Trustmark Corp (TRMK) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's fourth-quarter earnings conference call and webcast.

(Operator Instructions)

As a reminder, this call is being recorded. It is now my pleasure to introduce Mr. Joey Rein, the Director of Investor Relations at Trustmark.

Good morning. I would like to remind everyone that a copy of our fourth-quarter earnings release, as well as the slide presentation that will be discussed on our call this morning, is available in 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'd like to introduce Jerry Host, President and CEO of Trustmark.

Thank you Joey, and good morning, everyone, and thank you for joining us. Also on the call this morning are Louis Greer, our CFO; Barry Harvey, our Chief Credit Officer; Tom Owens, our Bank Treasurer; and Breck Tyler, President of our mortgage company.

2016 was another great year of achievements for Trustmark. We would like to thank our associates for their hard work, along with our customers, communities and shareholders we have the privilege of serving during 2016, as you all had a part in helping us continue our success.

We will begin by taking a closer look at our financial performance highlights, beginning on page 3 of the presentation material. We are pleased to have achieved another quarter of solid financial performance. Let's review by first looking at profitable revenue generation.

Loans held for investments increased by $352 million from the prior quarter, to total $7.9 billion. When compared to the previous year, balances increased by $760 million, nearly 11%. For the year ending 2016, revenue excluding income on acquired loans increased $19.5 million, to total $550 million. Net interest income, excluding acquired loans, increased by $18.7 million in 2016.

Mortgage banking non-interest income before hedge ineffectiveness increased $2.8 million in 2016. Acquired loan performance continues to exceed expectations, as well as providing capital to support continued growth in the loans held for the investment portfolio. Process improvement and expense management, core non-interest expense continued to remain well controlled, totaling $97.1 million for the fourth quarter. Achieved cost savings of $2.1 million related to the early retirement program in the fourth quarter and $4.4 million of cost savings was achieved during the second half of 2016.

Under credit quality, credit quality continued to remain solid, as nonperforming assets declined 6.8% in the fourth quarter and 16% for the year, which represented 1.38% of total loans and other real estate at year end. Allowance for loan losses represented 267% of nonperforming loans, excluding specifically reviewed impaired loans. For the year, net income totaled $108.4 million, which represented earnings per share of $1.60. I would also like to remind you that our Board declared a quarterly cash dividend of $0.23 per share, payable on March 15, 2017 to all shareholders of record on March 1.

Let's review the quarter results in a little bit more detail by turning to slide 4. At year end, loans held for investments totaled $7.9 billion, an increase of approximately $352 million from the prior quarter, and a $760 million increase from the previous year. During the fourth quarter, we continued to experience robust growth in the held for investment loan portfolio, while still maintaining our focus on credit quality and profitability.

As for our energy portfolio, as of December 31, 2016, Trustmark's total energy exposure was approximately $476 million, with outstanding balances of $272 million, which represented 3.5% of the held for investment loan portfolio. Nonaccrual energy loans represented 4% of the energy-related loans, and 15 basis points of the outstanding held for investment portfolio.

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 5, let's discuss credit risk management. As a reminder, unless noted otherwise, these credit quality metrics I'll discuss exclude acquired loans, and other real estate covered by an FDIC loss share agreement.

During the fourth quarter, nonperforming assets declined $8.1 million, and when compared to the prior year, declined $21.2 million. Nonperforming loans decreased $5.2 million from the prior quarter, and $6.1 million year over year.

At December 31, other real estate totaled $62.1 million, a $3 million decline from the prior quarter, and a $15 million decrease from the previous year. The allowance for loan losses represented approximately 267% of nonperforming loans, excluding specifically reviewed impaired loans, while the allowance for both held for investment and acquired loans represented 1.02% of loan balances.

Now turning to slide 6, let's look at the acquired loan portfolio. At quarter end, acquired loans totaled $272 million, a decrease of $24 million from the previous quarter, and $118 million from this time last year. For the first quarter of 2017, we expect the yield on acquired loans, excluding recoveries to be in the 5.5% to 6.5% range. Also during the first quarter, acquired loans are expected to decline between $20 million and $25 million.

If you look at slide 7, we will now discuss deposits. At December 31, 2016, average deposits totaled $9.8 billion, an increase of $93 million from the prior quarter, while period-end balances totaled $10.1 billion, a linked quarter increase of $370 million.

Noninterest-bearing deposits represented approximately 32% of total average deposits. We continue to maintain an attractive low-cost deposit base, with approximately 61% of deposits in checking accounts, and a total cost of deposits of 14 basis points.

