Trustmark Corp (TRMK) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Trustmark Corporation's fourth quarter earnings conference call. (Operator Instructions) As a reminder, today's call is being recorded.

It's 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 fourth quarter earnings release as well as the slide presentation that we'll be discussing 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'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, we'll turn the call over to Gerry Host, President and CEO of Trustmark.

Thank you, Joey. Good morning, everyone. Thank you for joining us. With us this morning is Louis Greer, our Chief Financial Officer; Barry Harvey, our Chief Credit Officer; and Tom Owens, our Bank Treasurer.

Trustmark reported net income of $15.8 million or $0.23 per diluted share in the fourth quarter. Adjusting for onetime charges related to the deferred tax asset valuation, Trustmark earned $32.7 million or diluted earnings per share of $0.48, which represents a quarter-over-quarter increase of 11.6%.

For the full year, Trustmark's net income totaled $106 million, which represented diluted earnings per share of $1.56. Again, after adjusting for onetime and nonroutine charges, we earned $131 million or diluted earnings per share of $1.92. 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 generations. Loans held for investments increased $163 million or 1.9% from the prior quarter and $719 million or 9.2% year-over-year. Revenue totaled $148 million, relatively in line from the prior quarter and up 5.3% from the prior year. FTE net income totaled $109 million, up 0.2% from the prior quarter. Efforts to manage expenses and improve processes were evident in the quarter, as core expenses, which exclude ORE expense and intangible amortization, remained well-controlled.

Core noninterest expense in the fourth quarter totaled $100.8 million, in line with the prior quarter of $100.7 million. Credit quality continues to be a strength for Trustmark. Nonperforming assets decreased $6.8 million or 5.8% compared to the prior quarter.

I briefly spoke to loan growth, but I'd like to ask Barry Harvey to add some color to both loan growth and credit quality. Barry?

Be glad to, Gerry. Looking on Page 4 of the slide deck dealing with loan growth, as you can see, during the Q4, we had loan growth of $163 million, and year-to-date, $719 million. So we're very pleased with the loan growth we were able to achieve in both Q4 as well as for the year 2017. About 2/3 of that growth year-to-date was from CRE and 1/3 was from C&I and public finance, those being our main 3 areas of growth within the portfolio. The growth was diversified as it relates to markets. The energy book, we're glad to say, we saw some decrease in the energy book throughout the year. Year-to-date exposure decreased $60 million, whereas the balances year-to-date decreased $45 million. We were pleased to see the reduction in that particular portfolio.

As it relates to credit quality, we -- the various categories you would normally think of: past dues, criticized, classified continue to be at historical low levels. Nonaccruals, we had 3 nonaccruals during the quarter, which were about $38 million that we were able to work down, other nonaccrual credits during the year, and that led us to about an $18 million increase in nonaccruals year-to-date. We felt pretty good about that, given the 3 large ones that occurred in the first quarter, second quarter, and then one this quarter as well. And so overall, I think we feel positive about the progress we've made, given the 3 that increased.

ORE was a positive story as well, down $19 million year-to-date. NPAs, given the increase in the 3 large nonaccruals ended up being flat for the year, which we felt like was a positive. Net charge-offs year-to-date were $9.6 million. $9.4 million of that came from 2 credits that we charged down this quarter. So outside of those 2 charge downs, basically, net charge-offs for the year were about $200,000. So we're pleased with the overall charge-offs for the year.

Looking at the acquired book, the book is down to $262 million as of 12/31. The Q4 yield was 9.27. Going forward, we always talk about the yield that's controllable, which we expect that to be about $6 million to $7 million -- 6% to 7%, going forward, starting in Q1 of 2018. We never can quite account for what we may come up with as far as a recovery here and there, which will juice the yield as it did in Q4. The runoff we would anticipate that being in that $15 million to $25 million range starting in Q1 of 2018.

Great. Thank you, Barry, appreciate your comments. We believe that one of our greatest strengths is our low-cost core deposit franchise. Tom, if you would please, give us a little color on deposits and the net interest margin.

