Trustmark Corp (TRMK) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Trustmark Corporation's Second Quarter Earnings Conference Call. (Operator Instructions) As a reminder, today's 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 second quarter earnings release as well as the slide presentation that will be discussed on the 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 the 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 Gerry Host, President and CEO of Trustmark.

Thank you, Joey, and good morning, everyone, and thanks for joining us. With me this.

morning are Barry Harvey, our Chief Credit Officer; Louis Greer, our Chief Financial Officer; and Tom Owens, our Bank Treasurer.

We had a very solid quarter in the second quarter. Although I'll tell you there was a little bit of noise and hopefully, we can help clarify that as we go through this presentation. We've reported net income of $24 million or $0.35 per share in the second quarter. There were several nonroutine items I'd like to call to your attention. First, we terminated our defined benefit pension plan during the quarter, which reduced after-tax income by about $11 million. Second, we had charges related to our merger with Reliance Bank in Huntsville, Alabama, and that reduced our net income by about $2 million. And then, in addition, we received nontaxable proceeds related to a life insurance policy we acquired as part of a previous acquisition that increased net income by about $5 million. Adjusting for these 3 items, our net income in the second quarter was $32 million or $0.47 per diluted share.

I'd like to briefly provide you with an update on our strategic priorities, which are on Page 3 of our presentation. We continue to make advancements regarding profitable revenue generation. Loans held for investments increased $291 million or 3.6% from the prior quarter and $891 million or 12% year-over-year. Revenue, excluding interest income on acquired loans and the life insurance proceeds, totaled $141 million, up 1.9% from the prior quarter and 6.4% from the prior year. FTE, net interest income, excluding acquired loans, totaled $100.7 million, up 3.5% from the prior quarter.

We completed, as I mentioned earlier, our merger with Reliance Bank on April 7, and had a seamless operational conversion and integration process. The estimated fair values of loans and deposits acquired were $117 million and $166 million, respectively. Our efforts to manage expenses and improve profits, these were clearly evident in the quarter as core deposits -- core expenses, which exclude ORE expense, intangible amortization, merger charges and pension plan termination expense remained well controlled. Core noninterest expense in the second quarter totaled $99.3 million and compares favorably to the $98.7 million in the prior quarter, particularly when you consider the additional ongoing operating expense from the Reliance merger that closed on April 7. We did experience an increase in nonperforming loans during the quarter. The increase was primarily the result of a single health care related credit moving to nonaccrual status. Other real estate, however, continued to decline. And recoveries exceeded charge-offs.

I'd now like to call on Barry Harvey to maybe discuss loan growth and credit quality in a little bit more detail.

Thank you, Gerry. Looking on Page 4, you can see that we had continued strong diversified loan growth during Q2 as well as you can see year-over-year both from a type and a geographical standpoint. We're very excited about that and pleased. The year-over-year growth kind of breaks down along the lines of CRE, it's about 53% of that growth; C&I, 19%; public finance, about 15%; and then some owner-occupied real estate was about 4%. So as indicated, it's well diversified as it relates to the various product types. Our energy book was pretty steady during the quarter. We had a reduction in the exposure, couple of loans paid off and moved out of the company. From an outstanding standpoint, it was fairly flat. It still remains a modest part of our overall book at about 3% of outstandings.

Looking on to page 5. As Gerry indicated, we did have one large new nonperforming credit of roughly $14 million. So, therefore, all of the increase of $12.8 million is attributable to that one credit. It is in the health care area and specifically, it's in the long-term acute-care hospital, management and owning type of entity. We unexpectedly had a Chapter 11 bankruptcy filing. Therefore, once we dug into that a little bit, we made the determination that the credit should be a nonaccrual. Therefore, we moved it there. From a reserving standpoint, we still have the pool reserves associated with that credit as a substandard credit, and then we'll go ahead and true that up as we get into the latter part of Q3, once we get some updated values.

As it relates to ORE, that's a very positive story that we had a reduction of $6 million during Q2. We sold $8 million worth of property, and had a -- and we had a gain on sale of roughly $1 million on those $8 million worth of properties we sold. We're very pleased with that. Gross charge-offs, obviously, are benign, had some nice recoveries. Therefore, we're net recovered for the quarter. Overall loan loss reserve remains adequate, picked up 1 basis point this quarter, but it just remains in line with what we believe to be the risk embedded in the portfolio today.

