Trustmark Corp (TRMK) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Trustmark Corporation's First 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 first quarter earnings release as well as the slide presentation that will be discussed this morning are 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'll 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 Louis Greer, CFO; Barry Harvey, our Chief Credit Officer; and Tom Owens, the Bank Treasurer.

Trustmark reported net income of $36.8 million or $0.54 per diluted share for the first quarter, which represents a quarter-over-quarter increase of 12.5% when compared to core earnings and 17.4% when compared to the same period in the prior year. I'd like to briefly provide you with an update on our financial results, which are on Page 3 of our presentation.

We continue to make advancements regarding balance sheet optimization, capital deployment and expense management. During the quarter, we continued to run off maturing investment securities, while repurchasing $2.5 million of our common stock. Loans held for investments declined $56 million or 0.7% from the prior quarter and increased $509 million or 6.4% year-over-year. Revenue totaled $149 million, relatively in line from the prior quarter and up 3.7% from the prior year. FTE net interest income totaled $105 million.

Efforts to manage expenses and improve process were clearly evident in the quarter as core expenses, which exclude ORE expense and intangible amortization, remained well controlled. Core noninterest expense in the first quarter totaled $100.2 million, a slight decline from the previous quarter. Credit quality continues to be a strength for Trustmark. Nonperforming assets decreased $2.6 million or 2.3% compared to the prior quarter.

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

Be glad to, Gerry. Thank you. As indicated by Gerry, the loans held for investment declined $56 million during the quarter from the -- we're still forecasting, as we have previously, for high single-digit loan growth for 2018. Q1 is typically a slow quarter for us as evidenced back in 2015. We were down $36 million during the first quarter. And still as of the end of 2015, we had a very good growth year. So that's not so unexpected to be a little bit slow in Q1. We are about 48 months into our cycle of growing CRE loans. And therefore, they are beginning to cycle through, and they'll be leaving us and will be a little bit chunky from time to time as it was in Q1. We also did experience, outside of what we anticipated, some unexpected payoffs and a little bit of slow funding, which is not unusual for Q1 as well, just because of weather and other potential delays.

When you're looking at the actual changes in balances for the quarter, the other real estate secured decreased about $92 million, as you can see. That's going to be multifamily projects that have either moved to the permanent market or they've been sold. And then looking on down to the public finance side of it, we have a small decrease there, about $17 million. That's going to be seasonal in nature.

So with that in mind, I think we're comfortable with what we saw in the first quarter. What was unanticipated in our forecasting process was we had some CRE projects that did move out quicker than we had anticipated, and the funding was a little bit slower.

Looking at the energy book, the exposure decreased $25 million during the quarter. Outstandings decreased $31 million during the quarter. All of the decrease was based on payoffs and pay downs, so we're very pleased to see the energy book continue to reduce in size. Although we are interested and willing to look at opportunities in that particular sector, we are glad to see some of the problem credits begin to move on through the process.

Looking on over to page -- Slide 5, the credit risk management. ORE is down $3.7 million for the quarter. We took no additional loss in liquidating the ORE. Net recoveries, we net recovered $541,000 for the quarter. The loan loss reserve, including acquired loans, increased from 92 basis points to 98 basis points, all of which we view very positively.

Looking on over to Slide 8 on the acquired loan portfolio. Acquired loans totaled $215 million of outstandings as of 3/31, continues to decrease over time. The Q1 yield on that portfolio was 8.13%. That included recoveries. The acquired loan book declined about $46 million during Q1. But beginning in Q2, we expect to see that moderate more to $15 million to $25 million worth of scheduled payments and payoffs. The unexpected, which we had some of during Q1, we can't foresee that. But on a just on amortization basis, we expect to see going down $15 million to $25 million in Q2. The acquired loan -- the provision for the acquired loan was only $150,000 during the quarter, so we're very pleased with the changes we saw on the acquired loan portfolio.

Great. Thank you, Barry. Let's turn to the liability side, and I'd like to ask Tom Owens to comment on deposits and the net interest margin. Tom?

Glad to, Gerry. Turning to Page 7. Total deposits increased $398 million or 3.8% during the quarter, primarily due to an increase in public fund balances. Total deposits increased $871 million or 8.6% in the prior year. We continue to maintain a favorable mix of deposits with 27% in interest bearing -- noninterest bearing, excuse me. And 60% of deposits are in checking accounts. Our cost of interesting-bearing deposits rose 9 basis points, representing a beta of 36% in the first quarter and 23% cycle to date relative to the Fed's rate hikes.

