Trustmark Corp (TRMK) 2016 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's first-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 Mr. Joey Rein, Director of Investor Relations at Trustmark. Sir?

Good morning. I would like to remind everyone that a copy of our first-quarter earnings release as well as the slide presentation that will be discussed this morning on our call is available on the investor relations section of our website at Trustmark.com.

During the course of our call, 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 we will turn the call over to Jerry Host, President and CEO of Trustmark.

Thank you, Joey, and good morning, everyone and thanks for joining us. Also on the call with me this morning are Louis Greer, our CFO; Barry Harvey, our Chief Credit Officer; and Tom Owens, our Bank Treasurer.

Let's begin by reviewing some highlights on page 3 of the presentation material. We continue to work diligently towards achieving another quarter of solid financial results and executing on our strategic initiatives to enhance long-term shareholder value. Looking at profitable revenue generation across our five footprint -- our five-state footprint, we expanded our loan portfolio with loans held for investments increasing approximately $177 million or 10% annualized from the prior quarter.

Revenue excluding interest income from acquired loans increased about $4 million or 3% linked quarter. Net interest income excluding acquired loans remained stable from the prior quarter but increased 6.7% year-over-year. In light of the continued low interest rate and competitive pricing environment, this quarter's performance reflects our continued focus on profitable credit discipline loan growth.

Noninterest income increased approximately 10% from the prior quarter as higher mortgage banking and other income more than offset seasonal reductions in a couple of fee income categories.

Next, process improvement and expense management. During the first quarter, routine noninterest expense remained well-controlled and totaled approximately $97 million. We also continued our measured approach to realigning our delivery channels. During the first quarter, we opened and closed one branch office and in the second quarter, we will close six branch offices with limited growth opportunities across Alabama, Mississippi and Florida.

This past December we introduced mobile deposit capabilities to myTrustmark, our digital banking platform and adoption of the feature has been very strong. A couple of weeks ago, we also added money management capabilities which allows our customers to track their spending across multiple accounts including those in other financial institutions. We will continue to expand product features and functionality to provide customers with the product and services they desire.

Under credit quality, credit remained solid reflecting decreases and increases in various metrics that were in line with normal business activity. We also remained adequately reserved representing a level management considers commensurate with the inherent risk in our loan portfolio.

Overall net income for the first quarter totaled $27 million which represented earnings per share of $0.40. I would also like to remind you that our Board declared a quarterly cash dividend of $0.23 per share payable on June 15 to shareholders of record on June 1.

Turning to slide 4, we will discuss this quarter's results in a little more detail.

For the first quarter of 2016, average deposits totaled $9.6 billion with non-interest-bearing deposits representing approximately 30% of total average deposits contributing to a total cost of deposits of 13 basis points for the first quarter.

On slide 5, we will look at credit. As a reminder unless noted otherwise, the credit metrics, the credit quality metrics I will discuss exclude acquired loans and other real estate covered by an FDIC loss share agreement.

Year-over-year criticized and classified loan balances decreased though were up on a linked-quarter basis. Nonperforming loans were also down from levels one year earlier but increased from the prior quarter because of three substandard credits, two in energy and one in healthcare that moved to nonaccrual status.

Other real estate continued to show improvement down from both the prior quarter and year-over-year. The allowance for loan losses represented approximately 203% of nonperforming loans excluding impaired loans and the allowance for both held for investments and acquired loans represented 1.09% of loan balances.

Now turning to slide 6, we will be looking at our loans held for investment portfolio. At March 31, 2016, loans held for investments totaled $7.3 billion, an increase of approximately $177 million from the prior quarter and $854 million year-over-year. Growth this quarter was generally diversified across our five-state franchise as well as by loan type. The linked-quarter decrease in the construction land development and other land loans primarily reflect the migration of construction loans into other loan categories within the held for investment loan portfolio.

Looking at our energy portfolio, Trustmark had no loan exposure where the source of repayment or the underlying security of such exposure is tied to the realization of value from energy reserves. At quarter end, Trustmark's total energy exposure was approximately $482 million and outstanding balances were about $253 million which represented approximately 3.5% of the held for investment loan portfolio.