If we look over on Page 6, you can see on our acquired loans, we had a yield of 7.96%. A little bit of that is produced by a few recoveries we had of 1.2% of that 7.96%. We do expect to see our yields going forward in the Q3 to be in that 5.5% to 6.5% range for our acquired book. During Q3, we also expect to return back to may be a $20 million to a $30 million reduction in outstandings. We did, obviously, trend up this quarter by $97 million as a result of the Reliance acquisition, which added in a $170 million at the time of the consolidation. But we also continue to see some paydowns and payoffs, and that netted out to be $97 million increase for the quarter. Gerry?

Barry, thanks for the update on the -- on loan growth and credit quality. One of our greatest strengths is our low-cost core deposit franchise. And I believe that it will be a distinguishing factor in a rising rate environment and thought we would go into a little bit more detail about where we are with our deposit base. So I'd ask Tom Owens if he could talk about our deposits and the net interest margins.

I would be happy to Gerry. Turning to Page 7. Total deposits increased $319 million or 3.2% during the quarter. Excluding the Reliance merger, deposits increased $153 million or 1.5% from the prior quarter. We continued to maintain a favorable mix of deposits with 30% noninterest-bearing deposits and roughly 60% of deposits are in checking accounts. Our cost of deposits rose 4 basis points during the quarter to 20 basis points, which represents an effective deposit data of about 16% relative to the Fed's March rate hike.

Let's turn our attention to revenue on Page 8. FTE, net interest income, totaled $107 million in the second quarter, up $4.5 million or 4.4% from the prior quarter, which resulted in a net interest margin of 3.49%, unchanged from the prior quarter. Excluding acquired loans, the net interest margin was 3.37%, down 1 basis point from the prior quarter.

Louis will provide an update on noninterest income.

Thanks, Tom. Continuing on Slide 8 on noninterest income. You can see our diversification in the chart there. And I'll tell you the total noninterest income equals $50.2 million in the quarter, but when you exclude the life insurance proceeds, we had $45.3 million in the second quarter, a slight decline from the previous quarter of about $700,000. The primary driver of the decline was decreased mortgage hedge ineffectiveness. Still though, our mortgage business posted a really strong quarter, generating revenues of $9 million. The production in the quarter totaled about $373 million, up about 23% from the prior quarter.

Now let's turn to Page 9 and look at noninterest expenses. Noninterest expense remained -- as Gerry mentioned earlier, remained very well controlled with routine noninterest expenses that exclude ORE and amortization intangible and the onetime charges, as Gerry mentioned, of $99 million -- a little over $99 million in the second quarter. We've continued to prudently manage expenses along with revenue growth experienced during the quarter. We resulted in an efficiency ratio of slightly under 65%. While we are pleased with the progress to date, we will remain focused on expense management. We will continue to realign branches and delivery channels, and make investments to enhance our customer experiences.

And as you can see on Page 10, we have ample capital to support growth and are focused on the most attractive methods of capital forming, whether that be through loan growth, dividends or repurchase of stock. So Gerry, back to you.

Louis, thank you. At this time, first the discussion we've had to go over the second quarter results has been helpful. But at this time, we'd like to open it up for any questions that you might have.

(Operator Instructions) And our first question today comes from Brad Milsaps from Sandler O'Neill.

Louis, maybe I could just follow up maybe on some of the expense commentary. I know you got a lot of moving parts heading into the third quarter. I know when you announced the Reliance acquisition, you said you're going to have -- make some investments there. So there might not be a lot of cost savings, but I'm sure you'll get some. And then you've got the pension piece. Just wanted to get a better sense of if you feel like you can kind of hold expenses at this level? Or do you have the ability to take that lower over the back half of the year, the core number?

Brad, I will tell you that the core number for the quarter is a little over $99 million. But I'll tell you, we acquired Reliance Bank on April 7, so we still have some additional expenses that -- to occur related to a fully loaded for the quarter relative to last. And I'll tell you in the third quarter, we do have seasonal revenues in our insurance area because of particular line of business. We've had the high watermark. So we do expect commissions to rise in the third quarter. And I'll tell you we expect to have a little bit higher salary benefit run rates, specifically because of few increases in the number of headcount as well as some incentive accruals or benefit accruals. So I expect that we're going to be able to keep that run rate around $100 million, maybe around a $101 million as we move forward. Again, excluding ORE and amortization of intangible. So I expect that $100 million mark for core expenses in the third quarter.

That's great. That's helpful. And then maybe, Tom, just a little more color maybe on the margin. This quarter, were there any big impacts of loan fees or prepayment penalties or anything like that, that would've affected loan yields? And I appreciate the discussion around the total cost of deposits, but some of the -- look like some of the interest-bearing categories are maybe up a little bit more. Just any color around kind of customer -- demand customer behavior in terms of kind of what you're seeing on the interest-bearing side of things?

