Trustmark Corp (TRMK) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Trustmark Corporation's Second Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

It is now my pleasure to introduce Mr. Joey Rein, Director of Investor Relations at Trustmark. Please go ahead.

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 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, we'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, Chief Credit Officer; and Tom Owens, Bank Treasurer.

Trustmark reported net income of $39.8 million or $0.59 per diluted share in the second quarter, which represents a quarter-over-quarter increase of 9.3% and 25.5% when compared to core earnings the same period in the prior year.

I'd like to provide you with a brief update on our financial results, which are on Page 3 of our presentation. We continue to make advancements regarding loan growth, balance sheet optimization, capital deployment and expense management. Loans held for investments increased $165 million or 1.9% from prior quarter and $382.9 million or 4.6% year-over-year.

We continue to runoff maturing investment securities while repurchasing $5.4 million of our common stock. Revenue, excluding interest and fees on acquired loans, increased 2.4% linked quarter to total $147.5 million. FTE net interest income totaled $108.4 million, up 2.9% linked quarter and 1.4% year-over-year.

Efforts to manage expenses and improve processes were evident in the quarter as core expenses, which exclude ORE expense and intangible amortization increased 2.4% from the previous quarter to total $102.6 million. Credit quality continues to be a strength for Trustmark. Nonperforming assets decreased $7.2 million or 6.7% compared to the prior quarter. I briefly spoke to the loan portfolio, but I'd like to ask Barry to add some color to both loan growth and credit quality. Barry?

I'd be glad to, Gerry. Thank you. Just looking on Page 4, as you can see, as Jerry mentioned, our loan growth for the quarter was $165 million year-to-date, that's $109 million worth of loan growth.

The growth during the second quarter, starting with commercial construction, we grew about $36 million, mostly Mississippi and Texas and that was multi-family related. And then we also grew on the 1-4 family closed in. We grew about $50 million, that was predominantly in our mortgage company.

Within the existing nonowner occupied bucket, we grew roughly $49 million, that was predominantly coming out of Alabama, but we did see growth in all of our markets. And then as you may see in other loans, we grew around $23 million. That's mostly going to be in Mississippi and Alabama. That's going to be a variety of type of C&I customers in the utilities, consumer finance, et cetera.

Looking on to Page 5. Glad to see we have a continuation in our reduction in our nonperforming assets. We had a nice reduction in nonaccruals of $7.3 million during Q2. A $4 million of that was paydowns. About $3.6 million of it was movement of problem loans into ORE, and that's our long-term acute care facility that we just talked about before. That's a particular credit. We had several facilities that moved into ORE and that out of the nonaccrual bucket.

And then also on ORE, we were able to get some of the ORE out the door. A little bit came in, made a little profit on what we were able to sell. But that's continued focus for Trustmark is to get the nonperforming assets down to an acceptable level.

When you look at net charge-offs and the ALLL, they appear to be very reasonable for this point in the economic cycle.

Looking on over to Page 6, the acquired book is down to $173 million at this point. Acquired loans decreased $42 million during Q2. The yield on the acquired loans was 9.96%, of course, the recoveries that we experienced juiced that yield up about 1/3 from where it would have been otherwise. The runoff in the -- we expect in Q3 should be in that $20 million to $30 million range, and the yield on that should be in that 6% to 7% range, barring any recoveries we may experience.

Great. Thanks, Barry. Let's turn to the liability side of the balance sheet. I would ask Tom if he could comment on both deposits and net interest margin?

Happy to, Gerry. So turning to Page 7. Total deposits increased $97 million or 0.9% during the quarter. Total deposits increased $649 million or 6.2% from the prior year. We continue to maintain a favorable mix of deposits with 27% in non-interest-bearing and 50% in deposits in checking accounts.

Our cost of interest-bearing deposits rose 11 basis points, representing a beta of 44% for the quarter and 27% cycle to date relative to the Fed rate hikes.

Turning to Page 8. Net interest income FTE totaled $108 million -- $108.4 million in the second quarter, up 2.9% from the prior quarter, which resulted in a net interest margin of 3.57%, an increase of 11 basis points from the prior quarter. Excluding acquired loans, the net interest margin was 3.46%, up 9 basis points from the prior quarter and 9 basis points from the prior year.

