter totaled $201,000. During 2013, recoveries exceeded charge-offs, resulting in a net recovery of $1.1 million.

Our provision for loan losses in the fourth quarter was a negative $2 million, as a result of the net recovery position and improved credit quality within our loan portfolio. During the fourth quarter, classified loans declined 9.28%, while criticized loans decreased 8.49% relative to the prior quarter. Compared to figures one year earlier, classified loan balances 13%, while criticized loan balances decreased approximately 22%.

Our allowance for loan losses totaled $66.4 million at year-end and represented 130 basis points of commercial loans and 75 basis points of consumer and home mortgage loans, resulting in an allowance to total loans held for investment of 115 basis points. The allowance for loan losses represents 191% of nonperforming loans, excluding impaired loans.

Each quarter, we reestimate cash flows on acquired loans. As a result, we recognized approximately $4.2 million in impairments in the fourth quarter, principally from the BancTrust portfolio. This was more than offset by recoveries of $9.3 million, which we will discuss in a moment.

Nonperforming loans totaled $65.2 million, a decrease of 11.1% from the prior quarter and almost 21% from the prior year. Foreclosed other real estate decreased 8.4% from the prior quarter and totaled $106.5 million. Compared to levels one year earlier, other real estate declined 20%, when excluding acquired ORE from BancTrust. During the year, we sold approximately $46 million in ORE at no significant gain or loss, including $16 million of ORE in the fourth quarter.

Now looking at the income statement. For the fourth quarter, net interest income totaled $105.6 million, a $3.5 million increase from the previous quarter. This increase resulted in a net interest margin of 4.10%, up 16 basis points from the last quarter, due to an increase in recoveries on acquired loans.

The effective yield on acquired loans during the quarter was 6.6%. Recoveries on acquired loans totaled $9.3 million, which contributed an additional 4.35%, resulting in a total yield on acquired loans of nearly 11% during the fourth quarter. Excluding acquired loans, the net interest margin in the fourth quarter totaled 3.48%, compared to 3.52% in the prior quarter.

Based upon the current interest rate environment, we would expect the margin, excluding acquired loans, to remain relatively stable. We expect balances on acquired loans to decline approximately $200 million during 2014, and the yield on acquired loans, excluding recoveries, to remain in a range from 6% to 6.25% during the year.

Non-interest income totaled $38 -- let me turn to non-interest income a minute now. It total $38.7 million, down $8.5 million from the prior quarter. And this decline is due to three factors. The first is a $2.6 million reduction in the FDIC indemnification asset associated with a $3.2 million recovery from the Heritage acquisition. And remember, if you would, recoveries are included in the net interest margin. And because of the FDIC loss guarantee, we had to reimburse the FDIC for 80% of the recovery; and this is reflected in other non-interest income.

The second factor impacting the decline in our non-interest income was a $2.9 million increase in partnership amortizations related to additional tax credit investments of approximately $23 million during the quarter. These investments reduced our taxes by approximately $3.8 million, as reflected in our lower effective tax rate for the quarter of 16.2%. For the year, our effective tax rate was reduced to 24% through the utilizations of these tax credits.

The third area impacting our non-interest income is mortgage banking revenue, which in the quarter totaled $5.2 million, down $3.3 million from the prior quarter, due principally to lower gains on secondary marketing loan sales, resulting from lower spreads and volumes, as well as reduced positive hedge ineffectiveness. Mortgage loan production in the fourth quarter totaled $276 million, down about 23% from the prior quarter and 44% from levels one year earlier. These declines reflect a slowing refinance activity, following an extended low interest rate environment.

Looking at insurance revenues, for the quarter, they totaled $7.3 million, a seasonal decrease from the prior quarter. However, when compared to levels one year earlier, insurance revenues increased 6.6%. Total insurance revenue for the year totaled $30.8 million, an increase of 9% from the prior year.