Now turning to slide 8, we will look at some revenue highlights. For the year ended 2016, revenue, excluding income on acquired loans, increased $19.5 million or 3.7%. Net interest income for the fourth quarter totaled $104 million, an increase of $1.4 million from the prior quarter, and was due mainly to growth in interest income from our three loan portfolios, which were significantly offset by decreased yields on the securities portfolio.

Net interest income excluding acquired loans remained relatively unchanged from the prior quarter, and for the year ended 2016 increased $18.7 million. The net interest margin for the fourth quarter was 3.52%, no change from the previous quarter.

Excluding income on acquired loans, the net interest margin in the fourth quarter was 3.31%, a decline of 7 basis points from the prior quarter. This decrease was primarily due to a reduction in the yield on the securities portfolios, and the loans held for investments and held for sale portfolios. At December 31, noninterest income totaled $41.7 million, a 6.7% decrease from the prior quarter, and a 6.2% increase from the previous year.

Mortgage banking revenue decreased $1.9 million from the prior quarter to total $5.4 million, and was due to a decline in fair value of mortgage loans held for sale, which was offset in part by reduced negative hedge ineffectiveness. Mortgage loan production for the fourth quarter totaled $406.6 million, a seasonal decrease of 16.7% from the prior quarter; however, a 19.6% increase year over year. For 2016, mortgage loan production totaled $1.6 billion, an 8.4% increase from the previous year.

Insurance revenue for the fourth quarter totaled $8.5 million, a seasonal decrease of 16% from the prior quarter, and in line with levels from the previous year. For the year, insurance revenue totaled $36.8 million, a $340,000 increase over the previous year. For the fourth quarter, bank card and other fees totaled $6.8 million, relatively unchanged from the prior quarter.

Service charges on deposit accounts experienced a slight decline of $230,000. Other income net increased $818,000 from the prior quarter, reflecting not only an increase in other miscellaneous income, but also a gain on the disposition of a closed branch facility. Non-interest income for 2016 totaled $174 million, relatively unchanged from the prior year.

Now moving to slide 9, let's look at noninterest expense. For the fourth quarter, noninterest expense, core noninterest expense, which excludes $525,000 of ORE, $1.7 million of intangible amortization, $664,000 of expense related to reducing the risk profile of the assets of the Corporation's defined benefit plan prior to termination, and $268,000 of additional pension expense related to ERP, all brought our core noninterest expense total to $97.1 million.

Results of the previously announced early retirement program produced savings of $2.1 million during the fourth quarter, and $4.4 million during the second half of 2016. In our effort to continue the realignment of our branch network to reflect the changing preferences of our customers, we consolidated nine branch offices during the year, across Alabama, Florida and Mississippi. We also opened a branch in Tuscaloosa, Alabama, and a loan production office in Pensacola, Florida.

We will now turn to capital management on slide 10. Trustmark continues to maintain a solid capital position, which reflects the consistent profitability of Trustmark's diversified financial services businesses. With that, Trustmark continues to remain well-positioned to meet the needs of our customers, while providing value for our shareholders. At December 31, Trustmark's tangible equity to tangible asset ratio was 8.74%, while the total risk-based capital ratio was 13.5%.

Looking at slide 11, we will continue with our strategic priorities. As we move forward into 2017, we will continue using our six strategic priorities as a guide, in continuing to make Trustmark a valued franchise. Profitable revenue generation will continue to be a primary focus.

Process improvement, expense management, leverage existing infrastructure, and effective risk management will continue to be important focuses as well, since significant investments have been made in recent years for these areas. Systems and infrastructure to be able to support growth, while also meeting regulatory requirements.

We will also continue our strong credit quality by maintaining our disciplined underwriting and pricing policy, along with resolution of existing problem assets. In terms of mergers and acquisitions, we continue to remain patient and disciplined in our investments to ensure we are creating long-term value.

Now at this time, I would be happy to take any questions that you would have of me or the group.

(Operator Instructions)

Brad Milsaps, Sandler O'Neill & Partners.

This is actually Peter Ruiz on for Brad. First, just touching on expenses.

Can you remind us about the timing of these expense initiatives? Can we still expect third quarter as the pension plan, the first time we see the real savings from there? And maybe still $8.5 million for the early retirement program?

As far as overall savings from early retirement for the entire year of 2017, yes we do expect to be in that range of $8.5 million for the full year. As far as the timing of the closure of the pension plan, Louis, why don't you comment on that, and remind everyone what we at least anticipate that expense will be at closure?

