Trustmark Corp (TRMK) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's Third Quarter Earnings Conference Call. (Operator Instructions) As a reminder, today's event 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 third 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'd like to introduce Gerry Host, President and CEO of Trustmark.

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

Trustmark reported net income of $35 million or $0.51 per diluted share in the third quarter. I'd like to briefly provide you with an update on our strategic priorities, which are on Page 3 of our presentation. We continued to make advancements regarding profitable revenue generations. Loans held for investments increased to $111 million or 1.3% from the prior quarter, and $908 million or 12% year-over-year. Revenue totaled $148 million, about 1% from the prior quarter and 4.3% from the prior year. Our FTE, net interest income totaled $109 million, up 1.8% from the prior quarter. Efforts to manage expenses and improved processes were clearly evident in the quarter as core expenses, which exclude ORE expense and intangible amortization, remained well controlled.

Core noninterest expense in the third quarter totaled $100.7 million and compares favorably to the $99.3 million in the prior quarter. Credit quality continues to be a strength for Trustmark. Nonperforming assets decreased $6.5 million or 5.2% compared to the prior quarter. And recoveries exceeded charge-offs.

I briefly spoke to loan growth but would like to ask Barry to add some color to both loan growth and credit quality. Barry?

Be glad too, Gerry. Looking on Page 4, you can see our -- as Gerry indicated, our loans held for investment increased to $111 million during Q3 and that was $908 million year-over-year. Within that was categories, as you can see, the CRE, a combination of construction, nonowner occupied, other real estate secured, those all accumulated to about $142 million worth of growth. And then you can see, we also grow in other loans, about $41 million. Within the CRE growth, we had strong growth -- continued strong growth in commercial construction, Mississippi, Texas, Alabama, that's a continuing thing for us and has been since 2014.

Within the nonfarm, nonresidential, which is nonowner-occupied, you can see we have some migration out of construction on some stabilizing projects that were retail-oriented as well as assisted-living that migrated down from the construction portfolio. Then also, you can see in the -- that we have growth in other real estate secured that's going to be some multifamily projects that have -- getting to stabilize CO to move down into the existing category. And then on other loans, that's going to be a combination of health care, some gaming, these are going to be advances on existing facilities as well as some new business.

As it relates to the CRE, our levels of CRE remain well within the regulatory guidance of 72% on the construction and development, and 210% of the 300% on total CRE, so we have plenty of opportunity and room continue to grow in that category. Our energy book, while modest, we did experience a reduction in exposure this quarter of about $15 million. We're very pleased with that. We continue to see that our oil-field service customers are challenged in today's environment and we continue to monitor those carefully.

On Page 5, criticized, classified, past dues, net charge-offs, all remained at historical low levels and very positive. We do continue to focus in on our nonperforming assets, and we did see some nice reduction this quarter of $6.5 million, but that is a focus we continue to monitor carefully and address as we are able to. Provisioning levels were in line with our expectation, except for the fact that we had $1.1 million that we provisioned specifically for Hurricane Harvey of our $3.7 million worth of provisioning for the quarter. And then looking on Page 6, you can see the acquired portfolio totaled $284 million, it continues to work its way down. We had a reduction this quarter of $31 million. The yield is a combination of the coupon rates as well as recoveries we are fortunate to receive. That yield is going to be 8.78% overall with 1.8% of that relating to the recoveries that we had during the quarter. And then, typically, what we're going to expect to see, starting in Q4, is going to be a 6% to 7% yield and that's not considering any recoveries that may occur. We also expect to see a runoff in that acquired book during Q4 of around $25 million.

Great, thank you, Barry, and we would be happy to answer any additional questions that you might have during the Q&A session. But right now, I'd ask Tom Owens, our Treasurer, if he would discuss our deposit base and our net interest margin.

I'd be happy to, Gerry. Turning to Page 7. Total deposits decreased $192 million or 1.8% during the quarter, primarily due to growth in personal deposits being offset by seasonal declines in public funds. We have a favorable mix of deposits with 29% in noninterest bearing, and roughly 58% of deposits are in checking accounts. Our cost of deposits rose 5 basis points during the quarter to 25 basis points, while the cost of interest-bearing deposits rose 6 basis points, representing a beta of about 25% relative to the Fed rate hike in June.

Turning to Page 8. FTE, net interest income totaled $109 million in the third quarter, up 2% or 1.8% from the prior quarter, which resulted in a net interest margin of 3.47%, a decline of 2 basis points from the prior quarter. Excluding acquired loans, the net interest margin was 3.34%, down 3 basis points from the prior quarter and down 4 basis points from the prior year.

