Trustmark Corp (TRMK) 2017 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 Mr. Joey Rein, Director of Investor Relations at Trustmark.

Good morning. I would like to remind everyone that a copy of our first quarter earnings release as well as a slide presentation that will be discussed 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'd 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 Gerry Host, President and CEO of Trustmark.

Thank you, Joey, and good morning, everyone, and thanks for joining us. Also joining me this morning in the room are Louis Greer, our CFO; Barry Harvey, our Chief Credit Officer; Tom Owens, the Bank Treasurer; and Breck Tyler, President of our Mortgage Services Operation.

Let's begin by reviewing our financial highlights, beginning on Page 3 of the presentation material. Trustmark achieved another quarter of solid financial performance. We continue to maintain and expand relationships while also focusing on executing our strategic initiatives.

Looking at our initiatives, let's begin with profitable revenue generation. Loans held for investment excluding the reclassification of acquired loans that we will address in a moment totaled $7.9 billion, an increase of $116.7 million or 1.5% linked quarter. When compared to the prior year, balance has increased by $700 million or almost 10%. Revenues excluding interest income on acquired loans increased $6.1 million or 4.6% linked quarter. Net interest income excluding acquired loans increased $2 million or 2% from the prior quarter. Mortgage banking income increased $4.8 million from the previous quarter to total $10.2 million.

Next, process improvement and expense management. Core noninterest expense continue to remain well controlled while totaling $98.7 million for the first quarter.

Under credit quality, other real estate decreased $6.1 million or 9.8% linked quarter and $15.8 million or 22% year-over-year. Net charge-offs represented 0.08% of average total loans. Allowance for loan losses represented 263.7% of nonperforming loans excluding specifically reviewed impaired loans. Net income totaled $31.2 million, which represented earnings per share of $0.46.

At yesterday's meeting, our board declared a quarterly cash dividend of $0.23 per share payable on June 15, 2017, to shareholders of record on June 1.

Now turning to Slide 4. We'll review the quarter's results in a little bit more detail. Under loans held for investment, during the first quarter, we reclassified $36.7 million of acquired loans to the loans held for investment portfolio. These acquired loans were reclassified due to the discount on these loans being fully amortized. Excluding this reclassification, our loans held for investments increased $116.7 million or 1.5% linked quarter and 9.6% from 1 year earlier. We continue to experience growth on our held for investment loans this quarter while keeping our focus on credit quality and profitability.

As of March 31, 2017, Trustmark's total energy exposure was approximately $466 million with outstanding balances of $256 million, which represented approximately 3.2% of the held for investment loan portfolio. At March 31, nonaccrual energy loans represented 9% of the energy-related loans and 28 basis points of the outstanding held for investment portfolio.

As a reminder, should oil prices remain at current levels, or go low for a prolonged period of time, there is a potential for downgrades to occur. We'll continue to monitor the situation as appropriate.

Looking at Slide 5, we'll discuss credit risk management. Unless noted otherwise, these credit quality metrics I will discuss exclude acquired loans and other real estate covered by the FDIC loss-share agreement. Nonperforming loans increased 24.5% linked quarter, primarily because of 1 substandard energy -- excuse me, nonperforming loans increased 24.5% linked quarter, primarily because of 1 substandard energy credit migrating to a nonaccrual status. When compared to the prior year, nonperforming loans declined 13.3%.

At March 31, other real estate totaled $56 million, a $6 million decline from the prior quarter and a $15.8 million decrease from the previous year. The allowance for loan losses represented approximately 264% of nonperforming loans excluding specifically reviewed impaired loans, while the allowance for both held for investment and acquired loans represented 1% of loan balances.

Now turning to Slide 6. Let's review the acquired loan portfolio. At March 31, period end balances totaled $218.2 million, a $54 million decrease linked quarter, which included $36.7 million of loans reclassified from the acquired loan portfolio to the held for investment portfolio. For the second quarter of 2017, we expect the yield on acquired loans excluding recoveries to remain in the 5.5% to 6.5% range. Also during the second quarter, acquired loans are expected to decline by about $10 million to $15 million.