Wealth management revenue during the quarter totaled $8.1 million, an increase of 8.3% from the prior quarter, reflecting increased sales within the investment services and improved profitability within the trust management business. Compared to one year earlier, revenue increased $2 million, or 31.8%, due in part to the BancTrust merger. Assets under management and administration and brokerage assets expanded to $12.5 billion. During 2013, we implemented a revised pricing plan which will be phased in over the next two years, and which we'll see benefits from that new phase in.

Bank card and other fee income totaled $9.6 million, an increase of 7.3% from the prior quarter; and this growth is primarily from increased interchange income and debit cards. Service charges on deposit accounts totaled $13.1 million, down 5.3% from the prior quarter, which was mainly due to a reduction in NSF and overdraft fees.

Non-interest expense for the quarter totaled $104.9 million, excluding ORE and intangible amortizations of $5.5 million. Non-interest expense during the fourth quarter totaled $99.4 million, an increase of $3.4 million from comparable expenses in the prior quarter.

Expenses during the quarter included additional incentive accruals of $1.2 million, one-time mortgage related reserves for potential put backs and additional foreclosure expense of $1.1 million, and compliance-related professional fees of $450,000, and other one-time expenses related to our community development entity of about $350,000. We expect core operating expense, which excludes ORE and intangible amortization, will continue in a range of $95 million to $96 million in coming quarters.

Now let me give you a quick update on BancTrust. I'd like to take a moment and cover some of the very positive things. We're pleased with the success of the operational conversion. We achieved our targeted cost savings one quarter earlier than anticipated.

We consolidated seven banking offices last year as a result of the merger, and we have solid traction in terms of new loan growth in Alabama. The growth in Alabama more than exceeded the runoff in the acquired loan balances in Alabama, so we're very pleased with that. We're excited about the potential opportunities before us.

Our focus will continue to be on profitable revenue growth and expense management. From a revenue growth perspective we are encouraged by loan growth opportunities, particularly for corporate, real estate and end market general obligation municipal finance. We have solid traction in our wealth management and insurance businesses, as well.

A key focus will be on business development and cross-selling. We will build on the successes of our referral program. And last year, we received more then 80,000 refers throughout our system, which resulted in more than 27,000 accounts, new deposit accounts, and $125 million in deposits.

From an expense perspective, we'll continue to realign our branch network, based upon customer patterns and trends. We've consolidated a total of 14 offices during 2013 and believe there are additional opportunities for brands consolidation this year, as well. We continue to pursue mergers that make financial and strategic sense, both in market and in other attractive markets in the Southeast. We are a proven acquirer with a successful track record.

Let me take a minute and recap. Looking ahead, we continue to expect mid-single digit loan growth in our legacy held for investment portfolio. During the course of the year, we would anticipate runoff of approximately $200 million of acquired loan balances; and that translates into average balance decline of about $100 million.

We expect the net interest margin, excluding the acquired loans, to remain at roughly 3.5%, as we had mentioned previously. We would anticipate that the yield on the acquired loans would remain in a range of 6% to 6.25%; and that is before any recoveries which are, as you know, extremely difficult to predict. Our mortgage banking business has outperformed through the cycle, but the benefits of HARP and refinance activity have diminished, and tighter spreads and lower volumes have been reflected in gains on sale levels.

From an environmental perspective, we appear to be at new norms. While there is a lot of noise in the fourth quarter, we continue to expect a quarterly non-interest expense run rate of $95 million to $96 million, excluding amortization of intangibles and ORE expense.

In closing let me say, as I mentioned, Trustmark has had a great year in 2013. We look forward to the future and with great confidence, as we enter our 125th year as a banking organization.

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

(Operator Instructions)

Catherine Mealor, KBW.

Hello, everyone.

Good morning, Catherine. We can barely hear you.

Okay. Can you hear me now?

A little better. You're still breaking up.

All right. How about now?

Okay. There we go.

Okay. Great. And I might be mistaken, but I think a few quarters ago you all had mentioned a goal to get your expense base, ex-OREO and CDI, to about $92 million. So you're higher than that now.

