Trustmark Corp (TRMK) 2014 Q1 法說會逐字稿

Good, morning, ladies and gentlemen, and welcome to Trustmark Corporation's first-quarter earnings conference call. (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. I'd like to remind everyone that a copy of our first-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, 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 and our other filings with the Securities and Exchange Commission.

At this time, we'll turn the call over to Jerry Host, President and CEO of Trustmark.

Thank you, Joey, and good morning, everyone. Thanks for joining us. As I finish my comments, we'll go into question and answers. And with us to add color to that session is Barry Harvey, our Chief Credit Officer; Louis Greer, our Chief Financial Officer; Tom Owens, our Bank Treasurer; and Buddy Wood, our Chief Risk Officer.

Let's start, if we could, by looking at some of the first quarter highlights. We had solid financial performance again. We experienced our fourth consecutive quarter of loan growth in our legacy portfolio. Our credit quality continues to improve and the core net interest margin expanded by four basis points.

We reduced our noninterest expense and, all in all, we feel it was very successful quarter as we begin our 125th year in business as a financial services company.

We do that with a very strong capital base and it has positioned us, we believe, very well for the future needs of both our customers and our shareholders.

In the first quarter, our net income was $29 million or $0.43 a share. Our return on tangible equity just below 13% at 12.93% and our return on assets 0.99% -- right it 1%. Yesterday, in our Board of Directors meeting, our Board declared a quarterly cash -- approved and declared a quarterly cash dividend of $0.23 a share and that will be payable on June 15 of this year.

Let's take a look in a little bit more detail in the first quarter. Looking at the balance sheet at quarter end, the loans held for investments totaled $5.9 billion. This was an increase of $125 million for the quarter or 8.8% annualized.

The growth that we saw was diversified by both market type and loan type. Our commercial and industrial loans increased right at $50 million during the quarter and it was attributable to expansion in the Mississippi, Alabama, and Florida markets.

And looking at the 1-4 family mortgage loans, they increased $48.2 million. That also was growth in Mississippi, Alabama, and Florida.

Commercial real estate loans grew $46.8 million during the quarter and this reflected growth in all five states within our footprint. Our construction and consumer portfolios remained relatively flat for the quarter. We're also pleased with growth during this quarter in our pipelines. We do believe that the growth we experienced in the first quarter will continue in the coming quarters.

As I mentioned, the pipeline is healthy. It's encouraging. Our people are out making calls. The market has improved. Businesses seem to be more active and we're excited about that and working very hard to service the needs of our customers and our prospects.

Looking at deposits during the quarter, they increased $262 million or about 2.7% from the prior quarter. What's nice about this is that about $216 million of this growth was in non-interest-bearing accounts. It does include some seasonal increases in public funds. We believe that will be very beneficial to the net interest margin during this period. At the end of the quarter, non-interest-bearing deposits represented 28.4% of our total deposits.

Take a few minutes on credit quality and, obviously, this is something that as we went through the challenges of the last five years that we've remained very focused on and feel very good about the work that has been done by many people throughout the organization. But let me note that the credit metrics that I'll talk about here exclude acquired loans and other real estate that's covered by our FDIC Loss Share agreement.

So if you look at our nonperforming loans, they decreased 1.9% from the previous quarter and over 23% from the prior quarter a year ago and now total $64 million. Other real estate totaled $111.5 million. That's an increase of $5 million from the prior quarter, but when you compare that to the levels a year ago, we've actually declined about $7 million.

Additional comments relative to other real estate - I think we'll ask Barry Harvey to add a little bit of color if there some questions when I'm finished. But we feel very good about how we have managed that portfolio throughout this cycle.

Our net recoveries during the first quarter exceeded our charge-off, and as a result we had a net recovery of $1.9 million. Our provision for loan losses in the quarter was a negative $800,000 as a result of the net recovery position and we improved credit quality within the loan portfolio.

From the previous quarter, classified loans were down $7 million while criticized loans were down $7.1 million. When we compare that to a year earlier, classified loans were down $20 million and criticized loans down $63 million. Again, that's just an indication as to the improvement in the credit quality metrics within the Company.