Let's discuss deposits by turning to Slide 7. For the first quarter of '17, average deposits totaled $9.9 billion, a $190 million increase from the prior quarter; while period-end balances totaled $10.1 billion, an increase of $48.5 million. Noninterest-bearing deposits represented approximately 30% of total average deposits. We continue to maintain an attractive low-cost deposit base with approximately 60% of deposits in checking accounts and a total cost of deposits of about 16 basis points.

If you look with me on Slide 8, we'll discuss revenue highlights. At March 31, revenue excluding income on acquired loans totaled $138.4 million, an increase of $6.1 million or 4.6%. Net interest income for the first quarter totaled $102 million, a $1.1 million increase from the prior quarter and was mainly due to the growth from interest income on our held for sale and held for investment loan portfolios being fully offset by -- being offset by decreased interest income from acquired loan portfolio and the increased interest expense.

Net interest income excluding acquired loans totaled $97.2 million for the first quarter, a $2 million increase from the prior quarter and a $5 million increase year-over-year. The net interest margin for the first quarter was 3.49%, down 3 basis points from the prior quarter. Excluding income on acquired loans, the net interest margin in the first quarter was 3.38%, an increase of 7 basis points from the prior quarter. The increase was due primarily to growth in the yield on the securities portfolio and loans held for investments and held for sale portfolios.

At quarter end, noninterest income totaled $46 million, a 10.3% increase from the prior quarter and a 6.4% increase when compared to levels 1 year earlier.

Mortgage banking revenues totaled $10.2 million, an increase of $4.8 million linked quarter and was due to a net positive mortgage valuation adjustment and a net positive mortgage servicing hedge ineffectiveness, which more than offset decreased secondary marketing gains.

Insurance revenue for the first quarter totaled $9.2 million, an 8.4% increase from the prior quarter.

Now looking at Slide 9. At March 31, core noninterest expense excluding ORE and intangible amortization of $3.3 million totaled $98.7 million. Salaries and benefits totaled $57.3 million for the first quarter, an $866,000 decrease from the prior quarter. Services and fees totaled $15.3 million, a $581,000 increase from the prior quarter due to additional advertising and outside services.

As a reminder, Trustmark terminated its defined benefit pension plan as of December 31, 2016. The final distributions will be made from the current plan assets and a onetime pension settlement expense of approximately $17.5 million, that is pretax, and will be recognized when paid by Trustmark during the second quarter of this year. Estimates that annual pension expense will be reduced by $3 million to $4 million from this point forward.

Now let's review capital management by turning to Slide 10. Trustmark continues to maintain its solid capital position reflecting the profitability of Trustmark's diversified financial services business. Trustmark remains well positioned to meet the needs of our customers while providing value for our shareholders.

During the first quarter, Trustmark did not repurchase any of its common shares. The repurchase program, which is subject to market conditions and management discretion, will continue to be implemented through open market repurchases or privately negotiated transactions.

At quarter end, Trustmark's tangible equity to tangible asset ratio was 8.8%, while the total risk-based capital ratio was 13.6%. We continue to remain prudent and diligent in the evaluation of all capital deployment opportunities.

Now turning to Slide 11, we'll conclude with our strategic priorities. We completed the merger with RB Bancorporation and Reliance Bank on Friday, April 7. We're excited to welcome our newest associates and their customers to Trustmark and are looking at a complete integration of systems during the second quarter of this year.

We believe our current strategic priorities align our daily activities with our long-term focus, which have contributed to the expansion of our customer relationships while continued solid financial results and added value for our shareholders. We will continue executing these priorities as we continue to add value to the Trustmark franchise.

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

(Operator Instructions) Our first question comes from Andrew Taylor of KBW.

So first question is on the margin. Obviously, you got some nice expansion this quarter that benefited from the higher linked quarter loan yields. Just digging into that, were there any outsized loan fees or any temporary items that helped drive the increase? Also maybe just speak about the pricing on new loan production and just directionally where the margin is going to head from here.

Andrew, we'll have -- we'll ask Tom Owens to comment first and then maybe Barry Harvey as it relates to the new loan yields.