Happy to, Gerry. So turning to Page 7. Total deposits increased $346 million or 3.4% during the quarter. This was primarily driven by our seasonal upswing, normal seasonal upswing in public fund deposits. Total deposits were up $521 million or 5.2% from the prior year. We continued to maintain a favorable mix of deposits at about 20% -- 28%, excuse me, in noninterest-bearing and 59% of deposits in checking accounts. So our cost to deposits rose 3 basis points during the quarter, while our cost of interest bearing deposits rose 5 basis points, representing a cumulative beta for the year of 27% relative to the Fed's 3 rate hikes.

Turning to our attention to Slide 8. Net interest income totaled -- FTE totaled $109 million during the quarter, relatively flat from the prior quarter, which resulted in a net interest margin of 3.48%, an increase of 1 basis point from the prior quarter, and excluding acquired loans was 3.35%, core net interest margin of 3.35%, up 1 basis point from the prior quarter and up 4 basis points from the prior year.

And now Louis will provide an update on noninterest income.

Thanks, Tom. As you can see on the table on Page 8, noninterest income totaled about $44 million in the fourth quarter and about $185 million for 2017. For '17, that represents an annual increase of 6%. For the linked quarter, noninterest income was slightly down principally due to seasonal declines in insurance for the quarter. It was offset by increased mortgage revenues, due primarily to lower hedge and affecting us through the quarter. I'll remind you, Trustmark's noninterest income remains very diversified, and continues to represent 30% of total revenues.

Let's turn to Page 9, and talk about expenses. As Gerry mentioned earlier, our core noninterest expenses remain very controlled with routine noninterest expenses totaling about a little less than $101 million in the fourth quarter, in line with our prior quarter, and with our previous estimates we gave you. 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 that enhance our customer experiences.

As for taxes, I'd like to point you to Note A of our financial stat sheet for the impact of tax reform that occurred in the fourth quarter. In addition, the elimination of a previously established deferred tax valuation allowance.

I will remind you that, as you can see on Slide 9, that our future effective tax rate, beginning in 2018, is expected to be 12% to 14%.

And on Slide 10, I will mention capital from a capital perspective. We have ample capital to support organic growth, and are focused on the most attractive methods of deploying capital. So Gerry?

Thank you, Louis. I trust that this brief discussion of our fourth quarter financial results, along with our press release and stat sheet that we released yesterday afternoon has proven helpful to you. And at this time, I would be glad to address any questions that you have.

(Operator Instructions) And our first question today comes from Catherine Mealor from KBW.

I wanted to start on the balance sheet. It looks like you all lowered your securities portfolio a little bit this quarter. Can you give us a little bit more color on that and your outlook for further reductions in that portfolio?

Sure. I'll ask Tom Owens if he'll address that, Catherine.

Catherine, thank you for the question. So yes, we did reduce the portfolio somewhat during the fourth quarter. When we looked at the market environment, the prospects for the Fed continuing to hike and the flattening of the yield curve, reinvestment of securities cash flows became a less attractive form of capital deployment. The other thing to keep in mind is we have carried a somewhat larger disproportionally large investment portfolio relative to peer, and that made a lot of sense during the low-for-long interest rate environment. But as we've continued to absorb excess liquidity with robust loan growth, that combined with prospects for further Fed tightening and yield curve flattening has caused us to reconsider for the time being continued reinvestment of securities cash flows. So that's an actively monitored, tactical decision. And the decision as to whether we continue to allow the portfolio to run off or not will very much be a function of what happens with the market and interest rates and the economy and on our loan growth.

Got it. So is there a percentage of securities to average earning assets that you think is appropriate as a goal over the next, call it, year or so?

So if you look at our securities to earning assets today, it's about 27%. If you look at the peer median, it's about 22%. And again, us carrying the larger securities portfolio is a function. That's sort of a legacy function of us. You look 4 years ago, for example, we had a loan-to-deposit ratio of 67%. Today, it's about 87%. What we've done is grow the rest of the balance sheet around the securities portfolio. But now that we have a loan-to-deposit ratio that's in the mid-80s, combined with the other things I discussed in terms of what's likely to happen with interest rates and the shape of the yield curve, it may make sense for us to continue to allow these securities portfolio to run off.