I would also like to note that no risk rating or accrual status changes were made as a result of the recent Shared National Credit Review.

In terms of nonaccrual energy loans as of March 31, balances represented less than 4.5% of the energy portfolio and less than 20 basis points of the HFI portfolio.

At this juncture, we view the activity of the energy portfolio as more isolated events as opposed to something that is representative of the portfolio as a whole. As a reminder should oil prices remain at current levels or below for a prolonged period of time, there is a potential for downgrades to occur. We will continue to monitor the situation as appropriate.

Now looking at slide 7, we will look at the performance of our acquired loan portfolio. At March 31, acquired loans totaled $365 million, a decrease of approximately $25 million from the prior quarter. For the next quarter we expect the yield on the acquired loans excluding recoveries to be in the 5.5% to 6.5% range. We also anticipate during the second quarter that acquired loan balances excluding any settlement of debt will decline by approximately $25 million to $30 million.

We will now turn to revenue highlights on page 8. Net interest income for the first quarter totaled $99 million and resulted in net interest margin of 3.54% both reflecting decreases in accretion and recovery income on acquired loans. Excluding acquired loans and yield maintenance payments, the net interest margin in the first quarter totaled 3.38%. In the first quarter, noninterest income totaled approximately $43 million, up about 10% from the prior quarter. Mortgage banking income increased relative to the prior quarter because of increased fair values of mortgage loans held for sale and positive mortgage servicing hedge and effectiveness.

Other net income increased from the prior quarter because of decreased expense related to FDIC indemnification assets as well as decreased partnership amortization of tax credit investments. Collectively, the increases in these two line items more than offset seasonal reductions in NSF and overdraft fees as well as interchange income.

Turning now to slide 9, we will review noninterest expense. In the first quarter, routine noninterest expense totaled approximately $97 billion remaining stable from both the prior quarter and the same period one year earlier. The relatively stable routine noninterest expense partially reflects the reallocation of cost savings into other areas of the corporation. As mentioned earlier on the call, we continue to realign our retail delivery channels from both a branch and digital perspective.

Looking at slide 10, capital management, Trustmark continues to strengthen its solid capital base and remains well-positioned to pursue various capital deployment alternatives. This past quarter we announced a $100 million share repurchase program that expires on March 31, 2019. We view this program as another capital deployment option in addition to loan growth, M&A, and delivering a consistent dividend. At March 31, Trustmark's tangible equity to tangible asset ratio is 9.01% while the total risk-based capital ratio was 13.92%.

We continue to remain prudent and diligent in the evaluation of all capital deployment opportunities to ensure that long-term shareholder value is created.

On slide 11, we will continue with our strategic priorities. We continue to work diligently to serve our customers and execute on our strategic priorities to deliver long-term shareholder value. We are continually changing the corporation to better address the changes our industry faces but are doing so in a way that causes minimal disruption to the relationships we have built over the years. We are excited about the progress we have made on many fronts whether it be loan growth or an enhanced customer experience via myTrustmark.

We believe the strategic priorities to place align -- excuse me -- we believe the strategic priorities in play align our activities with our focus and we have contributed to the expansion of customer relationships and the value of the Trustmark franchise.

At this time, I would be happy to take any questions.

(Operator Instructions). Emlen Harmon, Jefferies.

This is actually Elan Zanger in for Emlen. I wanted to start on energy. Do you guys have a specific provision against energy now that there are two NPAs? If so, what is the percentage? And then maybe if you could comment a little bit on what you guys are seeing in Houston.

Would you repeat that? You broke up right in the middle of the comment or the question.

Sorry, it was on the provision. Do you guys have a specific provision now that you have two NPAs in the energy book?

Barry?

Say it again, Jerry, I'm sorry.

The specific provision in the energy book?

No, we do not. No, we do not have a specific provision. We continue to --because of the nature of our energy book, we continue to view them in line with our other operating companies. We continue to risk rate them based on current information and continue to reserve for them as you typically would working capital and non-working capital credits.

Okay, thanks. And then maybe some color on what you guys are seeing in the Houston economy?