And now Louis will provide an update on noninterest income.

Thank you, Tom. Noninterest income totaled little over $47 million in the second quarter, which represented a quarter-over-quarter increase of about 1.3%. As you can see, strength in our insurance and mortgage business has offset declines in other fee income areas. So we continue to have strong noninterest income, which represents about 31% of total revenues.

As you look on Page 9, noninterest expenses remained well controlled with routine noninterest expense, which exclude ORE and intangibles, they totaled about $102.5 million in the second quarter, increase of about 2.4%. The main drivers of the increase were principally increased commissions associated with insurance and mortgage business as well as investment in technology.

We are pleased with the progress to-date, We will remain focused on expenses as we continue -- we will continue to realign branches and delivery channels, and make investments to enhance our customer experiences.

As for taxes, we expect our future effective tax rate to remain at around 13% to 14%, it's a little over 13% for the quarter. We remain well positioned from a capital perspective, as noted on Page 10. We have ample capital support organic growth and are focused on all methods of capital deployment including share repurchase.

Thank you, Louis. I trust this very brief discussion of our second quarter financial results has been helpful.

And at this time, we would be glad to answer any questions that you might have.

(Operator Instructions) And our first question comes from Daniel Mannix with Raymond James.

Just want to start with the loans. So the paydown seem to have subsided on the CRE side, and you had some good growth across real estate and consumer loans, but the C&I loan growth looks like it actually turned negative when you exclude energy. So the first question, I guess, is, is the high single-digit loan growth guide still achievable for this year?

We'll address that Daniel here in a second, just to comment on the market overall. Obviously, it's become very competitive, especially on the C&I side as well as the public side. The real estate -- commercial real estate, obviously, is still very strong, but very competitive market. And then Barry, I guess, you want to add some color and give some indication as to what we are seeing for the remainder of 2018. I think that would be helpful.

Sure. Glad to, Gerry. Daniel, I think the way we're viewing it is from a production standpoint it's -- we're seeing some good production coming out of our CRE areas, but we are seeing and we do forecast and anticipate a -- of risk amount of early payoffs coming to us in the second half of the year. The guidance we're giving at this point based upon our latest forecast is going to be low to mid-single-digit growth during 2018. The biggest headwind there is not the activities we're seeing and the opportunities and what we're approving, it's just going to be those unanticipated early payoffs that are coming on the CRE book and basically on our most recent forecast. And that's occurring for a number of reasons, which are very positive, other than the fact that the -- that we're from a earning asset standpoint, it diminishes our ability to generate earnings, in the sense that these projects are coming off early one because the projects are going better than expected from the borrower's perspective and the pro forma. And therefore, they are stabilizing quicker or approaching stabilization quicker and moving out through either a sale of the property to a REIT, et cetera. And it's moving out to that avenue or it's moving to the permanent market and because it has stabilized quicker. So we're constantly day-to-day updating our modeling as it relates to projects where they are, when we think they're going to come out, having conversations with customers. But we do see it is very fluid. And we do see and project, for the second half of the year, an increase in some of the payoffs that maybe during in Q1. We didn't see paying off during '18. We saw more of the '19 departure and there will be an '18 departure in the second half of the year. So for that reason, we are lowering our loan growth for 2018 to low to mid-single-digits. But here again, when you look at it from a production standpoint, we've got better production on the CRE side today than we did last quarter, a year ago, et cetera. So we've got a lot of projects coming off the books . So obviously there's equity that needs to be put in by default. We'll probably get a chance to fund. And what's coming off the books is fully funded. So for those reasons, from the C&I, from the public finance side of it, it's steady, but it's not going to be able to move the needle enough to get us back to the loan growth we've seen in the prior 3 or 4 years.

Okay. That's really helpful. I guess, just looking at it on a segment basis, is there a lot of variance between, like, CRE and C&I or both are kind of in that low to mid-single-digit range?