Can you talk a little bit about what maybe is driving this differential? And do you think that that $92 million is just unachievable now, just given maybe some changes in your operating structure, or are there any initiatives that you have in place to maybe get that expense base down to that previously targeted level?

Thanks, Catherine. First of all, we probably need to go back and take a look. Our records indicate that we had led to this 95% -- excuse me, $95 million, this last call that we had. And that's where we think we'll be, within that range. But let me have Louis comment a little more, if you would.

Okay. Thanks.

Good morning, Catherine. This is Louis.

Good morning.

As Jerry mentioned, I think when you look at -- our total expenses were around $104.9 million. Backing out about a $5.5 million for ORE expenses, as well as amortization, we're down to about $99.4 million. But when you look at the expenses increases for the quarter, certainly salary and benefits went up.

We had certainly a year-end incentive accrual adjustment for about $1.2 million. I see that as a one-time expenses.

In services and fees, we had two items. One was compliance-related matters. We spent about $450,000 one-time, which was consultants to work on some compliance-related matters.

In addition to that, we had some controllable advertising expenses we accelerated in the fourth quarter. And then when we look at other expenses, I think it's discussed in the press release and in Jerry's comments, we had about $1.1 million of one-time expenses related to the mortgage company.

In the beginning of the fourth quarter, we settled a global settlement with Fannie Mae, which cleared up all the Fannie Mae put back expenses. But we accrued an additional $500,000 at the end of the year. Based on some analysis, we now have a reserve of a little under $2 million, I think it's $1.8 million, as well as some cleanup in some foreclose. But we see those as one-time.

And then, in addition, in other expenses, there's some controllable expenses related to some community involvement of about $300,000. So as I reconcile back to the quarter from $99.4 million, we see that quarter run rate being about $96 million. And we see that being fairly steady in quarters to come.

Okay. Great. Thank you. And maybe switching a little bit just to the accretable yield. You gave some guidance for the yield in the acquired loans to be 6% to 6.25% this year. But you had a fairly large loan mark on BTFG.

And as we're getting into an environment where credit is getting better across the country, do you think there's a likelihood that we will see higher accretable yield coming off of that portfolio? I know it's hard to predict, but maybe talk about what you are seeing as you're looking through those credits.

I think that's the challenge. We'll have Barry Harvey comment. But obviously, just as recoveries are difficult to project, and we pointed that out, we've given guidance on what we project the size to be and the yield on that. But both recoveries and how we do relative to the mark are two things that are very difficult to hit.

But let me ask Barry if he can just give a little bit of flavor on what they are seeing, now that they've worked through a significant number of these credits.

I'd be glad to, Jerry. I guess a few things to bear in mind. One is, since we made the acquisition back in the first quarter, we've had our chance to go through on all the problem loans, where all the mark resides, and reassess where we are, reassess the values of the collateral, those that are collateral dependent, reassess the cash flows, get updated financials. And I think we've got a good benchmark established, as of year-end, as to some certainty regarding each customer, problem customer, where they are, how we move forward, and a good plan of action that we've gone through a couple times and revises.

We've also got a situation where our independent asset review function went in the latter part of the year and did a very thorough review, first time they've been able to go back in and have the benefit of the lender discussions that you normally don't have during the due diligence process. So that, plus additional updated financials on all the borrowers, has allowed us to make the risk rate changes that we think are appropriate up and down; and those have been made and are part of, a big part of, the provision you see being made in this quarter.

So with that in mind, I think we're ready to move forward, trying to work through the credits. I think one thing to bear in mind is, when you are talking about a credit improving but still remaining on the books, or deteriorating and remaining on the books, when they improve with a risk rate change, you end up with situations where the improvement is spread out over time, whether it be the loan itself, or over the pool in which they reside in.

So good things that happen are spread over time. Negative events are recognized immediately, in the form of a provision. So there is a timing gap between how things are resolved and when you recognize a positive event or a negative event that's not a terminal event.

Okay. That's great. Very helpful. Thanks, guys.