Just to give you an example, we cash flow about $50 million a month from these securities portfolio. So annually, that's about $600 million. So if hypothetically, we were to allow the securities portfolio to run off for the remainder of the year, we'd be $500 million to $600 million lower. And if you do the math, that would take us from 27% of earning assets down to about 22% of earning assets, which is about to peer median. So that's the way to think about it. Mathematically, the decision has not been made yet, and as I've said, it's an actively monitored balance sheet management decision that we're making.

Very helpful. And then one follow-up on the margin. Can you give us -- is there any impact that you expect from the FTE adjustment with the lower tax rate for your margin, and then do you have an outlook for your margin maybe kind of -- as we look how the securities strategy may impact it, and then maybe even outside of that just from kind of core margin outlook?

Absolutely. So just the one-off effect of tax reform and the lower effective tax rates, the math on that turns out to be about a 6 basis point compression in our reported core net interest margin. Again, that's sort of geography. Now you make it up from the lower tax rate, lower in the income statement. With respect to trends in our core net interest margin, you think about the guidance we've given the last couple of years, which is basically very modest compression in core net interest margin with some potential upside, depending on how realized deposit betas compare to modeled projected deposit betas, and that's what's come to pass, right. If you look at for the full year 2017, core net interest margin of 3.36% versus full year 2016 at 3.37%.

That's essentially what's come to pass. It continues to be our guidance that you would see that type of dynamic. So in terms of loan growth, LHFI growth, we're projecting similar growth to what we've had over the last couple of years. We're projecting very modest dilution to core net interest margin with some potential upside from actual realized deposit betas. And so you do the math on all that, and you get to a 2018 projection that looks similar to the 2016 and '17, which basically resulted in mid-to-high single-digit growth in both earning assets and core net interest margin.

Now obviously, if we did continue to ratchet back on reinvestment and securities cash flows, that becomes a headwind to earning assets growth, which if you do the math on that, then that puts you into the, I'll call it, low to mid-single-digit growth in earning assets. But again, that's a tactical decision that will be evaluated in May going forward. We're not necessarily guiding to continued run-off of the securities portfolio. But it is possible, depending on how the other dynamics of the balance sheet and the economy and interest rates come to pass.

Our next question comes from Peter Ruiz from Sandler O'Neill.

This is Peter, on for Brad this morning. I just wanted to see if we could first maybe touch on your outlook for loan growth in 2018, and maybe what the pipeline kind of looks like today? And if there's maybe any opportunity to accelerate beyond the current mid-single-digit net growth rate and maybe into a higher single digit?

Okay. Peter, I'll ask Barry Harvey if he'll answer that question.

Sure, Gerry. Peter, I think that our goal is high single digit for 2018. We've got to cover some runoff that is from the acquired book in order to get there, but we anticipate achieving that goal of high single digits. We've got a meaningful amount of CRE that is on the books today that we'll fund throughout 2018 that will help us get there. And then we do have expectations of continuing to grow in both C&I, public finance as well as our consumer areas. So that is our expectation for 2018 is to be in that high single digit net of the runoff.

Great. Appreciate the color. Maybe turning to the acquired loan reserve. The negative provision here for that book has been pretty consistent over the last several quarters. But it's obviously shrinking to almost a de minimis amount in terms of the acquired loan reserve. What are you guys thinking about what that looks like for the net provision and where you want that to end up maybe by year-end?

Peter, this is Barry again. The reduction that has occurred quarter-over-quarter has -- that's run its course through Q4, so there will be no other consistent reductions coming out of the acquired loan reserve. So what you would anticipate on a go forward basis would be any need for additional reserving on the acquired loans just like you would for the nonacquired portfolio. So the reserve will, based upon changes and credit quality within that nonacquired book. You'll see changes just like you will with recoveries, et cetera, no different than what you see with -- the acquired and nonacquired are going to function the same way on a go forward basis. It's going to be based upon the changes in credit quality, and then, of course, on the acquired -- on the nonacquired side, it's going to be based upon loan growth that's going to drive the provisioning.