It is -- there's a good bit of -- there's some variance there. We're going to see -- we're going to continue to see some growth on the CRE side. We don't anticipate much in the way of growth from the C&I side or the public finance side. On the public finance side, we had a lot of credits maturing this year more than normal, and we've got part of that all the way in the first quarter. We still have a meaningful amount of public finance deals that will be maturing this year relative to prior years and future years. So it's a bit of a headwind, and hopefully, we won't have again in '19, but we will have in the remaining half of '18. So but we do see good solid production coming out of our CRE group, it's just a matter of get them on the books and get them funded once the equity goes in.

Okay. Really helpful there. Just one on expenses. I guess, you guys had broadcasted that you're going to be at the top end of the core expense guidance range in the second quarter. I understand there's lumpiness in the timing of projects that you guys -- investments that have going on. But is that $100 million to $101 million still a good run rate? Or is that adjusted going forward?

Daniel, this is Louis Greer. In the third quarter, our insurance business has this high watermark in revenues, so commissions are a little higher. So I will give you guidance on the third quarter of about $102 million. That's what we expect our run-rate to be in the third quarter. So just because the seasonal in this -- in the insurance business, we have increased commissions on those -- on that line of business. So we're looking around $102 million is our guidance for the third quarter.

And as far as some unexpected expenses in the second quarter, we finished a major conversion in our wealth management area of the company on July 2. I mean, we had some outside expenses, where we hired in some help to ensure that we hit our deadlines. And so that pushed them up a little bit, along with some commissions in both the insurance and brokerage side. I will tell you that we are in the process, a major conversion of some of our core systems related to loans to upgrade those. That will be a process that will take place over the next 18 to 24 months. And so you will see some choppiness, but there is still a very significant focus in the company on controlling and reducing expenses and utilizing some of this new technology to find ways to streamline the way we operate for the future.

And along those lines, the controlling expenses, you've talked in the past a little bit about potential branch closures. Have you identified anything at this point?

We -- that is not a onetime focus to close x number of branches. It is an ongoing process. We have a committee that is -- that meets every month to review overall branch performance, changes in transaction levels, volume levels, account levels. It looks at the market itself. And we review that, like I said, every month to look for new opportunities to reduce overall branches and branch expenses.

Our next question comes from Jennifer Demba with SunTrust.

Gerry, just wondering about your appetite for M&A right now. The market has not been very responsive to deals in the last couple of months. Just wondering what you guys are seeing and what you're thinking about right now?

Yes, Jennifer, obviously there's been a number of deals announced, as you're well aware. And as you pointed out, the market is questioning the earn-back period, and we're seeing more and more focus there. Our approach is this, it's around capital. This company, as you covered us for a long time and know, remains more so on the conservative side, on the side that works towards a stable and predictive earnings stream. We try to be as transparent as we can. And so when we look at overall capital management, and we meet every month to look at different opportunities. We are looking at levels. We're looking at risk for banks our size. DFAST is no longer a reportable event, but we have maintained our processes around the DFAST stress testing and have incorporated it into our overall capital planning process. In doing that, we look to make sure that we have adequate capital through the challenging time. But the rest of the process is really focused on where is the best deployment of capital, is it organic growth, is it some sort of buyback program or is it an acquisition. So we look to be very disciplined in weighing those 3 options or any combination thereof. And as you pointed out right now some of the things we've seen have been, maybe a little bit pricey, especially as we look to it as to how we would utilize our capital via our current stock price levels. And so as a result, we remain very disciplined, but we also are very aware of potential opportunity and are aware of opportunities that we hope might develop at some point. And what that means, what I'm saying is, is that yes, we are very focused on looking for acquisition opportunities, but only if they make sense. And we're comfortable from a cultural standpoint in terms of an acquisition and a financial perspective.

Our next question comes from Brad Milsaps with Sandler O'Neill.

Maybe I want to talk about the margin a little bit. And, Tom, just kind of curious, we've talked in the past about kind of what you're doing on the -- with the bond portfolio and I appreciate the comments around the loan book. Just kind of curious any update, kind of how you're thinking about the size of the balance sheet and pulling the securities portfolio down further and kind of what that means for the NIM, as you think about the back half of the year?