Turning our attention to revenue on Page 8. Net interest income-FTE totaled $105 million in the first quarter, down 3.5% from the prior quarter, which resulted in a net interest margin of 3.46%, a decrease of 2 basis points from the prior quarter. Excluding acquired loans, the net interest margin was 3.37%, up 2 basis points from the prior quarter and down 1 basis point from the prior year.

And now Louis will provide an update on noninterest income.

Thank you, Tom. As you can see on Slide 8, for the quarter, noninterest income total of right at $47 million, which represents a quarter-over-quarter increase of about 6.5%. The strength in our revenues for the mortgage and insurance business has offset seasonal declines in our other fee income areas. Trustmark's noninterest income continues to represent about 31% of our total revenues.

As you can see on Page 9, as Gerry mentioned, noninterest expenses remained very well controlled with routine noninterest expenses, again, which exclude our ORE expenses and intangible amortization, totaled a little over $100 million in the fourth quarter, down slightly from the previous quarter and in line with our previous estimates. While we are pleased with our progress to date, we continue to remain focused on managing expenses.

We will continue to realign our branch and delivery networks and channels and make investments to enhance our customer experience. Now as for taxes during the quarter, our effective tax rate was 12.95% and in line with our previous guidance.

We were -- if you look at Page 10, Trustmark remains well positioned from a capital management perspective. We have ample capital to support organic growth, share repurchase as well as M&A. And we continue to remain focused on the most attractive methods of capital deployment.

Gerry?

Thank you, Louis. We hope that the discussions of first quarter financial results are helpful to you. But at this time, we'd like to open it up for questions. So operator, if you could do that?

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

Wanted to kind of follow up on some of the margin and balance sheet discussion. I appreciate the color you provided in terms of the public funding that you typically get this time of year. Also noticed on the average basis, the -- a lot of the wholesale funding was down quite a bit. It looks like you traded some of that for more interest-bearing-type deposits. Can you talk about how -- does that continue to play out as the year moves along? Or does that -- do those borrowings come back in as maybe your loan growth picks up? Because it looks like you really benefited from a mix change on the right side of the balance sheet, that, that helps you out a lot in terms of NIM. I'm just curious how that kind of -- as you look out, how that helps or hurts the NIM as you move through '18.

All right, Tom?

Brad, this is Tom Owens. So yes, what you see there, the decline in borrowings is a function of 2 things really: One is the decline in the securities balance during the quarter. The other is the seasonal public fund inflow of deposits. And we did experience a bit more public fund inflow in the first quarter than is typical for seasonal. We did have a couple of what I'll call relationship wins during the quarter. So those you would expect to persist. But largely, the pattern here at Trustmark is this time of year, right now, about April, is about the peak in public fund deposit balances. And what you should expect to see is a decline from this point through, say, a low point in October, November. Now in terms of -- so taking that dynamic into consideration, you would expect to see an increase in borrowings to compensate for that. I will say though that if we continue our current practice of nonreinvestment of securities portfolio cash flows, that, that should largely offset the runoff of public fund deposit balances. So the net of those 2 things would be that you would see short-term borrowings remain at about their current level. And then from there, it's just a question of the relationship between loan growth and deposit growth going forward. And obviously, the differential there would impact short-term borrowings.

Okay. That's helpful. And maybe bigger picture question, I mean, do you think, kind of all the puts and takes, you can build upon this quarter's core NIM improvement? Just curious if any loan fees that impacted this quarter? Or do you think this kind of 3.37% number is something you can kind of build off of as you move through '18?

So first quarter is pretty clean in terms of loan fees and yield maintenance payments. So it is pretty comparable on both a linked-quarter basis and a year-over-year basis. So you think about the guidance we've given in the past, which is, with respect to core net interest margin, very modest compression, potentially offset by realized deposit betas that are lower than modeled. That's basically what's come to pass. I mean, year-over-year, our core net interest margin is off 1 basis point. I would expect those dynamics to persist, but now you also have the dynamic of, if we continue to run off portfolio, the investment portfolio through year-end, you should continue to see some accretion to core net interest margin as a result of that. And I'll call that about 2 to 3 basis points per quarter.

Our next question comes from Jennifer Demba from SunTrust.

Update us on your M&A interest at this point, size and geography -- geographic wise, and what you're seeing in terms of pipeline or conversations.