Thank you, Catherine.

Steven Alexopoulos, JPMorgan.

Hello, everyone. This is [Freepe] on behalf of Steve.

Just a question on the loan yields outside of the acquired portfolio. It looks like there was quite a bit of pressure sequentially. Can you talk about what the blended yield was on new loans coming in, and then maybe some color on the types of projects and pricing that you are seeing in C&D, as well as the commercial real estate book?

Okay. We'll ask Barry Harvey to answer that.

Sure. The yield on what we see coming in is not a lot different today than it was, say, a year ago for our commercial real estate opportunities, where we are seeing some new business coming in there. C&I is very competitive, especially on the higher quality deals. But it's not a lot different than what we saw in the previous 12 months.

What has changed, of course, is the ability to retain and obtain floors on new credits. We're not able to give floors on new credits. We're working hard to retain some of the floors, as we're able to, on the existing business.

So from a pricing standpoint, it remains very competitive. I wouldn't say it's a lot different than what we saw 12 months ago, or 6 months ago, but with the exception, maybe, of public finance type of lending, where it's a bid process. A lot of banks are making money now, so a lot of banks have some interest in some tax-free yields, therefore, it's become more competitive in that regard.

But I don't think the environment has -- it's not gotten any better. I don't know that it's changed a lot, in terms of the overall pricing pressure that we've seen over the last 6 or 12 months.

Okay. That's helpful. And then just in terms of the types of property types that you're adding in commercial real estate?

It's going to be a combination of multi-family, and that's going to be both apartment complexes, as well as student housing, on occasion. We've also got a good many opportunities with office space in some of our faster growing markets, such as Houston and some in Mississippi, some in Alabama.

And that's going to be a combination of owner occupied and non-owner occupied. And that's going to be the majority of the opportunities that we're seeing coming through on the commercial real estate, in the form of construction requests.

Okay. That's very helpful. And then lastly, it looks like you slowed growth of residential mortgage in the quarter. I know industry-wide, originations are slowing. Could you talk about your appetite for adding to this portfolio?

Now, you're referring to the internal portfolio?

Right, held for investment.

As we commented, I think two quarters ago, once we got above 3% yield levels, we began keeping production in the 10-year, 15-year mortgages; and rather than selling those out to the Street, kept them on the books. Obviously, the overall volume of production has slowed, as we noted.

However, we continue to retain the new production internally, as opposed to selling it. And we would expect that that will continue to increase over time, fairly steady rate, but at a slower pace than what we have been seeing.

Okay. Great. Thanks for all the color.

Thank you.

(Operator Instructions)

Steve Moss, Evercore.

Good morning, guys.

Good morning, Steve.

Most of the questions have been answered here. Did want to touch base on mortgage production for the quarter. Wondering what the mix was, purchase versus refi.

We'll have Breck Tyler answer that.

Sure. This is Breck. Our fourth quarter mix was 64% purchase. And that's -- our third quarter was 61% purchase, second quarter was 46%, and our first quarter was 34% purchase. So purchase market, obviously, is very strong, and hopefully will continue to increase.

Okay. And it looks like gain on sale margins declined pretty substantially this quarter. Just kind of wondering what the dynamic is there?

Okay. As Jerry said, spreads did compress and volumes were reduced. Our volume, as you saw, on a linked quarter was down 23%. The (Inaudible) in the portfolio of the 10- and 15-year, our link quarter reduction of sold loans was 36% reduction. So that had affect on the gain on sale.

And then the third quarter, we kept our spread wide for an extended period of time. And in the fourth quarter, some of our trades that were set for December, we had to reset in January, holidays and impending regulation and so forth. But still the bottom line is, spreads did compress, volumes did drop.

That's why we're -- spreads are difficult to predict. They are going to be what they're going to be on the gain on sale. So that's why were just extremely focused and excited about the growth opportunities we have with Alabama and Florida, the BancTrust acquisition. That's what we're focused is growing production.

Okay. Thank you very much.

Blair Brantley, BB&T Capital Markets.