In the fourth quarter, we sent out an updated 8-K announcing that we've taken a one-time charge of about $17.5 million in the second quarter, to fully terminate and pay out our CAP plan, which is a designed benefit pension plan. And you are correct we begin a $3 million to $4 million annual saving beginning in the third quarter of 2017.

Okay that is great. And maybe just following up with the NIM.

Core loan yields were obviously down a little bit. Is that partially due to some loan fees that were maybe elevated in the third quarter?

Yes, that is part of it. We had a number of loans that were on the books that continued to fund up, and of course those fees are taken on the front end, so you didn't see the fees off those loans. Tom, you may want to add a little color to the rest of the margin change?

Peter, so what you see is a 7 basis point linked quarter decline in core NIM. When you back out the normal variability of loan fees, as well as make-whole premiums on some of the investment portfolio securities that pay off from time to time, is really more like 4 basis points on an adjusted basis.

And again, fourth quarter was a pretty robust quarter in terms of loan growth. I would direct you to our year-over-year core net interest margin, which was 3.37% in 2016 versus 3.46% prior year, which is probably a cleaner number, and consistent with the guidance that we have been giving.

Okay that is great. That is it for me.

Catherine Mealor, KBW.

A follow-up on the margins. So what is your outlook for the core margin moving forward? It feels like we saw a little bit more compression this quarter, one, how do you think about the incremental yield on this new growth that you're seeing come in? And then what benefit we should see in the margin from the higher rates and the steepening of the curve?

Catherine, Tom will take the question.

Catherine, obviously higher interest rates that we have seen here in recent months help substantially. And as you would imagine, as a result, our current projections are for stabilization of loan yields, and maybe increases given where market interest rates are currently, as well as market implied forward.

So as I said earlier, the 9 basis point year-over-year decline in core net interest margin, maybe that gets cut in half, maybe that's a 4 to 5 basis points decline in margin in 2017, but again with core earning asset growth, we would continue to expect it to be the case, that core net interest income year-over-year, you would continue to see mid single-digit increases in core net interest income.

And then on the growth, the growth was just phenomenal this quarter, as you mentioned Jerry. How much of that was from you already ones that have been originated just funding up versus just new originations that we saw come through this quarter? And then what does that mean for your expected growth rate, going into next year?

Catherine, I will have Barry Harvey answer that question. I think he can add a lot of color.

Catherine, I think the total growth was about 46% of that was drawings on existing lines, and about 54% was going to be new bookings, and advances on those new bookings. Within the CRE book, it's about half of the growth that we saw on the CRE side, was related to new fundings of existing lines, existing facilities, and then new bookings and new findings on those.

About half of our growth that you saw us have in the quarter came from CRE. So CRE represented about half the growth, and then within the CRE category, it was split pretty evenly between funding on existing lines, and the new business with fundings on those.

And an outlook for next year?

I think from our standpoint is a little more predictable going into 2017, strictly because of the CRE credits that are on the books now, that we're projecting to fund over time. There's a lot of equity going into these deals on the front end, so we are beginning to see fundings in a meaningful way, and will continue to through 2017, that relate to late 2015 bookings. Obviously, bookings during 2016 are beginning to fund.

We will begin to fund this year in a meaningful manner. So I think from our perspective, we're still viewing it as mid to high single digit growth, and as we indicated previously, I think we outpace that a little bit this year. But I do think that is realistic for us to be mid to high single digit growth.

Okay great, thanks. And one last one. Was there any update or change in classified and criticized numbers versus last quarter?

Within the classified and criticized, we had an increase of about $23 million, both of them, are the same increase. Really just two credits that drove that.

One was an energy credit for about $12 million, and the other was non-energy for about $17 million. That led to the full increase between those two credits. One was a Texas credit, one was a Mississippi credit.

All right. Thank you very much.

Kevin Fitzsimmons, Hovde Group.

I am going to ask another one about margin, and a little bit more of taking a step back, looking at the reported margins. So the reported margin this quarter was 3.52%, the core margin is 3.31%. The core margin headed down, but it seems like there was some things we shouldn't necessarily expect going forward at that pace to decline, but it seemed like you indicated it could still be going down, but not at the pace we saw this quarter.

And then the reported margin, of course has the steady outflow of accretion income, but some of that might get refilled a bit with the deal. How, all that being said, how should we be looking at the trajectory of the reported margin versus the core margin. Is it like it's basically going to converge, but is it somewhere in the middle?