Jennifer, this is Gerry. I'll answer that question. In terms of size and geography, we still remain interested in deals in the $300 million to $3 billion size, although not limiting ourselves to that range. That's just the focal point. Primarily in the Southeast, we are looking at opportunities in some of the better growth markets for new footprint. And we're also looking at opportunities within existing markets that would have a consolidation element to them. As far as the pipeline, it remains, I think, good as we have seen for the last several quarters. I would -- I think you can look at the numbers and see where pricing expectations are. I think they're still relatively high. Many of the opportunities out there are P/E-based opportunities, which present -- can present a particular challenge. So we remain very interested. But we want to make sure that any acquisition we do, we are very comfortable, is it long-term value to the franchise?

And question on branch rationalization. You guys have done some of that in the last couple of years. What do you think is remaining over the next couple of years for you to do? And if you could give us an idea of what types of branches you tend to be consolidating? Are they -- are you exiting a market altogether? Or are you just combining -- just consolidating some where you're -- where you have more scale?

We have a group of that meets on a very regular basis, that would be monthly, to look at the specifics around various branches in the system. And look at not just a ranking of branches, but specific markets and the composition of branches, ATMs and other delivery channels in terms of some markets are more accepting of the digital channels that we have deployed over the last several years, and that impacts the transaction volumes in the branch. So we look very closely at transaction volumes, a market as a whole and how can we reconfigure that market while retaining and being able to service that existing customer base and then grow as well. So it's not an end game, if you will. It's a continuous process of reconfiguring the markets, and that's how we approach it. I think you could expect that we're going to continue to consolidate, to work expenses out of markets. But we're very concerned about maintaining the customer base, the deposit base and providing opportunity for growth in those growth markets.

Our next question comes from Daniel Mannix from Raymond James.

Just wanted to start with loans here. So you noted a higher level of paydowns in CRE portfolios as a headwind in the quarter. We've heard a few of your peers say that they're starting to see those paydowns slow, still at elevated levels, but slowing down nonetheless. Can you tell us what you've seen so far this quarter? And how that's trending?

Daniel, this is Barry. We've seen that as well. Really the -- we had a somewhat of a January effect, where all of the sudden, we saw quite a few projects that we were touching the customer on in the month of December. And it was kind of status quo, and they were probably scheduled to go out actually in 2019. And then all of a sudden, in January -- during that January, mid-February time frame, we were being notified of it moving out during Q1 of this year, which was a little bit surprising. But nonetheless, we understood the rationale. I think it's a combination of things that are happening in the marketplace. In the permanent market, there's an appetite to, from time to time, provide some construction. And that occurs from time to time. And some of the companies who do the permanent financing and permanent guaranteed financing, they occasionally do bridge loans. They'll do some things that might move a project out away from the bank, quicker than historically you would see it happen. Normally, it would [CO] and stabilize, and then move to the permanent market. Occasionally, there'll be some bridge financing that would get it there quicker. And then there's also on the sales side, where projects are being sold. Stabilization is important, obviously, to maximize the price they're being sold for. But there are occasions where the buyer will look at the velocity at which it's stabilizing and give the seller credit for it having reached stabilization from a pricing standpoint, when in reality, it hadn't quite got there. So there's all of those type of factors that would potentially lead for the seller to sell it sooner than they might would otherwise and still almost maximize the price they could've gotten had it been stabilized. So for those type of reasons, we are seeing from time to time projects move out in the industry a little quicker than it would have normally. We have seen that trend of unexpected payoffs subside somewhat during second half of February, March and then little ways into the April time frame. So we were hoping that, that is the case throughout the rest of the year. And then we've got, of course, forecasted payoffs that will occur. But we're hoping not to see too many more unanticipated payoffs, or at least be a little bit more sporadic than it was in Q1.

Got it. Very helpful. Looking at the C&I loan growth, it looks like energy loans massed a pretty good quarter there. Can you talk about what you're seeing in terms of demand, and whether tax reform has had an impact on pricing so far?

I think as it relates to the demand side, it's been scarce on the C&I side. I think all banks are struggling to find a meaningful amount of opportunities. And of course, as you can imagine, when the deals are somewhat scarce, it's very competitive, not only from a pricing standpoint, but from a structure standpoint. So we're trying to remain disciplined, but yet avail ourselves of every opportunity we have and kind of have a blend between the attractive pricing we're able to get on the CRE side and maybe the less attractive pricing we see sometimes on the C&I side and still have an acceptable ROE for the bank. We are actively pursuing every C&I opportunity we see, but they are limited. And the ones we're seeing, of course, are very, very competitive. So -- but we're out there making calls very aggressively, looking for opportunities. And then -- but at this point, really through the second half of last year and all of the first quarter, it's been fairly slow in terms of deal flow, and that has been very competitive.