Be glad to. What we are seeing is really a continued slowdown in opportunities for new borrowings and we are seeing activity of course in our other Texas markets that we operate in and pursue opportunities in, that being predominantly Texas and Austin. But in the Houston market, we have seen a slowdown -- not so much, not so different this quarter but really all of 2015, we saw a slowdown in the opportunities being presented specifically of a real estate nature where we had seen a pretty brisk pace of opportunities.

Those same investors, developers are looking at other options in terms of other markets that they have historically operated in and probably choosing those as their next project to be pursued.

Okay, that is helpful. Lastly, switching over to loan growth, this quarter it was strong following the back half of last year which was also strong. Just want to know if you guys have any indication of what you expect for loan growth for the year?

Yes, I think we would anticipate that loan growth could slow slightly from levels that we have seen over the last year. Some of that will be part of how we are managing opportunities. The pipeline overall remains very strong although down slightly from peak levels last year. We continue to see opportunities as Barry mentioned in other areas within the Texas market and opportunities out of our Alabama operation and our Tennessee operation.

We would anticipate that we take a closer look at -- pricing is very, very competitive so we will take a closer look on some of those opportunities that don't present as strong a return on equity as we have seen in the past. So a slight slowing but it will be something that is intentional simply because of the competitive pricing market.

Okay. I will hop out. Thanks, guys.

Preeti Dixit, JPMorgan.

Good morning, everyone. On the migration of the Texas construction loans into CRE this quarter, can talk about what kinds of projects these were and were these just scheduled to enter permanent financing or were their market conditions that drove the decision? Just trying to get a sense of what triggered the timing of the reclassification.

This is Barry. I will go ahead and address that. This was just routine business. There was nothing unusual about it. We continue to have a pretty big backlog of construction within the Texas market, both in office, retail, multifamily as well as some hospitality. And this was just a progression where the projects eventually got the certificate of occupancy. We at that point will migrate them down to the existing category and this was just the natural transition of that occurring.

Okay, that is helpful. And then any comment, I know those were helpful comments on Houston but specifically in commercial real estate in that market, any trends that you are seeing there?

As I mentioned earlier, I think what we have seen is a slowdown in the opportunities that have come along within the Houston market specifically. The projects we have are going according to plan, there is not any problems at this point that we have identified and we are constantly looking hard to make sure we are comfortable with where our projects stand.

We are seeing opportunities as I mentioned earlier in the Dallas market as well as the Austin market. A lot of our investors and developers are looking at opportunities there, probably in lieu of an opportunity in Houston just because of the backdrop of the energy environment that they currently find themselves in.

Okay. That is helpful. And then shifting gears. The other income on the mortgage banking line elevated this quarter. Can you just help us understand what drove the increase and then maybe how your pipeline is shaping up, any general thoughts on mortgage banking revenue outlook here?

Yes, as far as what drove the increase we had steady volume, we had an improvement in the valuation of the mortgage pipeline that occurred because of the higher volumes. We had a positive net ineffectiveness relative to our servicing portfolio hedging activity. So those are all things that helped drive the increase there and it was based on good, solid volume.

As far as next quarter, given a fairly stable rate environment we would expect that we would continue to see good, solid growth. We are seeing now almost two-thirds of our volume is purchase volume as opposed to refi which we take as a very positive sign. So we would expect that we would see continued growth relative to what we have seen in the first quarter in the second quarter.

Okay, got it. Last one for me, in terms of the 100 million share repurchase, can you talk about expectations for timing there and how you would look to balance that with potential M&A opportunities? I guess as part of that, any color on how the M&A landscape is shifting would be helpful.

I will address it this way that we continue to look at what we see as the four main drivers of capital utilization from a dividend perspective. We have a strong dividend that is very attractive to our shareholders. We do not anticipate movement there. That leaves us with the organic growth which we have had double-digit now for the last couple of years. And as I mentioned earlier, you may see a little slowing as to the rate of growth as we work on the overall return relative to those new opportunities.

With M&A, we continue to look for the opportunities that fit our franchise long-term. We are active in our approach to finding those opportunities but as I have mentioned before, there are still some widespread expectations between buyer and seller that keep us from having announced anything.

