Trustmark Corp (TRMK) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Trustmark Corporation's second-quarter earnings conference call and webcast. (Operator Instructions). As a reminder, today's conference call is being recorded.

At this time, it is my pleasure to introduce Mr. 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 second-quarter earnings release, as well as the slide presentation that will be discussed on our call this morning, 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, I will turn the call over to Jerry Host, President and CEO of Trustmark Corporation.

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

Before I begin the program, let me make you aware that Trustmark learned that its investor slide presentation that we're about to cover, which summarizes financial results for the second quarter, had mistakenly been released to the market Monday evening, July 25. This information was not intended to be released until after the close of trading yesterday, Tuesday, July 26. To ensure that everyone had access to our complete earnings package, Trustmark issued its full second-quarter earnings press release and filed Form 8-K containing the press release and the investor slide presentation on Tuesday, July 26, prior to the opening of the market rather than after close of the market, as originally scheduled. We're reviewing the events that led to the premature release of our investor slide presentation and will take steps necessary to prevent a reoccurrence of this event in the future.

Now, let's begin reviewing some highlights on page 3 of the presentation material. Trustmark achieved another quarter of solid financial performance. We continued to maintain and expand relationships and executed on our strategic initiatives to enhance long-term shareholder value.

Looking at profitable revenue generation, loans held for investment expanded across our five-state footprint by approximately $137 million, or 7.6% annualized from the prior quarter. Revenue excluding income on acquired loans totaled approximately $133 million, up from both the prior quarters and year over year. Net interest income, excluding acquired loans, remained stable from the prior quarter, while non-interest income increased by 2.2%.

During the quarter we continued to proactively manage non-interest expense. As previously announced, we completed a voluntary early retirement program, which will create opportunities for our associates and better position Trustmark to address the continued structural changes our industry faces.

Additionally, our Board of Directors authorized the termination of a previously frozen pension plan. The pension plan termination will be effective December 31, 2016, and anticipated cost savings, once completed in the second quarter of 2017, will be between $3 million and $4 million annually.

Moving on, routine non-interest expense remained well controlled, totaling $98 million for the quarter. We also closed the previously announced six branch offices.

Under credit quality, credit continued to remain solid as non-performing assets declined during the quarter and net charge-offs were negligible. The allowance held for investments and acquired loans totaled 1.09%, representing a level management considers commensurate with the inherent risk in our loan portfolio. Overall and excluding the impact of the one-time charge incurred during the second quarter, net income totaled $27.2 million, which represented earnings per share of $0.40.

Also, our Board declared a quarterly cash dividend of $0.23 per share, payable on September 15, 2016, to shareholders of record on September the first.

On slide 4 we'll discuss this quarter's results in a little bit more detail. At June 30, 2016, loans held for investments totaled $7.4 billion, an increase of approximately $137 million from the prior quarter, and $958 million year over year. As I mentioned last quarter, we remain focused on credit quality and profitability when growing our loan portfolio. That said, growth this past quarter was solid and diversified across our five-state franchise.

Looking at our energy portfolio, Trustmark has 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 $474 million, and outstanding balances were about $258 million, which represented approximately 3.5% of held-for-investment loan portfolio.

In terms of non-accrual energy loans, as of June 30, balances represented 4.5% of the energy portfolio and less than 20 basis points of HFI portfolio. As a reminder, should oil prices remain at current levels or below for a prolonged period of time, there's a potential for downgrades to occur. We'll continue to monitor the situation as appropriate.

Now looking at slide 5, we'll discuss credit risk management. As a reminder and unless noted otherwise, these credit quality metrics I'll discuss exclude acquired loans and other real estate covered by our FDIC loss share agreements. On a linked quarter and year-over-year basis, both criticized and classified loan balances declined. Non-performing loans decreased approximately 8% from the prior quarter and 5% from levels one year earlier. As you can see on the slide, other real estate continued to display steady improvement. The allowance for loan losses represented approximately 231% of non-performing loans, excluding the specifically reviewed impaired loans, and the allowance for both held-for-investment and acquired loans represented 1.09% of loan balances.

On slide 6 we'll be looking at the acquired loan portfolio. At June 30, acquired loans totaled $339 million, a decrease of approximately $26 million from the prior quarter. For the third quarter, we expect the yield on acquired loans, excluding recoveries, to be in the 5.5% to 6.5% range. Excluding any settlement of debt, acquired loans are expected to decline by $25 million to $30 million during the third quarter.