Is it somewhere closer to where the core margin is now? And I'm just trying to factor in the accretion income rolling off, the positive impact of rising interest rates, and the pressure on the loan yields. If we can speak to that. Thanks.

Tom, do you want to take that?

Kevin, that was a whole bunch of questions, but I will do my best. Again expecting, let's call it mid single-digit compression and core interest margin in 2017, given where rates are today, and marking implied forwards. And as I said, the substantial increase we have seen in market rates as you would expect, leads us to believe that loan yields -- core loan yields, will stabilize, perhaps increase a bit.

So then the question is, why are you projecting or giving guidance that core net interest margin might actually continue to decline a bit? And there's a couple drivers there. One is that investment portfolio yields, we think, will continue to decline just a bit.

If you look at current yield of the securities portfolio, it's still a bit higher than the investment securities that we're purchasing at this point. So you get a little bit of compression there.

And then the big wild card is we're projecting, we have elasticities assumed in our model, where we are projecting that with the increase in rates that has already occurred, market interest rates that is, as well as the projected increases in market interest rates, that our deposit cost of funds will begin to rise correspondingly. And as we know, that's a big wild card.

And so is there perhaps some potential benefit from the industry lagging, in terms of repricing the deposit base? The answer is yes. And perhaps that gets you closer to flat year-over-year core net interest margin.

Now regarding your question about how to think about headline reported net interest margin total versus core, yes, the answer is that they would continue to converge. And that in 2017, that convergence would be more towards the core net interest margin than the total net interest margin.

What about, one thing you did not mention is your all loan to deposits is still a little lower than peer -- and if you guys can keep growing loans at a decent pace, even though your average security yield is going down, is it possible that could be a catalyst to the margin, just from the mix shift, within average earning assets?

It is, but we are very careful about how we talk about that. We talk that the last three years, last 2.5 years, we have seen a steady, although a low double digit growth in the loan portfolio. We do, as you well know, have plenty of capacity from a capital perspective, and also from a deposit perspective, as you stated, in the loan deposit ratio.

Our focus the last couple of years have been on selectively bringing on loan relationship managers, primarily in markets outside of Mississippi. And so that remains very much a focus. But in terms of our projections, we are trying to be as accurate as we can, without assuming that all of these all of these positive things that seem to be projected by the market are at least somewhat discounted by where we are at this point in time.

Jerry, I was looking at it from the standpoint that with going into a rise in rate environment, you seem to have a real meaningful fund to cost advantage. And at the same time, you have room to ramp up that loan to deposit ratio. So it seemed like you had the potential to benefit on both of those fronts, and it just didn't seem consistent with the tone on the margin, but perhaps you are being a little more conservative, and I can't argue with that.

Yes. We would like to think all of these things could play out. We'd like to believe that the projections of potential for a lower tax rate and maybe less regulation, and a few other things, in terms of a growing economy, are going to help us. But I think we have worked to try to ground ourselves in where we are now.

Where we've been, as you point out, you have hit some of the things that we are very focused on. How do we take advantage of some of the strengths of our balance sheet, given this projected new environment that we're in. And we think there's some real opportunity there, but we don't like to make projections on it until we get a little bit more clarity, Kevin.

Got it. Just one follow on, M&A, you are back in the M&A arena after a while off. Just curious, Jerry, what you are seeing out there, in terms of, it seems like all of the stock prices have moved up, so maybe it's just a relative game, and there's no change.

But maybe it helps you if you're looking at privately held players. Just how do you feel this move up in the stocks has changed, if at all, your [guys] likelihood to continuing to get involved in M&A? Thanks.

This is purely opinion. Obviously, we've seen a number of deals and specifically in the Southeast, folks that we're familiar with, foreign deals over the last month. The increase in currency value I think is helpful, and maybe is moving some people that were on the fence, moving them off a little bit, maybe on situations that were already underway. So I think it is helpful from that standpoint.

What's nice is that we do have the capital levels that would allow us to do a deal. We feel good about where we are, in terms of this current deal, in being able to move it along very quickly from both a regulatory standpoint, and a standpoint of actually consolidating. So doing this transaction in Huntsville, it is relatively small, but we think strategically important, because of where it is, and the quality of the people in this franchise that we're buying.

So we have the capacity, I think, it is nice to have the improvement in the currency. The other side of that, Kevin, is that everybody that may not be publicly traded, maybe believes that they stepped up even more than the market. So you have to have those as well.

But nonetheless, we view it as a positive, and we view it as maybe a change in people's thinking, in terms of maybe this is an opportunity, and feel like we're well-positioned in a lot of ways to take advantage of it.