Turning to the allowance for loan losses, it totaled $67.5 million. At the end of the quarter, it represented 1.33% of our commercial loans and 0.65% of our consumer and home mortgage loans. This resulted in an allowance to total loans held for investments of 1.14%. The allowance for loan losses represents 181% of nonperforming loans, and as I said before, it excludes the impaired loans.

Looking at interest income at the income statement, we'll look at net interest income in the first quarter. It totaled $98.7 million that resulted in a fully taxed equivalent net interest margin of 3.92%. Interest income declined $7.4 million from the prior quarter, principally due to a $5.5 million decline in recoveries on acquired loans that took place in the fourth quarter. This is reflected in the 18 basis points contraction in net interest margin.

The effective yield on our acquired loans in the first quarter was 6.70%. Recoveries were $3.8 million of that added to that percentage. And that added 197 basis points to the yield. As a result, the total yield on the acquired loan portfolio was 8.67% in the first quarter. When we exclude the acquired loans and look at the net interest margin, we were at a 3.52%, which is up four basis points from the prior quarter.

And this is a result of expansion in the margin on the securities portfolio, a consistent yield within the loan portfolio, and slight improvement on the cost of interest-bearing deposits. And I will tell you that based on the current rate environment, we would expect this margin, excluding what happens with the acquired loans, to remain relatively stable.

During the quarter, acquired loan balances declined nearly $60 million. We expect that these balances will decline approximately another $150 million during the remainder of the year or about $50 million a quarter, with the yield on the acquired loans excluding recoveries to be somewhere in the 6.25% to the 6.5% range during the remainder of the year. This is slightly higher than previous guidance we had given and it reflects the most recent estimates on the cash flows.

The noninterest income totaled $44.1 million for the first quarter. That's an increase of $5.4 million from the prior quarter. The improvement reflected a decrease in our partnership amortization of about $2.6 million that are related to the tax credit investments, most of which occurred in the fourth quarter, as well as a decrease of $1.7 million in the net reduction of our FDIC indemnification asset. And this was primarily the result of the re-estimation of the cash flows and loan payoffs. Each of these items was included in other noninterest income.

One real positive area was in the noninterest income category or insurance revenues. It totaled $8.1 million dollars during the first quarter. That's an increase of 10.3% from the previous quarter and was due in part to increased business in our group health, commercial property, and casualty categories.

Mortgage banking revenue for the first quarter increased $1.6 million and totaled $6.8 million. This was due mainly to an increase in the hedge on the mortgage servicing rights. Mortgage loan production for the quarter was down 16.6% from the prior quarter and totaled $230 million, which is a reflection of what we're seeing in the market with the refis slowing and was not unexpected nor something we hadn't previously discussed in other calls.

Wealth management remains strong, with revenues steady for the first quarter. Service charges on deposit accounts totaled $11.6 million. That's a decrease of about $1.5 million from the prior quarter and this is -- we believe this is a seasonal reduction in NSF and overdraft fees.

Bank cards and other fees totaled $9.1 million during the first quarter. That's a decrease of about $500,000 from the prior quarter and reflects seasonal decline and interchange income as well as the commercial credit-related fee income.

Noninterest expense for the quarter totaled $101.6 million excluding ORE and intangible amortization of $5.6 million. Noninterest expense during the first quarter totaled $96 million, a decrease of $3.4 million, which is in line with the guidance that we have given on prior calls. Our salaries and benefit expense remain well controlled and unchanged from the prior quarter and totaled $56.7 million.

Services and fees decreased $1.3 million and that's due to a reduction in various legal and professional fees that we incurred during the fourth quarter. Other expense decreased $2.2 million from the previous quarter and this was a result of lower mortgage loan and expenses and other miscellaneous expenses.

Another note -- I'll tell you, we consolidated Summerville Bank and Trust, which was the only other bank within the holding company that we had, other than Trustmark National Bank during the quarter. This bank had -- we acquired this bank -- part of an acquisition in Memphis about 12, 13 years ago. We allowed the bank to operate separately.

During that time, we have been working to bring them into some of the systems and standards with Trustmark, and now that has been completed. We believe it will help eliminate some functions that are duplicated and some operating costs that we can do away with and help to make that operation more efficient. So we're pleased that that has been completed without any issues whatsoever.

As we look ahead, we are very excited about the success we've had in the first quarter and the opportunities that are in front of us. Our focus will remain very much on profitable revenue growth and an increased focus on expense management.