Good morning, guys.

Good morning, Blair.

A couple questions. One, on the security balances, I understand they have moved this quarter to held to maturity. Could you give some more detail on duration of those securities?

Yes. I will ask Tom Owens, our Treasurer, to comment on that specifically.

Hello, Blair. This is Tom. So duration on securities moved from AFS to HTM was about 5.25 years. And the composition is primarily -- it's all agency stuff. It's primarily RMBS, but also it's some DUS bonds and callable debentures.

Okay. And how does that duration compare to what you held in AFS?

The overall duration on the portfolio is about 4.25 years. You can do the math there. So if it's 5.25 years in HTM and 4.25 years overall.

Okay.

Blair, let me just add a little color to that. We've spent a lot of time and effort in analyzing both the portfolio, which securities we'd move, liquidity-related issues. We do anticipate continued loan growth. And the runoff, just the cash flow, in the existing portfolio, we believe, is going to be more than sufficient.

Couple that with the strong deposit position we have, and we are very comfortable that we can meet any upcoming potential loan growth needs from just regular cash flow runoff.

Okay. That was my next question was in terms of relative size, are you comfortable with this current level, given the percentage it holds relative to earning assets, and what you see trending there?

Yes. I think that we are comfortable maintaining, so now we're basically at one-third of the portfolio in HTM and two-thirds in AFS. And as Jerry said, those securities will cash flow. And we will be making decisions going forward in terms of the extent to which we maintain that relative percentage, but we are comfortable with those levels.

Okay. And then just to switch gears a bit. I know you mentioned the acquired loans going down about $200 million. Is that kind of a bottom level you see those loans reaching and then kind of building from there, or is that just a function of what you kind of had planned for runoffs through 2014?

No. As you know, on those acquired loans we have to recalculate those every quarter. We would anticipate that the majority of those loans are going to be run off over time to be replaced, either we maintain the relationship, they're reworked and renewed into another loan, or new loan growth from the markets that we've entered, relative to the acquisition.

How much came, in terms of the loan growth for this quarter, came from the acquired loans coming on into the held for investment category?

This is Barry. We really haven't moved any loans of any significance from the acquired loan category into the new loan category for the new bank, if you will.

So we've been very, very careful about that from a regulatory standpoint and from a GAAP standpoint. So that's not something that is factored -- that's not having any impact on our actual loan growth that we're representing for Alabama.

Okay. Thank you very much.

(Operator Instructions)

Kevin Fitzsimmons, Sandler O'Neill.

Hello, guys. This is Joe Adams for Kevin. How are you guys doing?

Good, Joe.

I was wondering if we could talk a little bit about expenses. I saw you guys give a guidance around, I think, $95 million or $96 million. But I was wondering if we could talk about what's not in that run rate.

The OREO expenses, I think these have been around $3 million to $5 million for the better part of the last two years, kind of closer to $3 million. But wondering what you guys expect from these going forward into 2014, if they're going to run down at some point or they're going to continue bumping around $3 million.

This is Barry. I would say it's going to be more in line with where we are today. And the reason is, is because we are working the ORE out, but we will, as a result of BancTrust, we will be migrating a reasonable amount of ORE of the problem loans into the ORE category.

So while we do have better markets to sell into, and we're seeing that every day, and we're very excited about that, and we are moving ORE, as Jerry indicated in his comments, and basically at a flat level, we do think that we'll have some increase in the ORE category and the balances as a result of the natural migration with BancTrust.

Okay. Very helpful. Thanks, guys.

Thank you.

Michael Rose, Raymond James.

Hello. Good morning, guys. My questions have actually been asked and answered.

Okay, Michael. Thank you for being part of the call.

Thank you.

As there are no further questions, 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, Operator. And I'd like to thank all of you for joining us on the call this morning. As you can see, we've had a great 2013.

We've got some real positive momentum relative to loan growth to begin the 2014 season, and look forward to being with you next quarter for that earnings call. Thank you all, and have a great day.

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