Got it. Thanks very much.

(Operator Instructions)

David Feaster, Raymond James

So energy balances were up a bit in the quarter, and we're glad to see that you are dedicated to this space. Can you just maybe talk a bit about what types of new credits you're seeing coming across your desk? How pricing is trending for energy credits, and maybe just your thoughts on this space in your portfolio going forward?

Barry?

David, we're not seeing a lot of new deal flow coming across, and what we are seeing is reasonably priced, but it's not something where there's a huge premium potentially for the industry's condition. We are seeing opportunities as it relates to transportation, primarily, whether it be over the road, pipe, whatever the case may be. We are seeing a few opportunities there, and specifically opportunities where they are obviously tied to the industry, but not necessarily tied to the commodity, in terms of the price of the commodity doesn't have a lot of influence on the particular viability of the Company or their business line.

So from that standpoint, it is fairly limited in terms of deal flow, with our book itself, we've had limited activity this particular quarter. The exposure remains flat. We had a little tick up in our outstandings. We did book one new credit for around $5 million.

The remainder of the increase was advances on existing formula-based credits. And so we continue to monitor these credits very carefully, looking at all the new information available each quarter. For us it's about [45] credits that we have to keep our hands around.

But we had one we had one increase, one credit that actually migrated into the criticized and classified category for about $12 million, so we did have a small increase there. We had no change in our non-accruals or nonperformings if you will, except for a small tick down, of a little less than $1 million. So it was a fairly uneventful quarter from the energy book's perspective, but we do continue to monitor it very carefully, and we do anticipate some additional downgrades coming over time.

Simply because it's taking a while for the higher commodity prices to translate into putting more assets to work for our borrowers at higher day rates and eventually that will transfer, or pass its way through our financials. So it is going to take a little time with the customer base that we have, which is more oil field services related, for it all to flow-through. And for us and for them and us to be able to benefit from the higher commodity prices.

Got it, that is helpful. You had pretty strong loan growth in the quarter. One of the big drivers was C&I.

Could you just maybe talk a bit about what you're seeing in that segment regionally and by industry? And just the general sense of optimism, and maybe your thoughts on the competition and pricing for C&I loans?

As far as C&I for the quarter, we did see a nice growth, predominately in our Mississippi market. But it when it's described in that manner, you have to backup and say, we've got a Mississippi group of corporate lenders who are housed here in Jackson, who have a calling area that is much broader than just the state of Mississippi, although that's how it's displayed. So bear in mind that these will be opportunities we have in contiguous states, that they are actively calling in.

And as far as the type of industries we are seeing some activity in, it's going to vary from heavy equipment dealers, we've got some medical equipment. Healthcare -- and then we got some grocers, payment service type companies. So it's quite a variety and it's diversified in terms of the type of customers that we're seeing opportunities with.

We really haven't seen anything today that's translated into new bookings, that you might attribute to a better feeling about the environment going forward. This is just regular business that's coming our way, through our lenders out hustling for the business. Talking with other companies, banks, et cetera, and [finding] opportunities.

But we really haven't seen anything that's far that you would attribute back to maybe the change in administration, or the perceived change in the environment we're in.

Got it, it's helpful. Last one for me. You've been pretty aggressive in your branch optimization. Can you give us some insight into your footprint going forward, and maybe opportunity for potential consolidation?

We continue to stay very focused on looking at ways that we can really optimize the delivery channels for our customers. So it's not a single-minded focus of how do we shut branches down. It's really looking market to market, to try to understand how our customers want to bank, and people in rural markets want to bank a little different than people in urban markets.

We've invested significantly in the last five years, in automated delivery channels. We've just introduced a new product this last quarter called My Teller, which is a virtual teller, that will allow us additional flexibility in helping to reduce staffing, or actually close some branches and replace it with this, to open up in some new channels that we haven't been into before.

So it's not a single-minded focus of how do we cut out X number of branches? It's how do we best match the needs of customers, from both an existing and a potential growth standpoint, in each market. So the pace that you've seen over the last couple of years in closures, we would anticipate would increase.

But then, we've already spent a lot of the money on automation of new delivery channels. So I would say just continue to watch for more. Pace should be about what you've been seeing the last few years.

That is terrific color, thanks.

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

First I would like to say that we at Trustmark are very optimistic about the potential for 2017. Our people are very focused on the opportunities that are out there, and will work hard to take advantage of it. I'd like to thank all of you for your interest in being on the call, and we look forward to visiting with you again at the end of the first quarter. Thank you so much.

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