Hi, Andrew, good morning, this is Tom. The increase in loan yields was pretty clean on a linked-quarter basis. So again, that's just the benefit. We had the Fed hike in December and that's the benefit of the floating rate loans and portfolio pricing up in response to that, so that's pretty clean. Now I'm sure someone will ask so I'll comment on it at this point. There is a bit of noise in the securities yield. So when you look at our 7 basis points linked-quarter increase in core NIM, taking into account some noise from day count and yield maintenance payments, it's more like 5 basis points. And the securities yield increase linked quarter of 9 basis points is actually more like 3 basis points taking into consideration day count and yield maintenance payments. The 3 basis point increase is primarily a function of slower prepayment speeds and slower premium amortization.

Great, that's helpful.

And Gerry, as it relates to the pricing of loans, what we're seeing is a continuation within the commercial side of being very competitive obviously on the public finance. Typically, it's a bid process so it's very competitive. What we are seeing on the positive side is within the CRE book, we are seeing better pricing today, substantially better pricing today than we were 9 to 12 months ago. And so we feel very encouraged that the projects remain solid from a structure standpoint, from an equity going in. There's not really a lot of change from that aspect of it but what we do see is a few less players from time to time and we do see better pricing with high-quality customers.

My last question is just on expenses. Obviously, the core run rate is almost $2 million higher than the $97 million average run rate you guys were running at last year. You got the pension savings coming in the back half of the year. Were there any seasonal or noncore items this quarter that would help us think about the core rate just until 3Q?

This is Louis Greer. Really, not anything out of the ordinary. We did have another expenses of onetime property evaluation adjustment on a branch that we had closed in December of about $500,000. That's the only unusual item. Core expenses, I think, we gave guidance somewhere between 97 and 98. We're slightly above that when you take out the ORE expenses as well as the amortization of intangibles. And I will tell you that we do have the acquisition coming in the second quarter. We closed that, as Gerry mentioned, on April 7. And the expenses associated with that acquisition on an annual basis were about $7 million, so that will add a little less than $2 million to that core run rate for next quarter. And so we're expecting a little between $100 million and $101 million as core expenses in the second quarter once you've backed out the onetime charge for the pension plan of $17.5 million, and we will also have some onetime expenses related to the acquisition of almost $3 million or so.

(Operator Instructions) Our next question comes from Brad Milsaps of Sandler O'Neill.

This is Peter Ruiz on for Brad. So I was wondering if you guys could maybe give a little more color around the energy credit added to nonaccruals. Are you guys seeing any general weakness? Or is this sort of a onetime blip? Any color on that would be great.

Okay. Barry?

Sure. Peter, I guess a few things. One, as you noticed, we had a reduction in exposure of about $10 million for the quarter and about $15.5 million in reduction in outstanding balances. So we did see a little migration off the books of a few energy credits balance reductions and then there was a particular credit we chose not to opt-in to a refinance of. But as it relates specifically to the 1 credit in question, we had about $11.7 million credit that was substandard as of 12/31. They ended up filing bankruptcy during January at reorganization. And so when that occurred, we went ahead and moved the credit to nonaccrual. We've gotten updated values on most of the collateral at this point. We're still waiting on a few pieces to come in, so we're really just kind of working our way through the bankruptcy at this point. We feel like that we've added a little bit extra to our specific reserve. We feel like we're in good shape for what we believe to be the last couple of days to come in. And so I think at this point, we'll just work our way through the bankruptcy, see where it leads us. There may be a potential for some DIP financing that needs be done, and we'll look to participate in that from a control standpoint. And as the process moves along, we'll just consider whatever plan that is presented and make decisions just on the normal course of business.

I guess just kind of switching gears a little bit. Loan growth was a little sluggish but that's not, I guess, unusual for a first quarter. Do you still think a mid- to high single-digit pace is kind of reasonable for the rest of 2017?