Got it. And if I could just squeeze one more in there. Nice job on the expense control again this quarter. Is that guidance of $100 million to $101 million in core expenses still good for the year?

Daniel, this is Louis. And I will tell you that from the 5 previous quarters we feed our estimate, we're going to continue to give guidance between that $100 million and $101 million. But we do have a couple of process improvement projects coming online in the second quarter that could take us to the upper end of our guidance for the second quarter.

Yes, one -- this is Gerry, and I'll add a little color. We should complete a major overhaul or system conversion within our wealth management group. Beginning July 2 is when we go live. That is causing us to utilize outside resources, which will be temporary in nature to complete that project the way we want it done within the time frame. The other project we have is a conversion of base loan and deposit system. That will be a 2-year project that began at the beginning of the year. We will, from time to time, utilize some outside resources as well to assist our existing personnel as opposed to hiring people to complete those projects. So this is -- Barry commented on the -- some choppiness within the loan portfolio. You'll see a little bit of choppiness in expenses. But as Louis pointed out, there may be quarter-to-quarter where we push the upper range and then work our way back down, depending upon where we are in the project and the amount of outside resources we'll use.

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

Just a question on the deposit side. Wanted to get a sense on the pricing of those public funds. And how much of the increase this quarter was related to the inflow of those public funds versus the rest of the deposit mix?

This is Tom. I don't know that we've, in the past, given specific pricing on public fund deposits. But with respect to the inflow in the first quarter, it was about $300 million. Again, that is largely seasonal. This year, if you -- I spoke earlier about it being a late fourth quarter and then into first quarter phenomenon. So I would say in total, the seasonality of that this year has been somewhat larger than years past. As you can imagine, the betas on public fund deposits -- I know we've spoken in the past calls about the relative betas. The -- if you look at the relationship between personal and nonpersonal and public deposits, nonpersonal, I'll just say cycle to date, that the beta on nonpersonal deposits has been about double that of personal deposits. And the beta on public fund deposits has been about double that of nonpersonal. So just to give you a sense sort of order of magnitude of the relative price sensitivity of such deposits. But again, public fund deposits are accretive relative to borrowings. And there are oftentimes other profitability aspects to those relationships: fees for services performed.

That's very helpful. And if you don't mind, let me just -- I thought was kind of going forward, maybe if public funds come down a little bit, maybe you see less movement of, I guess, quarterly movement in those cost of funds. But maybe just say a sense of how the pricing is now. And do you think that those -- that the betas that you're seeing kind of in the other areas, do they continue to kind of march higher?

Yes, we believe they do. I think our thinking is not dissimilar from the industry as a whole. I would tell you that through the fourth quarter of '17, for example, if you looked at our aggregate deposit betas, cycle to date, we're 19%. Through the first quarter of '18, that rose to 23%. We're currently projecting that by year-end, we are consistent with the market, thinking there'll be 2 more Fed hikes here in calendar '18. And we're projecting that the cycle to date beta would rise to 36%. So we do think we have appropriately conservative assumptions in our forecast model, and we have been experiencing accelerating betas and anticipate that, that will continue.

And then just lastly, just a question on the securities book and your plan to potentially kind of decrease that over the year. Is there a point where the yield curve, maybe you see yields increase in the longer end, they may slow that? Or is this just -- would you like to just get to a point -- you've talked about maybe 22% of average earning assets. Is that more of a goal versus whatever you have as far as yields?

Well, you hit it right on the head. I mean, as we said on our last call, I mean that is a tactical decision that we continuously monitor. And what I would say is that the conditions, market conditions and shape of the yield curve and the continued increases in rates have not adjusted our thinking at this point about continuing to ratchet back on reinvestment. And yes, we do believe if we continue that practice through year-end, that would bring our securities to earning assets percentage down to about 22%, 23%, which would be more consistent with peer median. And we do think also, Brian, I mean, if you look at sort of the way we've timed this and what's happened with interest rates, it's actually an accretive activity if you look at it over a 3-year period. And that's even before considering the liberation of capital that might be used to -- for share repurchase.

At our next question comes from Catherine Mealor from KBW.

Just a follow-up. You just mentioned the share repurchase activity. Could you just talk about your outlook for that? And how aggressive you think you may get on the buyback?