We'll turn now to deposits on slide 7. We continued to maintain an attractive, low-cost deposit base, as average deposits totaled $9.7 billion, with non-interest-bearing deposits representing approximately 30% of total average deposits for the quarter, and total deposit costs remained unchanged at 13 basis points.

Turning to slide 8, we'll look at revenue highlights. Revenue excluding income on acquired loans totaled approximately $133 million, up from the prior quarter and year over year. Net interest income for the second quarter totaled $101 million and resulted in a net interest margin of 3.56%. Excluding income on acquired loans and yield maintenance payments, the net interest margin in the second quarter remained unchanged from the prior quarter at 3.38%. Non-interest income increased from the prior quarter to total approximately $44 million. Insurance and wealth management performed well, increasing 12.2% and 8.1%, respectively, from the prior quarter. Mortgage banking income before hedge ineffectiveness increased 4.5% from the prior quarter, while mortgage loan production volume increased about 31%.

Moving to slide 9, non-interest expense. For the second quarter, routine non-interest expense remained well controlled at $98 million. Recall this figure does not include the one-time charge of $9.3 million related to our voluntary early retirement program. Excluding a portion of that one-time charge, salary and benefits expense totaled $58 million, up marginally from the prior quarter due to increased commission costs on higher mortgage production volume.

Lastly, we'll consolidate the previously announced six branch offices in the second quarter. That leaves us with a total of 194 branches in our footprint, and we will continue to realign our delivery in retail channels from both a branch and a digital perspective.

Looking at slide 10, capital management, Trustmark continues to maintain and enhance its solid capital position, which provides the flexibility to support our strategic growth initiatives. This past quarter, we repurchased approximately 34,000 common shares through the open market. As mentioned on last quarter's conference call, we view this program as another capital deployment option in addition to loan growth, M&A, and delivering a consistent dividend.

At June 30, 2016, Trustmark's tangible equity to tangible asset ratio was 8.97%, while the total risk-based capital was 13.82%. We'll continue to remain prudent and diligent in the evaluation of all capital deployment opportunities.

On slide 11, we'll continue with our strategic priorities. This past quarter's results continue to reflect our diligent efforts to serve our customers and execute on our strategic priorities. We maintained and expanded customer relationships across our five-state franchise while continuing to control non-interest expense. We also continued to take proactive measures to address structural changes in our industry and better position Trustmark for the future.

We remain excited about the progress we've made and are thankful to our associates who have helped us get there. As we look forward, there still remains a lot of work to be done, and we'll continue to execute on our strategic initiatives to expand customer relationships and deliver long-term value to our shareholders.

At this time we would be happy to take any questions that you might have.

(Operator Instructions.) Emlen Harmon, Jefferies.

This is Elan Zanger on for Emlen. You guys made a couple of big steps this year on expenses between the early retirement plan, some branch restructurings. Do you guys have anything else on the radar in the immediate future?

Well, we think that the closing of the CAT plan, although impactive to some extent this year because of the de-risking efforts, along with some final closing costs next year, will really result in some positives long term for the future, somewhere in the neighborhood of anywhere from $2.5 million to $3.5 million or $4 million. So we consider that another major initiative.

We froze this plan back in 2009, but for a number of reasons have not been able to close the plan. Closing it, we think, also provides, when we distribute the dollars in that CAT plan, we believe it will provide our associates with the opportunity to access these dollars, combine them with other retirement dollars that they have, and manage them according to their own style. So that's another major initiative that we should complete, hopefully, in the second quarter of next year that will result in some long-term, continuous savings for the bank.

We continue to stay focused on the correct balance between our digital delivery channels and our brick-and-mortar channels. We do not believe branches are going away, but what you do in branches and how many branches you need in the future, I think, is critical. So we meet on a very, very regular basis to evaluate each market and understand what the opportunities are there, how we can keep growing, and what are the best ways to keep growing.

The only other thing I'd say is that technology plays an important part going forward. Data management and data information help us to become more efficient, better serve our customers, and that's what these comments about this company transitioning for the new environment is all about. So you'll see, I think, more of that in the future.

Okay, that's helpful. So with all of these new expense reductions, what can we expect in terms of -- what are the cost savings that might be reinvested?

Well, maybe a better way to think about that is what do we think our run rate will do, going forward, what we see, maybe, for the remainder of the year and things that -- and what are the trends for the future? I would ask Louis Greer, our Chief Financial Officer, if he would comment.