And then on the repurchase activity, we will continue to use that as a tool to balance against those other three opportunities that are out there and work to be opportunistic as the situation presents itself.

Okay, thank you for all the color.

(Operator Instructions). Catherine Mealor, KBW.

Thanks. Good morning, everyone. One follow-up on energy. I noticed that your energy balances increased in the quarter. Can you give us any color on the types of new credit that you are putting on the books?

Yes, Barry will do that.

Good morning, Catherine. We did have one credit that we put on the books during the quarter that was about $9 million and about $5.2 million in outstandings as of 3/31. We also like all banks, have an ongoing process of reassessing the credits that should be included in their energy book, it is a very fluid process. As we come across those opportunities or come across the situations where we think we need to add or delete, we do so.

During the quarter we saw a couple of credits that we thought we would migrate into our energy book based upon the activities with the borrower and the credit itself. We took the opportunity to do that. So some of the increase is going to be a migration that naturally occurs in and out of that energy book as the borrower's circumstances change and then a little bit of it is going to be some actual growth on the one credit. And then you are always going to have some fundings on your lines of credit that are out there. These are all operated inside of a borrowing base, they are all operated inside of a covenant package and in order to be able to draw on the line. So we do see a combination of things with some new bookings, some drawing on the lines themselves and then a little bit of a migration into the energy book with some existing credits.

Okay, thanks. And then one thing on the growth, so Jerry, you mentioned that growth should slow a little bit in the back half of this year and so is part of that from a shift in your outlook for construction growth? A lot of last year's growth came from a 30%-some increase in construction balances. And so as the lifecycle of those projects kind of churn and those move into commercial real estate and then maybe your anticipation for booking new construction credits particularly in Houston slows, is that dynamic part of what is driving that or would you expect to see construction balances still grow maybe in other markets?

Catherine, this is Barry. And I would say the latter is probably the case. We are still seeing good opportunities in all of our markets for construction growth on the commercial side and we are looking at those and making prudent decisions we feel like on which opportunities to pursue or not.

The level of equity going into these projects versus the exchange for the burn off of the guarantees is still in line with what we think is reasonable and we still see a lot of equity going in these projects so we still have some interest there.

From a concentration standpoint, we are still very comfortable with the levels of construction projects we have and how they will eventually flow into the existing buckets and our overall levels of exposure from the standpoint of CRE. All those things are still favorable for us at this time. We are still pursuing these opportunities. I will tell you in the first quarter when you look at the GAAP reported numbers, you do see a shrinkage in the construction category but that as is indicated in the talking points, it is very clear that this is a migration process. In reality we grew in construction as opposed to declined in the commercial construction book.

So we are still seeing opportunities, we are still pursuing those opportunities and the credit measures on those opportunities still appear to be attractive to us. So this is still an ongoing part of our business.

Okay, great. Maybe my last question just switching over to expenses, can you quantify the amount of savings we will get from the six branch closers next quarter?

In the second half of the year, Catherine, this is Louis, we expect a cost savings of somewhere between $750 thousands to $850 thousands so that would be for the third and the fourth quarter total for those branches. And that would be the direct expenses, not all of the expenses will go away because we will retain those loans, we have expenses related to those as well as the deposits. That is our expectation.

And that is an annual number?

That would be for the second half of the year.

So the last two quarters combined? Got it. Okay. Great. Thank you very much.

Kevin Fitzsimmons, Hovde Group.

Good morning. Can you just talk about the core margin so excluding all of the accretion related stuff, it looked like it went down 2 basis points linked quarter to 338. Just if you can give us a little sense on why you think that went down, did the Fed rate hike not flow through? Was that not enough or was it just the pricing environment that you talked about, Jerry? And maybe if you can talk about looking forward what the outlook for that 338 is going forward? Thanks.

Kevin, I will make a comment and then what Tom Owens jump in here. I am not sure that the Fed rate increase really was impacted at all. I don't think it affected the competitive environment for loans especially high-quality loans. And we continue to see compression coming from repricing on the asset side where as you look at our total cost of deposits in the 13 basis point range it is tough to get that number down much lower. So we are continuing to feel the effects of a squeeze on the asset side as we have existing loans roll off and the new ones rolling on at a lower rate.