From a growth perspective, we are encouraged, as I mentioned earlier, about what we're seeing in the pipeline, particularly in the C&I and the real estate lending areas. Improvement in wealth management and the insurance businesses, I think, are going to also help to drive new revenue growth.

A key focus that we've talked about in the past has been on our business development and cross-selling efforts. And during the first quarter, I'm very pleased to report that we received more than 23,000 internal referrals -- cross sell referrals that resulted in 8700 accounts and more than $70 million just on the deposit side.

From an expense perspective, we'll continue realigning our branch network, based on changing patterns with our customers and trends in the industry. And we do believe that there are going to be additional opportunities for branch consolidation throughout the year.

As far as mergers and acquisitions, we continue to stay very focused and pursue opportunities. We do think that there will be those available. We want to make sure that those opportunities make strategic sense and they will be both in-market and in other attractive markets in the southeast.

So recapping, as we look ahead, we continue to expect mid-single-digit loan growth in our held for investment portfolio during the remainder of the year. We would anticipate runoff of approximately $150 million of the acquired loan balances or, as I said earlier, $50 million a quarter. One caveat that as we work through some of these larger transactions in this acquired loan portfolio, that could create some changes as we work through those large transactions, but this is our best estimate at this time.

We expect the net interest margin, excluding the acquired loans, to remain at roughly 3.5% and we would anticipate the yield on the acquired loans would be, as I said earlier, in the 6.25% to 6.5% range and that's before recoveries. But I'll note that that is a number that's very difficult to estimate.

We continue to expect quarterly noninterest expense run rate of about $95 million to $96 million excluding amortization of the intangibles and the ORE expense. So let me conclude by saying that Trustmark has a great start to the new year and we look forward with great confidence as we begin our 125th year.

And at this time, I would like to open it up to any questions that you might have.

(Operator Instructions) Michael Rose, Raymond James.

Just wanted to kind of reconcile your commentary around mid-single-digit growth this year, because it looks like the legacy growth is a little bit better and wanted to get some context on what happened in Texas this quarter. It looked like growth stalled out after pretty nice growth over the past couple of years. Was there any paydowns or any seasonal items or anything that impacted growth in Texas? Thanks.

Thanks, Michael, and yes, there was some significant paydown. We had a couple of hotel projects that we have been involved in from a construction standpoint that went to permanent; we had another large participant credit that we were involved in that we chose not to renew. That was very significant. And then a couple C&I paydowns. The total amount of large non-schedule paydowns was in excess of $60 million.

Okay. Thanks for taking my question.

Steve Moss, Evercore.

Just wanted to touch -- in terms of the CI book here, what were the big underlying drivers of growth this quarter?

On the C&I portfolio? It was very well diversified throughout the footprint. Barry, you want to add some specific color?

Sure, I'd be glad to, Jerry. The main two markets that the growth occurred in -- while we did have growth throughout the footprint, as Jerry indicated, we did see quite a bit of growth in Mississippi and Alabama. It was energy-related. There was transportation, [temper]. We had commercial contractors. Those were the main areas where we saw some growth on the C&I side.

Okay, and just wondering in terms of pricing these days, what are you guys seeing? Is it more just on price or are you seeing it on term and structure, too?

It's mostly on prices, what we see. Our underwriting process is pretty similar to most institutions we compete against. So there's not a lot of difference in most instances on the opportunities we see, but from the pricing standpoint, while it has somewhat stabilized in terms of the ROEs that we're able to achieve on the credits that we're getting a chance to bid on -- while it has stabilized, it is still fairly competitive and it is fairly thin in some instances on the high quality credits.

But the good news is -- it has over the last 18 to 24 months, it has stabilized in terms of the pricing that we're getting on the high quality credits.

Okay. Thanks very much.

(Operator Instructions) Steven Alexopoulos, J.P. Morgan.

Hi, everyone, this is Preeti Dixit on for Steve. Quick question on the service charges -- they look pretty soft this quarter. Was there any unusual activity there beyond the usual seasonality and could we maybe expect more of a catch-up heading into 2Q?

Louis, let me let you answer that.

Yes, there is some seasonality in there, but also do think we saw a little bit of decline related to maybe some of the weather activity during the first quarter, people not being able to get out in the southeast because of the weather conditions here in the southeast. A fairly severe winter and we saw less swipes on the debit card. As a result of that, we saw fewer charges related to that activity.