Thanks, Jerry. You know, looking at the next two quarters and some of the cost initiatives, you add these things up, and certainly, we've got salary and benefits on an annualized basis saving about $8.5 million. You take that quarterly, it's about $2.1 million. We've got branch closures, six that are coming up, that we just closed, that will affect the second half. I think we mentioned that would be about $800,000 for the second half, about $400,000 on a quarterly basis.

Jerry mentioned the de-risking strategy on the pension plan. That's actually going to cost us a little over $0.5 million for the next couple of quarters. So you add all that up, that's slightly under $2 million for the third and the fourth quarter. So we predict that our estimated forecast, that our run rate for expenses is going to be between $95.5 million and $96.5 million for the third quarter, maybe even slightly down from there in the fourth quarter.

So Jerry mentioned the CAT plan. Certainly, those savings won't come about until after the second quarter because we'll have to fund that plan to the tune of about $12 million. So you'll see those savings after the end of the second half --

The second quarter of 2017.

That's right, the second quarter of 2017, so those savings will come about beginning in the third quarter of 2017.

Okay, guys, thanks for answering my questions.

(Operator Instructions.) David Feaster, Raymond James.

Could you just give us a sense of what you're seeing in your footprint as it relates to multifamily and construction? What's the pulse of the market, and are there any areas that are causing you any concern?

Let me ask Barry Harvey, our Chief Credit Officer, if he would take that question. Barry?

Be glad to, Jerry. David, what we're seeing is still a reasonable amount of activity on the multifamily side. In all of our markets, it's still fairly steady. It's a little slower today than it has been in 2015, and definitely slower than we experienced in 2014. But we've seen somewhat of a slowdown. The structure of the deals are still very similar in terms of the amount of equity going in upfront. We continue to focus on the Tier 1 sponsors, ones that we've done a lot of business with, ones who have been in this business for a long period of time, and they're still in that anywhere from 25% to 40% to 45% equity going in upfront.

Occasionally, you will see the interest-only period on these projects maybe a little bit longer than it has been historically, maybe another six months longer. And that's more a function of the market allowing for it than it is a need for stabilization, because projects are coming online and stabilizing fairly quickly. And then if it's a merchant builder, they're moving on to the secondary market as planned.

So we've not really seen any change other than a slight slowdown in the number of multifamily projects coming across our desk. But as far as the performance of the projects thus far, we've seen no deterioration there. We've seen no change in the secondary market in terms of its acceptance of the projects. Cap rates still are strong. So from that standpoint, we continue to see a solid market there, just a little bit at a slower pace as far as new opportunities.

Okay, that's helpful. And could we talk a little bit about M&A real fast? What are you seeing in the market, and maybe where would you be focused, both regionally and size-wise?

Okay, thank you, I'll take that. This is Jerry. As far as where our focus is, it remains in the Southeast. We would like to expand in some of the growth areas within states like Alabama and Florida. We do not have a footprint in Georgia yet, and we believe that would be a good opportunity for us. And obviously, Texas remains a state where we're primarily in the Houston area. We are doing business in some of the other markets, and it could be helpful to have a deposit footprint, a banking footprint, in some of those other metropolitan markets in Texas.

So that's where our focus is from a geographic standpoint. Size standpoint, we said we'll do any opportunity that we think enhances long-term value. Somewhere in the $300 million to $3 billion size are opportunities that we have taken advantage of before and can manage -- we believe are in the scope of our ability to manage.

So each deal is a little bit different, but that is generally a range and scope of what we would be doing. We continue to look for opportunities that will provide for enhanced shareholder growth for the company. And each deal is different. We continue to evaluate opportunities, and as we see the right ones and can work through them, then that certainly becomes part of our overall capital management plan and capital deployment.

Okay, great. And since you talked about Texas a little bit, could you just give us a pulse of what you're seeing in the Texas economy? It's obviously held up much better than most have expected, but could you just give us your thoughts on Texas and specifically how Houston's holding up as well?

I'll take the first shot and then ask Barry to add color from his perspective as the Chief Credit Officer. Spent some time out in our Houston market recently, making some calls with our Houston relationship managers. As you mentioned, the market in Houston itself has always been impacted by the energy business, has held up very well. What we see, I guess, are maybe two key things. One, the market seems to be much more diversified than we've seen in other cycles, and as such has been more resilient.

And then secondly, I would say that what we've seen is many of the clients that we have out there have responded more quickly to adjusting their business models at the beginning of the downturn, and I think that has been helpful.