And now Louis will provide an update on noninterest income.

Thanks, Tom. Also on Slide 8, you can see our diversified noninterest income and total about $44.5 million in the third quarter, a decline of about $5.5 million from the prior quarter. While insurance revenues increased 6.7% from the prior quarter, it drove to $10.4 million. Mortgage banking revenues declined by about $4.5 million. That decline was a result of negative hedge in effectance in the third quarter of approximately $2.6 million and a negative fair value adjustments for loans held for sale of about $415 million included in the other net and mortgage section.

Looking at noninterest expenses on Page 9, you can see that they remained well controlled, with core expenses, as Gerry mentioned earlier, that excludes ORE and amortization, totaled about $100.5 million in the third quarter, in line with our guidance from the prior quarter.

We remain focused on expense management, expect core expenses to remain in line in the fourth quarter with the third quarter. We will continue to realign our branches, our delivery channels and make investments to enhance our customer experience.

Also on Page 10, you can see our capital position, very, very strong. We have ample capital to support growth and are focused on the most attractive methods to deploy that capital.

Gerry, turning back over to you.

Thank you, Louis. I am going to correct one thing. I think I heard you say, you said total noninterest expense totaled $100.5 million. $100.25 million...

$100.5 million, excuse me. Thank you, thank you. I apologize.

Just wanted you to be clear on that. No problem, Louis. Well, that's it, a very short presentation this morning, and I do trust, though, that this format's a little bit better for those of you listening. And that concludes the discussion portion of our third quarter financial results.

And at this time, would be -- we'd be happy to address any questions that you have.

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

It's actually Peter Ruiz on for Brad. I guess maybe just looking first at the NIM. Obviously, core NIM was down just a little bit this quarter. I mean, it seems like maybe deposit costs are, kind of, accelerating a little bit. Just, kind of, wanted to get an idea of what you guys are seeing in the markets and if you guys are specifically making any changes?

Peter, this is Tom, and thank you for the question. So a couple of observations I would make. First of all, the linked-quarter decrease of 3 basis points in the core NIM is actually more like 1 basis point when you consider just normal volatility of loan fee income as well as the day-count difference between the quarters. And when you look at it year-over-year, core NIM of 4 basis points is actually more like 3 basis points. In the year-ago quarter, we had some yield maintenance payments that we received on the investment portfolio. And so thinking about it on a year-over-year run-rate basis, the core NIM compression now is down to 3 basis points. If you think about the guidance that we gave coming into the year of mid-to-high single-digit compression in core net interest margin, with some potential upside depending on the pace of Fed tightenings and our realized versus model deposit betas, that's pretty much the way that the year is played out. We are now down 3 basis points core NIM on an apples-to-apples basis, year-over-year. And we are expecting that, that continued decline in compression, in margin will continue, and so I would say, currently in terms of guidance, if you think in terms of continued compression, very modest compression at that pace, again, with potential upside depending on, as we go into '18, the pace of Fed tightening and industry reaction in terms of deposit repricing. But in terms of our deposit betas, best we can tell, we're, kind of, middle of the pack. There's different ways to measure that, but if you look at our interest-bearing deposit betas year-to-date, relative to the change in the Fed funds rates, we are in the neighborhood of, say, 18% to 20%. And so that's below what's modeled. I would expect that will probably continue. If you look at second quarter, interest-bearing deposits up 6 basis points, that's the same rate of increase as -- I am sorry, the third quarter rate of increase of 6 basis points, that's essentially the same rate of increase as we had in the second quarter. So there's not really evidence there of an acceleration for -- in the increase of deposit betas. As you dig into it deeper and look at the composition of deposits, there's been some change between personal, nonpersonal and public, but we're not seeing a very significant acceleration in the rate of change on deposit betas.

Okay, that's great. And maybe just -- is there any opportunity maybe with the loan-to-deposit ratio in the mid-80s? The slight core NIM compression is maybe some additional upside there with the possibility of driving that a little bit higher or...

Well, there is. I would expect that, that ratio will go higher, but as you can imagine, cost of deposits is only one aspect of relationships with our customers. And so, and as I said earlier, particularly with public fund depositors and some of the larger corporate depositors, that's where you're going to see your higher betas. And we're going to do what we have to do to remain competitive in the marketplace and retain those relationships.

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

Yes, just a question first on the nonaccrual you had last quarter, I think it was $14 million for nonaccrual. Any update on that and just any thoughts around timeline as far as potential resolution?