One of the things -- let me add to that, Louis. One of the things we comment on, we have seen a change in NSF revenues. Some of that, we believe, is seasonal; some of it may be a function of people's balances being higher because of e-filing of tax returns and they are receiving their tax payments earlier as we look at accounts, so it is a bit softer than it was.

Some of it is seasonal; some of it may be behavioral changes, as well. It's a little early to tell. We've -- we think that this is something that other banks are experiencing as well, but it's a little early to be certain.

Okay, that's really helpful. And then in terms of the mention on focus on expenses and some branch consolidations, can you maybe give us a little bit of color on the puts and takes that keep that guidance at kind of the 95% to 96% range, and then maybe if there are any opportunities you're seeing to drive a little bit lower?

We're constantly looking at options to drive the number lower. The balance that we look to reach has to do with a process where, as we mentioned earlier, we're looking at branch consolidations in different markets, process improvement through utilizing technology while we have technology spends to keep us current and competitive. Same time we're balancing that against some expenses that we have had related to increased compliance and regulatory costs.

One of the things we talked about last time was DFAS and the fact that we are working through a more robust model to be in compliance with banks over -- the requirements banks over the $10 billion size. But a lot of those expenses have been incurred. We would anticipate there are going to be additional expenses just because of the environment that we are in.

We are staying focused not only on regulatory issues and appliance issues, but also issues that help ensure that safety and soundness from a cyber security standpoint are on the forefront and we remain very focused and diligent relative to that issue.

So it's very much a balancing act at finding expenses at the same time where you're having to incur expenses. We do believe we can keep it at that 95% to 96% level but, internally, there's a lot of things going on to keep it there.

Perfect. Thanks for the color.

(Operator Instructions) Dave Bishop, Drexel Hamilton.

I was wondering, Jerry, if you could maybe talk about, maybe, as you look at capital, maybe the rank order of use of capital. Is it the acquisitions, maybe solidify the dividend bit, potential buybacks? I'm just curious how you sort of think about the use of capital?

That's something that is discussed regularly with the Board and I will tell you that, as you mentioned, the different types of capital utilization. Our dividend payout ratio is just about 50%. It's been consistent now for a number of years. We've gone through the cycle without lowering that. We believe that those investors in Trustmark find that to be very beneficial.

At the same time we've kept that steady consistent dividend, we've been able to grow capital and have done three acquisitions, one of them fairly significant last year. Since then, the profitability has allowed us to grow back the capital levels to a point that where we can sustain this organic growth that we have recognized here in the last four quarters on the loan side, sustained that, and still have the ability to go out and look at other opportunity.

Because at this point in time, we feel like growth is clearly our major focus and strategy and it's a combination of both organic and M&A opportunities.

Great, thank you.

Blair Brantley, BB&T Capital Markets.

Had some questions on the investment portfolio and how you're kind of thinking about that from a relative size perspective. Obviously just (inaudible) throughout the cycle. Just trying to get a sense of what maybe a target size may be, given some of the loan growth that you had recently.

Well, I'll let Tom Owens talk a little bit about the strategy there.

So, Blair, as we've got it in the past, our current target is about $3.6 billion. You can see we're up a little bit during the quarter to about that level. There's really been no change in strategy there. Jerry mentioned earlier in terms of liquidity, things like the seasonality of deposit flows were a bit higher than where we would expect to be right now. Maybe a couple hundred million dollars or so.

We are evaluating the deployment of that liquidity, so if the market presents great opportunities, it wouldn't be surprising to see us invest growth portfolio a couple hundred million dollars. And then, over time, I think that the plan is to maintain it at that level.

But as we say, we need to continue to grow earnings assets and so that would be a lever that you could potentially pull to do that if you didn't get the loan growth that you are looking for. But there's been no change in the strategy in terms of duration or the securities that we are investing in.

So all else being equal, as a percentage of earning assets, you would expect that to fall over time? The security portfolio?

As growth continues -- you're right, the normal cycle is that as growth continues, the investment portfolio -- cash flow helps to fund that loan growth. And that's what we would expect, but as Tom said, in the event we see the economy slow again -- loan growth slows -- then obviously we will take advantage of utilizing the excess cash we have in the portfolio.