In other markets outside Houston, like Dallas, like San Antonio, like Austin, we do have lending opportunities in those markets. And we see activity in those markets remains very strong. It's less impacted by energy, and there are still significant opportunities, I would say, especially in the Dallas market.

And Barry, there may be some additional color you'd like to add to that.

Be glad to, Jerry. In addition, I fully agree with that description of what going on in the market. I think from our portfolio specifically standpoint, we are seeing some continued commercial construction opportunities in the Texas market. But most of those are going to be, as Jerry indicated, in Dallas as well as Austin. And those are going to be a continuation of what we've seen throughout all of our footprint, which is going to be some opportunities in the multifamily as well as student housing and apartments being the two different categories there, as well as some retail, some office, and a little bit of hospitality. Those are the opportunities we're seeing present themselves in the Texas market, but not necessarily in Houston itself.

And then outside of that, I think our portfolio has been fairly flat in terms of balances, our growth in the Houston market. But our energy portfolio there, the portion that's in the Houston market has performed very well, and we've been very pleased with that. And so from the overall standpoint, we've been pleased with the way the market has held up, given the commodity price, as well as the opportunities we've seen in some other Texas cities other than Houston.

All right, thank you very much.

(Operator Instructions.) Catherine Mealor, KBW.

This change to the outlook for your margin, given the moving rates this quarter -- I mean, the core margin has been down a little bit, but fairly stable over the past few quarters. And do you think that you can continue that trend? Or given the yield curve and we're right there, we might see a little bit more pressure there in the back half of the year?

We could answer that question accurately if we all knew what the Fed was going to do between now and year end, Catherine. But given the fact that we can't, and given the fact that Tom Owens was about to finish out the call without having the opportunity to talk, I'm glad that you asked this question. So, Tom, if you would?

I appreciate that, Jerry. And hi, Catherine. Thank you for your question. So I think the guidance that we've given historically in terms of low-single-digit annualized percentage compression in our core net interest margin is appropriate to maintain going forward. Year over year, it's 11 basis points decline. I think the story continues to be that low-single-digit compression in core NIM, offset by high-single-digit growth in core earning assets, is going to allow us to continue to grow core net interest income mid-single-digit-ish year over year.

To your point about lower interest rates, obviously, the flattening of the yield curve and the lower-for-longer environment is not helpful. But I think that the trends that we've seen historically here are going to continue for the time being.

I will also tell you that, as we've talked about on past calls, there is normal volatility to both loan fees and yield maintenance payments in the investment portfolio. If you adjust for those year over year in the second quarter, our core net interest margin was off only six basis points. But I think if you continue to think in terms of two to three basis points a quarter, eight to 12 basis points -- call it 10 on average -- for core NIM year over year, is going to continue to be appropriate.

Okay, really helpful. Thank you, Tom. And then maybe one follow-up, just on the buyback. Can you talk a little bit about your expectations for the pace of buyback activity and how you balance that versus looking at M&A opportunities?

Well, I'll take that as well. This is Tom. So as Jerry indicated in his comments, we view the share buyback program as an alternative form of capital deployment, and we continually evaluate the returns available from that form of deployment versus organic growth for lending or acquisition opportunities. And I think the right way to think about it is yes, we will continue to be opportunistic with share repurchase where the market presents those opportunities. In the broader context, it's a tool to be used in the event that we continue to grind lower in terms of loan coupons and loan spreads. The way I think of it is it's a floor in terms of the returns available for capital deployment.

Got it, makes sense. So as the stock maybe hangs around current levels, it would be fair to assume that we may not see that much activity as we would if we had a big pullback in the market again?

Catherine, that is a good assumption. And I think it also -- one of the things you look at is how does our currency value compare to maybe some of the other banks in the market that could be in an acquisition mode, and we take that into consideration as well in terms of overall balance of capital deployment.

Makes sense, great. Thank you.

And ladies and gentlemen, this will conclude today's question-and-answer session. At this time, I'd like to turn the conference call back over to Mr. Jerry Host for any closing remarks.

Thank you, operator, and we appreciate everyone joining us. We will continue to stay focused on investments that help to grow long-term shareholder value for this company. We remain optimistic about some of the things we're seeing going on in the market. We will continue to control our expenses in this challenging rate environment and are very hopeful and optimistic about the future.

So again, thank you for joining us, and we look forward to meeting with you again at the end of the third quarter.

Ladies and gentlemen, today's conference is now concluded. We do thank you for attending today's presentation. You may now disconnect your telephone lines.