We do. It was a little sluggish but as you noted, that is somewhat seasonal for the beginning of the year for us. In addition, I think you're hearing throughout the country that most banks are experiencing a little less activity than they had in 2016. We, however, have a number of loans that have already been booked as -- on a construction book that as they fill out, they will continue to fund up and a very healthy pipeline of loans. And we would think that the original projection that we gave you in January would hold true to be somewhere in the mid- to upper single-digit growth rate.

Great. And I guess just maybe one last one for me. Have you -- could you quantify at all what sort of cost saves you could expect from the acquisition, if any at all?

I figure -- this is Louis, sorry, this is a relatively small acquisition. It was very strategic, and we have some nominal cost savings in this. Our estimates of adding this acquisition owned are not significant because we do expect to grow that market and add some additional resources.

Yes, this was -- the addition of the Athens, Madison, Huntsville markets were an extension north on I-65 from Birmingham. And a well-run organization that we acquired, operated very efficiently, isn't really much overlap. But we believe it's one of the top growth markets in the Southeast, and we believe that the growth potential is the value in this acquisition more so than cost saves.

(Operator Instructions) Our next question comes from Kevin Fitzsimmons of Hovde.

Just more of a broad top-level question on the margin and I guess this might be more of a move point once we have the deal but -- or the deal is in there. It seems like looking back at that margin chart that you all have on, let's see, I believe it's on Slide 8, down the lower left. It seems that this -- we're really getting the reported margin and the core margin starting to get closer and closer together. So Louis, just wondering how we should think about that trajectory. Is that in terms of the convergence, when it happens and how it happens in terms of was it more likely that the core margin moves up toward the reported margin? Or does the accretion wane quicker and the reported moves closer to the core margin?

Kevin, we've been doing a lot of work on that projection. We have, obviously, a Fed rate increase in December then one in March, and it's kind of readjusted the inflection point with the core margin plus the reclass of some of the loans and the acquired loan portfolio that we talked about. And then the minimal size of the acquired loan portfolio has decreased. So I'm going to ask Tom Owens, who's done that work, to add a little color. If you would, Tom?

Sure. So Kevin, as you noted, those -- the 2 reported margins that continue to converge with the run-off besides the acquired loan portfolio as well as the yield associated with it, we are getting closer to stability. Our internal projections are that they will continue to converge but not quite total convergence, but really close here over the next year or 2. The other related point is that we're pretty close to the point now where total NII should be going up, may well be going up year-over-year as the growth in the core earning assets and the core net interest income now finally overcomes the headwind from the payoffs of the acquired loan portfolio.

Just one addition. Gerry, with the deal closed and I'm sure now you have to focus on integration for a while, can you give us a sense for how the pace of conversations out there is going with potential sellers, whether that's something that seems -- you seem more optimistic, less optimistic versus 3 months ago?

Thanks, Kevin. As you mentioned, yes, we've closed the transaction from a legal or regulatory standpoint. Integration, we anticipate by June, we will fully convert their systems and a lot of training already taking place. And of course, much of the work, we've already moved past. So clearly, a focus on looking at other opportunities that may be available. As far as conversations, I think the movement in stock prices in general and the financial sector has caused a lot of people to rethink, some from the perspective of there's valuation there that hadn't been there in a long time. We talked at the last quarterly meeting about the 4 things that could really help justify this increase in valuation: the change in the corporate tax rate; economic stimulus through government spending; less regulatory costs; and then finally, a steepened yield curve. Quite honestly, there -- none of those things we see have really occurred yet. So that side of it, the higher valuation and really nothing has changed significantly has got people thinking about maybe it's time to move. So I would say there's good conversations, a different type of conversation. And we feel like our capital position has improved to a point that we'll be ready for the opportunities that hopefully we can uncover. I don't know if that was helpful or not but that's kind of where we are.

(Operator Instructions) There appear to be no further questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Gerry Host for any closing remarks.

Thank you very much, operator. We're very pleased that you joined us this morning. We're excited about our first quarter. I feel like we have so much positive momentum in the company and all areas of the company, and we'll work very hard to continue this momentum forward.

So again, thank you for joining us, and we look forward to our next second quarter results in our July call. Thank you and have a great day.

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