Yes, thanks, Brad. So essentially what we experienced -- let me back up, we think about the guidance we gave back in January for the year where we were projecting very modest compression in core net interest margin, call it mid-single-digit basis points. And we talked about how there may be some upside to that to the extent that our realized deposit betas came in lower than modeled. That is essentially what you've seen year-to-date. And so basically whether you look at it year-over-year or on a linked-quarter basis, you see increases in loan yields basically being offset by increase in deposit cost. I can tell you that as you would intuitively expect as far as realized betas, personal, consumer betas are very low; commercial, larger accounts are somewhat higher; and then the largest betas, we're actually experiencing are in public fund deposit category, although that's a relatively small portion of the deposit base. So in terms of guidance going forward, not much has changed in terms of the composition of the balance sheet. So it continued to be the case. We're projecting it relatively flat to modest decline in core net interest margin. But again because of earning asset growth of mid- to high-single-digit core earning asset growth year-over-year, you should expect to continue to see mid- to high-single-digit core NII, net interest income, growth year-over-year.

Our next question comes from Michael Rose from Raymond James.

I just wanted to dig in a little bit to the health care credit. I know you gave some color. But can you just remind us as to what the size of the health care portfolio is at this point and if you have any broader concerns about the health care space at this point?

Michael, this is Barry. Let me give you a little bit more of color on the credit itself. Here again, this is a private company who's in the business of managing and owning these long-term acute care hospitals. We were monitoring their credit, obviously, like all the credits in the portfolio very carefully. This was very much something that came out of the blue for us. We know they're -- we're very familiar with the regulatory changes in the environment, the various areas within the health care industry are facing, and their challenges and benefits to changes are all different. But in this particular case, this was one where there was really no early indicators from a financial standpoint of any distress and, therefore, the filing was a little bit of a surprise to us. It is a participation we got 4 of the banks -- 3 of the banks besides ourselves involved. And when the filing occurred, we just got to the bottom of what we could find out about why it happened. Now we're moving to the bankruptcy process and there will be hearings, as you can imagine, starting up next month. And we'll be very actively involved in that and it -- and then we'll just see where it goes from there. We will be getting updated values on all of our real estate as part of the impairment process that will formally be done in Q3. And as I mentioned earlier, we did retain all of our reserves that came through our pooling process as a substandard credit. So we feel like we were in pretty good shape from a valuation standpoint, but as we get the updated values, we'll be able to determine for sure where we are and, of course, either release reserves or use reserves as we right -- as we adjust the credit to the appropriate size. As it relates our health care book from an outstanding standpoint, we're about $547 million and that's going to be about 41% of risk-based capital. Having said that, it's very diverse in terms of the types of health care customers we have from nursing home facilities to physician offices, just your routine typical, general medical and surgical hospitals, specialty hospitals similar to ones we just talked about there, and they want particular credit. Then there's going to be a number of other type of emergency-type centers that are involved in that mix. So some of those have been held by changes that have occurred over the last several years, some of them have been impacted more, but most -- all of our customers have done a really good job. Just like in the energy space, our health care customers have done a good job of adjusting their expense base relative to the changes in reimbursement and things of that nature. So we're very comfortable. We took a little look into the portfolio, specifically after this one popped up, looked at about 55% of the exposure, about 58% of the outstandings on the higher larger credits. Didn't see anything that concerned us, didn't make any great changes, didn't make any accrual status changes. So we did look at it to see if there was something we were missing as it related to the one that popped up, and we didn't see anything to that effect. What we saw was companies who were running their business and taking the appropriate actions based upon changes in their industry just like we have in the banking industry as well as the energy sector. So we felt very comfortable with our health care book.

That's great color. Maybe just one more for me. You guys loan growth this quarter was pretty strong. Can you talk about, as we look forward, kind of where your pipelines stand at the end of the quarter versus where there were maybe at the end of the first quarter. And it also looks like ex-Reliance -- ex the addition of Reliance, you guys definitely added some FTEs this quarter. Just wanted to see if any of those were revenue producers and how that would play for loan growth as we think about in the back half of the year?

Barry, I want you to comment on loan growth, and I'll comment on the additional FTE.