Okay, and then -- that was very helpful, thank you. And then on just the reported margin side of it, accretion, obviously, from BancTrust -- there is going to be some volatility and whatnot, but how would you see that kind of trending over time or how much license is really left there in terms of that benefit?

Well, Barry, you add to my comment, but obviously, there was a significant mark and a significant size within that acquired loan portfolio that we are continuing to work through. We have recognized some of the opportunities and value and we would anticipate that there will be additional benefit through the remainder of the year, given the fact that the economy continues to improve.

So we would think that there is additional benefit, that the timeframe should be throughout the remainder of this year, and Barry, I don't know if there's additional color you want to add or not.

Yes, Jerry, I guess a couple of things, Blair, and Louis may want to chime in on the accretion piece of it. We've talked about roughly $150 million worth of runoff that will occur over the remainder of the year in that -- in our acquired loan portfolio and that's based upon schedule payments and maturing loans, things of that nature.

Now -- and that part of it I think, as we know it today, is fairly predictable and in some respects -- but I think the part that's less predictable is the potential resolving and settling out of some of this debt and it will come in the form of -- in many cases in the form of recoveries.

In some cases it will come in the form of improvement in the credit itself and show up through the accretion side, but to answer your bigger question -- is there is still much life left in the portfolio. We believe from a recovery standpoint, there's quite a bit of life left in the portfolio from the standpoint of working through the credits and how we perform based upon the market we've previously established.

And then that will influence the accretion as well, because as we do work through the problems, and hopefully generate some meaningful recoveries, those loans will not be there to accrete on a go-forward basis. So it's kind of a -- there is kind of two parts to it.

And Barry, to add to you, we've got about $745 million worth of those loans as of March 31. And I'll tell you, the accretive will yield on that at March 31; to be accreted over time is still over $100 million, so right at $103 million, $105 million, so I think at the pace of runoff of about $50 million a quarter, I think you can do the math.

Okay, that's very helpful. Thank you.

Jennifer Demba, SunTrust Robinson Humphrey.

Just curious as to how much of your loan growth during the quarter might have come from participations or shared national credits and the like? And then I have a question about M&A.

Okay, well, Barry, you have the specifics, then. Go ahead, Barry.

Jennifer, what I can tell you is we are obviously always looking at all of the credit opportunities we have. We've got some pretty strict parameters about which we decide to get involved in participations and we do focus strictly on inside of our market footprint and also making sure there's a business reason to be involved in the credit and not just a transaction. There's some ancillary opportunities to obtain additional business.

On a regular basis, on a monthly basis, we monitored carefully our levels of participations, whether it be SNCs or non-SNCs that we buy into and we have established parameters that are at Board approval level as to how much we're going to have in any given market and any given type.

We don't track day in and day out how much of our growth is participations versus non-participations, but I would say that of the large credits that we're participating in, quite a few of those are shared national credits or at least purchase participations.

But I would say from that perspective, it's nothing other than credits that are larger than we're looking to have a single hold in and there is a business reason to be in every one of them and we feel like there's ancillary business to be gained in every one of them and they are inside of our market footprint.

Okay. And on the M&A front, you said you're interested in transactions in attractive markets in the footprint. Specifically, what markets hold greater interest for you at this point?

Basically, that's something, Jennifer, that -- we have stated before that our focus is in the southeast. You know as well as -- probably better than I do, that opportunities to acquire other banks present themselves or can be gathered depending upon a particular situation in an organization. So we have not limited our focus to do any particular area or specific market.

We have found success in both in-market transactions, where we can take some costs out and we can improve market share and as well as opportunities like the BancTrust transaction, where we really -- we had a mortgage loan presence, but we didn't have a banking presence and moved into that market and have done very well with that transaction. So we'll stay within the southeast footprint, we'll stay open as to both consolidating opportunities and opportunities to expand footprint.

Okay, thank you so much.

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

Well, I'd like to first of all thank you again for joining us and for your interest in Trustmark. We do believe we had a very good first quarter. There's great momentum both from a growth standpoint and from -- as we have talked about the opportunity on what we're doing with the acquired loan portfolio.

The businesses, as it relates to wealth management insurance, have done very well and we believe will continue to do well. And again, we thank you for joining us and we look forward to visiting you at the second-quarter call.

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