Brian, this is Barry. I'll give you a quick update on that. We continue to work through, as you know that was a chapter 11 that we're working through. And we have gone through the process of getting updated values on all of the collateral because it is collateral-dependent. We've also -- to determine the appropriate amount of additional reserve that was needed based upon those updated values, and that's reflected in our provisioning and in our reserves that you see as of Q3. So we've gone through that process, we continue to work through the bankruptcy court and to a, some type of plan coming out the other end. Hopefully, we'll get there in Q4 and be able to update you then, but what we have done is, we have made sure that the reserve on that impaired loan is appropriate at this point based upon updated collateral values. Otherwise, it's just, kind of, business as usual working through the bankruptcy process.

Okay. And then just wanted to see if there was any additional impact from the storm regarding [loan] fees or loan production or anything along those lines besides debt provision that you talk?

Brian, this is Barry again. At this point, I think it's a little -- still too -- a little too early to tell. Obviously, there is a reduction in the borrowing activity to some extent. There's a couple of different aspects of it. We have seen, obviously, when we surveyed our customers to check on them first and foremost, and then also to see where they were as it related to our collateral and any potential damage and whether it was covered by insurance or not, that was applicable. But beyond that, we have seen some of our areas within the marketplace improve as a result, for example, multifamily is one where you see a lot of leasing up of excess capacity. I think they have reported there was around 70,000 units available going into the storm, and there was roughly 60,000 units damaged during the storm. So obviously, those people migrated to some of the -- and took up some of the vacancy as well as individuals and their homes where they had damage. And it's going to take a while to repair, and they've had to make other living arrangements. So we are seeing positives and negatives as it relates to the storm outside of our assessment of any damage to our collateral value. So I think it's a little bit of a mixed bag at this point. We continue to be actively calling in with our customers and new -- potential new customers in the marketplace as well as calling throughout the state of Texas with our Houston Lending Group, both in Dallas-Fort Worth and Austin, we're very active from a CRE perspective there.

And this is Gerry. I'll comment on the deposit side of this. And that is that Harvey really was the one storm that affected Houston. Our deposit base there is one that is more business than retail-oriented, so we really don't see much impact at all on deposit fees associated with the Houston base. And as far as the other 3 storms, most of which affected the East Coast, we see very little, if any, impact at all, mainly because our deposit base there is primarily in the Florida Panhandle, which was, for the most part, unaffected by any of the storms.

That's very helpful. And just lastly, C&I was down a little bit. Did you see line utilization or it was a seasonality? Just any thoughts around the C&I loan book?

Brian, this is Barry again. I think it's combination of those things. There's some seasonality there and there was just -- and we did have a couple paydowns and payoffs that were not anticipated, specifically. So we don't expect that to be an ongoing trend. We've got a very experienced group of C&I lenders throughout the Corporation, actively calling. The amount of opportunities in the C&I space, specifically during 2017 has diminished than what we saw in '15 and '16. Obviously, what opportunities, there are, are very competitive and we understand that. So we're just aggressively calling. I think the opportunities will, kind of, come intermittently. We have seen some opportunities here locally in the Jackson market, to move some noncustomers that we've been calling on for a number of years -- into the bank, and that's been very exciting. And that's full-service type of customers, where we're moving in deposits, treasury management and other type of services, where we can generate some good fee income. So there are bright spots, but we -- but it is a very tough environment today.

(Operator Instructions) Our next question comes from Matt Olney from Stephens Incorporated.

This is Matt Sealy on for Olney. So looking at a next quarter as those public funds start to come back on, do you expect any sort of material upward pressure on funding cost as those come back?

Tom, I ask you to answer...

Well -- this is Tom. Yes, because of the mix change, you will see some increase from that. But that's about all, and so when you think about the math on that, it's -- I would not expect that to be a significant contributor. This is just normal seasonality, I think. Again, talking about the betas and the realized beta in the third quarter versus the second quarter and, sort of, the changing dynamics there. The second quarter was very much driven by public less so in the third quarter. Still the primary driver, but more of the large corporate is starting to kick in a little bit. And so I don't think that the seasonal inflows into the fourth quarter here and into early part of next year will be all that material in terms of driving up deposit cost. But clearly, that is a factor.

Okay, great. And on expenses, is 3Q a good run rate? And do you guys still expect the core expense number to be, kind of, that $100 million to $101 million range you've outlined in the past?

Matt, this is Louis here. I expect that the run rate for the fourth quarter would be very consistent with the third between $100 million and $101 million.

And ladies and gentlemen, at this time -- (Operator Instructions) And I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Thank you very much. Thank you for being with us this morning everyone. We appreciate your interest in Trustmark, and we look forward to sharing our fourth quarter and our full 2017 year results in January of 2018.

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