And Barry, I would add too that the BankTrust portfolio has diminished tremendously in the past. Most of that muscle left is Reliance, and so...

That's right.

The reevaluation of the cash flows for BankTrust is almost to the end...

Yes, just to put it in perspective...

Most of those losses were in line.

That's right. We're down to $262 million portfolio for acquired, and of course, when we moved to Reliance then, it was around $118 million. It's what we moved in at time of acquisition. So as Louis said, the majority of what we have remaining in that book is going to be from the recent acquisition.

(Operator Instructions) Our next question comes from Jennifer Demba from SunTrust.

Question on Huntsville. Obviously, they've had a big announcement since you've completed your acquisition last year. Just wondering what that means for your loan growth there. And then my second question is on details on the net charge-offs you had during the fourth quarter.

Okay, Jennifer, I will -- this is Gerry, and I'll address the Huntsville acquisition. One of the reasons we found, Huntsville, the market and the bank, to be attractive to us, was that, number one, the bank had been around for quite some time. So it was a truly a core franchise in what we viewed as a market that had great growth potential, and that, as you alluded to, is beginning to play out.

So although it is a relatively small portion of our overall loan book, we view it as a market that had some really good growth potential and that had the gun to ramp up resources in that market, not only from a commercial lending perspective, but very much so from a mortgage perspective. So we did see really good opportunity there. At this point, it is a small portion of our growth, but it is one of those markets that has much higher potential for us. So we're adjusting resources accordingly. On the detail relative to the charge-offs, Barry, I'd ask that you address that question.

Glad to, Gerry. Jennifer, as we mentioned in the press release, we had 2 commercial credits that we charged down to value during the fourth quarter. One of them was the health care related credit that we've talked about previously that we actually moved to nonaccrual in the second quarter, got updated values, working with our other participants during the third quarter. And as we got the final piece of that in during the fourth quarter, we were able to write that down to value based on updated collateral values.

And so that was something we had reserved for in the third quarter, and actually took the write-down the value in the fourth quarter, and then the other one was a credit that, as we mentioned in the press release, that had been substandard for quite a while. During the quarter, we've got one other participant who actually leads the credit with us in this particular facility, and we made the determination that it should be on nonaccrual -- moved to nonaccrual. We had updated values on all the collateral, went ahead and wrote it down to value during the quarter. And those 2 combined, one is going to be $4.8 million, the other is $4.6 million. So you can see that that's $9.4 million of our year-to-date charge-offs of $9.6 million. So as I mentioned earlier, outside of those 2 charge-offs, net charge-offs outside of that is about $200,000.

What industry was the second credit in?

The second credit is a distributor of parts.

Our next question comes from Daniel Mannix from Raymond James.

So just wanted to start on loan growth. C&I loans looked pretty flat in the quarter. Can you give us a sense of what the line utilization is, and how that's been trending the first few weeks in this year?

Daniel, this is Barry. The line utilization for us has remained very consistent over time. We don't see a -- we have not seen a lack of line utilization or a significant increase in utilization. So it stayed consistent over the last several years from that standpoint. So it's really just going to be a matter of when we -- as far as C&I goes, we've had some good success during 2017 in several of our different lines of business. Markets trying -- as far as moving business over from other entities, it's just a lack of activity and lending opportunities that we've been seeing really for the last couple of years on the C&I side. The deals we do see are very competitive and which is fine. The structure is very competitive. The pricing is very competitive.

We're active in pursuing all that business, but what we have seen the last couple of years has really just been a slowdown in the opportunities. Now that may be a function of lack of expansion by the companies themselves or the expansion that is occurring, being from their cash and liquidity and their balance sheets. So hopefully, some of the new -- the tax law changes that allow for some acceleration of depreciation, things of that nature, will begin to bring forward some more opportunities for us to lend on the C&I side, whether it be equipment, et cetera. So we're hopeful in '18 that the volume of activity on the C&I side will pick up.

Got it. That's helpful. I want to turn back. In the prepared remarks, you talked about controlling expenses. Can you provide us an updated outlook for expenses in 2018?