Sure. I'd be glad to, Gerry. And as mentioned earlier, Michael, what we are very pleased about especially this quarter and even year-over-year and really since we started seeing some real uptick and growth back the very beginning of '14 is the diversity in the portfolio. This -- in Q2, we saw, on the C&I side, about $94 million worth of growth. That's an area where, like all banks, we would love to see growth in that category and preferably well priced, but you can't always have both. But nonetheless, we have -- we did see good solid growth on the C&I side. On the CRE side, we continue to see good opportunities. We continue to be very selective, and especially in certain categories. Obviously, multifamily is one as well as hospitality that we're very selective and -- but the quality of the deals remain very solid. The pricing is actually improving on the -- in the CRE opportunities we're seeing. So we're very pleased with that, and we're pleased with the diversity of the geographical makeup of the increases we saw in Q2 as well as year-over-year. We are seeing some opportunities in some public finance areas throughout Mississippi and Alabama, and then we're continuing to see opportunities on the construction side as well as the existing side of CRE.

And then Michael, as far as the FTE hedge, you're exactly right. The hedge has been in revenue-producing areas. 3 areas primarily. First, the mortgage company. We've added new originators and some processors, but primarily originators in the Alabama and the Florida markets. Next, in the insurance area, we've been adding new producers and existing producers in terms of bringing them in to the company. And as you know, in that business, most businesses, most insurance agencies are setup with some noncompete, so it takes a couple of years to get through that. But as we look at pricing multiples for insurance agencies out there, they are relatively high if you compare them on a historical basis. So we've chosen to grow through adding and hiring both existing and new brokers to that business. And then the third area is in the lending area, where we have continued to add CRMs in certain markets where we see growth possibilities that we just don't have the lenders in our existing area. So those are the 3 areas. On the other side of the fence, we'll continue to try to find ways to improve productivity and improve our processes, so that we can reduce some of the operating expense areas. And then also continue to look at our branch distribution network to see if there are opportunities to improve that, yet continue to protect this customer -- this customer and deposit base we have.

Thanks for the color. Maybe just one quick one. What do you guys expect the tax rate to be the for rest of the year?

This is Louis, Brad. I think we expect that for -- Michael, I'm sorry, excuse me. I expect that tax rate to stay in the low 20s, somewhere around 20%, 22%.

The anomaly was caused by the life insurance proceeds, which was tax exempt that we had in revenue. So that's what the drop it for the quarter.

Yes. In addition, Gerry, I think we reinvested in tax credit and added to that reduction in the effective tax rate as well. I think we have tax credit benefited by couple of hundred thousands.

But it seems going back up in the low 20s.

Low 20s.

(Operator Instructions) Our next question comes from Brian Zabora from Hovde Group.

Just a question on the loan growth, again. The C&I growth that you [Audio Gap] this quarter was it new credit extensions? Or did you see any pickup in line utilization?

Brian, this is Barry. It was a combination. We did see some -- we did see quite a bit of new opportunities that were fully funded as they came on the books, and then we did see some funding up of some other credits that we -- that were already existing facilities. But it was well diversified in terms of industries, industries that we do routine business and are very familiar with. So it was pretty much Mississippi, Tennessee and Alabama on the C&I side that drove the growth that we experienced. But we were very pleased to see that pickup. First quarter, we didn't see a lot of growth on the C&I side and that really was the same in the fourth quarter of '16. So to see it pick up, we were very pleased with that and hope that trend will continue.

Great. That's great. Okay. Another question on the other real estate owned. You had nice dispositions there this quarter and some gains. If you -- can you apply the pricing that you saw this quarter and does that imply maybe some future gains in the coming quarters?

And, I guess, from that perspective, what we see and what we've kind of always looked at is that net number being in that $5 million range. So far this year, we've seen about $2.2 million worth of net ORE expense. In this particular quarter, Q2, we saw a little reduction in expenses, and we saw a little pickup in the gain on sale versus Q1. So between the combination of the 2, that resulted in the -- basically the improvement by about $1.3 million, $1.4 million quarter-over-quarter. We would continue to expect to see some opportunities for some gains on sale as we go out through the rest of the year, and we're very hopeful that the expense side as we began to continue to lower the amount of ORE recurring the expense side will come down as well. So I think we got it in the past around a net ORE expense of around $5 million. We're about $2.2 million, $2.3 million through the first 6 months. So I think we still feel comfortable with that, but we, obviously, are going to work hard to see if we can pick up some additional gains on sale and keep reducing the expense side.

(Operator Instructions) And ladies and gentlemen, I'm showing no additional questions. I'd now like to turn the conference call back over to the speakers for closing remarks.

Thank you. This is Gerry Host, and let me say thank you to everyone who joined us this morning. We appreciate your interest in Trustmark and our opportunity to review our second quarter results. We look forward to discussing third quarter results in late October. So until then, again, thank you for your interest in Trustmark, and we will see you there.

And ladies and gentlemen, that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.