All right, I'll -- let me start, Tom, and then you add the color to it. The way we approach share buyback, Catherine, is in a total view of utilizing capital. So it includes opportunities to acquire and how much we might need there, the organic growth within the company and what, if anything, we might think about relative to the dividend. So that's one component of it. And then within that, Tom and his team have developed a model that I think really kind of help oversee and govern our activity relative to buyback through, I think, fluctuations within the market. So Tom, I'll let you add to that, if you will.

Sure. As Gerry indicated, we do have a rigorous analytical approach to share repurchase. We do employ a dividend discount model valuation, and we are looking for a certain threshold IRR. And as you would imagine, we're also looking at earn back of tangible book value dilution. We were fortunate in the first quarter to take advantage of the downdraft in financial prices in general and repurchase some shares. So the authorization is for $100 million, expires March 31 of '19. We're at about $3.25 million to date, which seems kind of slow. But think about the environment that we were in 2017, for example, with pending tax reform and the uncertainty around ultimately whether there would be passage and what tax rates would look like. As you can imagine, when you're trying to do a dividend discount model valuation and you have that uncertainty in terms of what your future earnings stream might look like, which is a function of something beyond your control, like tax legislation, we felt it prudent to sort of err on the side of caution and not chase the market increase in financials prices generally. But obviously, the dust has settled here, and there has some retracement in financials. And I would expect that we will continue to be diligent, and where the opportunity presents itself, continue to repurchase.

Got it. So it seems like you're really more opportunistic for pullbacks in the price, as opposed to if we could see financials kind of -- sort of to outperform again, then you would most likely be -- you'd less likely to be more active in the repurchase activity, even though your capital is building at a faster pace with tax reform.

I think that's fair. But you do make an important point there, which is our capital continues to build, and we're projecting that it will continue to build. And our capital ratios are above our operating targets at this point. And so we are mindful of that. And so all else equal, that would tend to make us a little more aggressive rather than a little less aggressive, as long as we can earn a reasonable IRR on that, that we will maintain our discipline around that. And we've been fortunate that the robust loan growth that we've achieved has been -- continues to be at attractive spreads and returns. And so share repurchase, so to speak, is competing with lending, right, and the returns available there. So we're always mindful of that dynamic as well.

Our next question comes from Matt Olney from Stephens.

This is Brand Steverson on for Olney. I wanted to follow up on the securities question from earlier. If loan growth is softer than the guidance you laid out for 2018, would you continue to shrink the securities book? Or is that strategy dependent at all upon loan growth?

This is Tom. So those 2 strategies are independent. I would imagine that when you think about the market conditions that might lead bank lending in general to be softer, might also make the deployment of capital through the reinvestment of securities cash flows more attractive. Which is to say, perhaps that would be an environment where the Fed would slow down a bit on their pace of tightening. And so you might find that those 2 things are related. So even though I'm telling you they're separate decisions, the consequences of one might lead to a market that's a little more attractive for us on the other.

Understood. And then last one for me on mortgage. Some of your peers have talked about seeing improved gain on sale margins in the mortgage business. Is that consistent with what you guys saw this quarter? And then what is the outlook for mortgage for -- that you all see going forward?

Let me comment. This is Gerry. Let me comment on the gain on sale. We saw good volume within the first quarter, despite the fact that we've seen some increase in an overall rate, primarily because we have been building out the retail portion of our mortgage operation and feel we've been very successful there. As far as gain on sale, I think that clearly is a function of the markets, and it is a challenge to project. That is very much driven by volumes. And as far as the mortgage servicing rights and the gain we had there, we do hedge our MRFs -- I mean our MSR. And we -- so we are trying to minimize the impact on the income statement from quarter-to-quarter. However, have been fortunate over the last 15 years that it has contributed to the -- to our earnings. And in terms of looking forward, clearly we're watching rates like everyone else is, and that will impact the mortgage business. But we have expanded, as I mentioned, retail producers in some very good markets and would anticipate that we will continue to grow that business, I think, at a better rate than what we see going on in the industry as a whole. Tom, I don't know if you want to add. Louis...

I think you hit it right on the head, Gerry.

And ladies and gentlemen, at this time, we'll conclude today's question-and-answer session. I'd like to turn the conference call back over to Mr. Gerry Host for any closing remarks.

Let me say that we appreciate very much you calling and being part of this call and your questions. I hope you found this meeting -- this call helpful to you in better understanding the company and the positives. And our next planned call will be on July 25, but we will be giving official notice prior to the call, and we hope you'll be able to join us again then. So thank you, again, and have a great day.

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