Daniel, sure. I think our forecast for 2018 on a quarterly basis is to try to remain around that $100 million to $101 million in expenses. So we're going to try to keep those relatively flat in 2018.

And that's core expenses.

That's core expenses. Excluding ORE and amortization, Gerry. That's correct.

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

A question on the -- in the press release, you mentioned myTeller and piloting some technology in branches. Just -- could you touch on how you're thinking about the branch network? Are you thinking about trimming? Or is this -- kind of supplements the branches? Just any thoughts around that.

Sure. I think the industry as a whole takes a look forward relative to the importance of physical branch locations. We are as well. We have a group that we call our market optimization team that meets on a monthly basis to review information about activity within our branches, our branch structure, what's happening to competition around specific branches and how we can adjust, not only personnel, but overall branch structure within a particular market.

So we are -- we will look -- as we look forward, couple things we have to do. We have to balance the physical locations with the new digital channels that we have begun providing, both from an Internet standpoint to deposit taking ATMs to remote deposit capture, to the myTeller, which we have a unique situation in our Memphis market where we've partnered with Starbucks, and actually have a myTeller sitting there in the Starbucks with someone that assists customers in utilizing this new technology to get used to it. So we look at it holistically, but the trend overall is going to be to operate with fewer branches that will be staffed with people that have the ability to support and service customers on a very broad range of products and delivery channels.

That's helpful. And then just on the tax reduction, how are you thinking about that with as far as capital deployment? Does it increase your affect for M&A? Just any thoughts around that as well.

Yes. View that as maybe 2 different questions. We just finished with a conversation about branch optimization and new digital channels and that kind of falls under the realm of overall technology and how our industry is transforming itself. So that we anticipate that a portion of the tax savings will go to further investments in technology to support a broad range of businesses. Our insurance business right now has completely -- gone completely paperless and they operate really on a digital platform in supporting their customers. That area has been upgraded.

We're upgrading our Wealth Management operating system to a fully digital platform now, and we plan to have that ready to go out in July of this year to go live. We've upgraded our -- both our business and our retail digital platforms for our customers. And in the mortgage area, we continue to upgrade systems there to allow to capture opportunities through the Internet and other digital channels.

So as we transform, we will be investing a portion of this money into technologies that allow us to stay relevant and stay focused and stay meaningful to our customer base. As far as the question around M&A, we feel like we have really solid capital levels that allow us to do a sizable transaction. The challenge has been finding the right opportunities that we think add earnings momentum or the opportunities to be in higher growth markets, and we continue to look for those on a very, very regular basis.

(Operator Instructions) Our next question comes from Casey Haire from Jefferies.

This is Elan Zanger on for Casey. Just one from me on these. You guys called out the BOLI income in the press release that has kind of popped up the last few quarters. I think in 2Q, it was related to an acquisition. Just trying to get a sense if this is something you guys see going forward.

I'll briefly comment, and then ask Louis to add a little color. That has come from a number of deaths that have happened both with associates and with directors, very, very difficult, as you would imagine, to project. So it is not something that we primarily give guidance on. But when it does happen, we do want to make you aware of where it did come from. So Louis, if you want to add a little color to that.

Yes, I'd just add that we have about a $250 million book of bank-owned life insurance as well as investment tied to that. $150 million of that is investment tied to BOLI where we've invested in and then the other is related to some benefit plans that do support pre-retirement death benefits and that type of stuff. And as Gerry mentioned, unusual year related to that, can't predict. It's a -- that's my only comment, but we do have a sizable book, as most banks our size do.

Elan, any other questions?

No, that's it for me.

And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to Gerry Host for any closing remarks.

Thank you, operator, and thank you, all, for joining us today. We appreciate your interest in Trustmark. We hope that you found this conversation helpful, and provides you an understanding of some of the variances in the numbers. We feel very good about the economy, especially as it relates to what we have all struggled through, I think, for the last 8 or 10 years, a lot of positive signs. We feel like the company is well prepared to take advantage of those, and we plan very much on doing that. So again, we thank you for joining us, and we look forward to talking with you again at the end of our first quarter. So thank you, all, and have a great day.

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