As far as looking forward and what you can expect for the remainder of the year, I will let Tom Owens comment.

Hi, Kevin. So a couple of things. First of all as you know, there is some normal quarter-to-quarter volatility in terms of loan fees and yield maintenance payments in the investment portfolio and actually if you consider those two things on a linked-quarter basis, we were much closer to flat in terms of core net interest margin.

As Jerry just said, the underlying fundamental trends remain. We are off 7 basis points core net interest margin year-over-year. That is a pretty clean comparison. It is consistent with the guidance we have given in the past of low single digit percentage annualized compression in core net interest margin and we would expect that to continue. But again, looking at core earning asset growth year-over-year about 8% despite a about a 2% decline in core net interest margin, we are at 6+% in terms of year-over-year increase in core net interest income.

So can I just ask it seems like the message on loan growth is it is going to be a little bit slower and that is deliberately so and that is based on the pricing that you guys are seeing and that is fine. But should incrementally there be some positive resulting impact to the core margin because you are kind of downshifting a little on the loan growth and appropriately not jumping into anything that you would see as not having an adequate return? Or so is there a positive benefit to the margin or is it simply you are pulling back on loan growth just to minimize that amount of compression?

I think the effect will be in some ways to minimize the amount of compression. But the other side of that I think is the capital utilization aspect of it and I think it is also, there are certain types of loans, the public finance loans that we can move in and out of that asset category depending upon how aggressive we are with our pricing and I think that is where you will see some of this migration. Any additional comments?

That is right, Kevin. So we are kind of crossing over from a discussion on core net interest income to return on deployed capital. And that is why it is a little difficult to answer the question. Again, I think the core fundamentals in terms of the relationship between growth in core earning assets outpacing compression and core net interest margin will continue. I think what Jerry is talking about in terms of the relative low growth is really a secondary effect is the way I would think about it here.

Got it. Okay. Great. Just one quick follow-up, appreciate the breakdown of your energy exposure and the amount that is actually outstanding. When you look at -- this may be a tough thing to answer -- but when you look at the amount that gap, I guess it is about $200 million plus of unfunded commitments that are out there in energy, do you have a sense or have you done a deep dive into how much of that balance if they were drawn tomorrow would be criticized on day one or if any?

Kevin, this is Barry. I don't really think there would be much or any increase if they were drawn day one because the number of criticized loans that we have is contained to just a few credits and those credits are either inside or outside of your borrowing base and at this point, our covenant package as well. And at this point, we have got a lot of control in terms of additional advances, as far as resetting covenants if they have tripped or picking up additional collateral, things of that nature.

So I don't really see there to be a lot of additional risk today based upon how they credits are currently graded that we would increase our levels of criticized balances by the ability of the borrower to draw unless the borrower's financial condition changed from where it is today.

Got it. Thanks. And one last one, Jerry, you talked about M&A before and how there is still a wide gap between buyer and seller expectations. But directionally are you sensing any kind of reality check there or do you think it is more that folks are waiting on the election or they are waiting to see what the Fed does? Just directionally, do you see things either getting better, getting worse or not really changing at all on that front?

I think a real good question and one that is difficult to answer. It would be pure speculation on my part. But our sense is that people are waiting somewhat to see what will happen by November. But we also see that there are I think people that are willing to talk that have not necessarily wanted to talk in the past. So we have been in this prolonged low interest rate environment with a lot of pressures from a regulatory standpoint and from an economic standpoint and so I think you are seeing more people that at least are willing to talk and consider other options.

Okay, thank you.

(Operator Instructions). Showing no further questions, this concludes the question-and-answer session. I would like to turn the conference back over to Mr. Jerry Host for any closing remarks.

Thank you so much. I would like to thank everyone for joining us this morning, for your interest in Trustmark and we look forward to visiting with you again on our second-quarter earnings call. Thank you all and have a great day.

Thank you, sir. The conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.