Sure. Good morning, Brad, this is Tom. So our past guidance has been for very modest compression in core net interest margin, potentially offset by realized deposit betas that are lower than modeled. And that's essentially what's come to pass in the second quarter. We've also guided to 2 to 3 basis points per quarter related to runoff of the securities portfolio. So in addition to those 2 things in the first quarter, we had a rebound in loan fees to a more normal run-rate. And we also experienced a favorable funding mix as we experienced below average seasonal runoff with the public fund deposit balances. So those are basically the drivers of the linked quarter increase in core net interest margin. Going forward, I'd say it's become increasingly likely that we will continue to run off the securities portfolio through year-end. We've talked in the past about wanting to get down closer to the peer median in the neighborhood of, say, 21% securities to core earning assets. Our current projections, based on the guidance you've heard so far this morning is that we'd end the year at about 23% of core earning assets in the securities portfolio. So I'd expect that you'll continue to see 2 to 3 basis points per quarter of accretion as the securities portfolio continues to runoff.

Okay. Great. That's helpful. So this quarter, the loan yield -- the core loan yield is around 4.60%. You're saying that that's a pretty normal level of fees in that yield. Is that correct?

That's correct.

Okay. And what would you anticipate, say, LIBOR, the Fed continues to move, would you expect to see that move up by -- I'm just kind of curious what the difference between the fees and what the actual moving rates did for loan yields this quarter compared to the first?

Compared to the first. So one other way to, I guess, to answer that question would be, if you look at the 44% realized beta on the deposit side, the realized beta on the LHFI core loan side would be about 60%. When you adjust for the rebound in loan fees to a more normal level, if you backed that out, which you really shouldn't on a run-rate basis going forward, but for the sake of understanding dynamics in the second quarter relative to the fed rate hike, you would have a realized beta of about 48%. You'll still have LHFI beta a little bit higher than the interest-bearing deposit beta. And, Brad, what it really does is sort of been in a dead heat here. If you looked over last 4, 5 quarters and if you looked at cycle-to-date beta, when you look at the LHFI beta and compare to the interest-bearing deposit beta, in any given quarter, one maybe 4% or 5% higher than the other. If you look at it over a smooth, say, trailing 4 quarters, it's been pretty much a dead heat. Now going forward, while we're projecting our - as far as Fed rate hikes, we use the market implied forward. So basically we have one hike between now and year-end, 50% probability of occurring in September, 100% probability that it occurs by December and then 2 hikes in '19, 1 hike in '20. And we're projecting that that's on the deposit side, the cycle-to-date beta increases from 27% currently to about 33% by year-end '18; 43% by year-end '19; and 47% by year-end '20. So we're projecting that deposit betas will continue to accelerate.

Got it. That's very helpful. And I can just maybe ask one follow-up on mortgage banking. You guys -- it looks -- and you give a lot of detail here, but the mortgage line sort of before hedging up maybe 10% year-over-year, production or gain on loan sale revenue up about the same. I'm just curious that's kind of counter to what's going on in the environment. Can you just kind of talk a little bit about how you can sustain that and maybe things you're doing on the mortgage side to sort of offset what's going on in a bigger picture?

Yes, I'll do that, Brad. We've had a conscious effort since the acquisition of BankTrust in 2013 to build out the retail side of our mortgage operations and become less dependent on our brokerage business. So we've actually been somewhere where retail was maybe roughly 40% of our total with 60% brokerage, we're really doing closer to 75% retail; 25% brokerage. And we have been very successful with attracting and retaining originators in a very stable markets that have done well in terms of growth. Well, you say, well, how do we buck the trend in the industry. We have seen obviously, in some of the larger markets, shortness of supply and product that has tempered things. But in the markets that we're in, we continue to see a solid supply of the demand is there, and we've been able to get our share with -- of the market with more retail originators. So feel good about how we have positioned ourselves, but certainly understand that. So we look forward, there are some challenges in the housing industry overall, which will affect mortgage volumes.

(Operator Instructions) And our next question comes from Brian Zabora with Hovde Group.

I had a question on the insurance commissions. Nice quarter year-over-year, up about 10%. Can you just give us some details on trends in the business and if you think that double-digit growth can be maintained going forward?

The -- Brian, I think, the growth has been as a result of work that we have been doing over the last several years. Scott Woods, who heads that area for us has had a focused effort on bringing in some younger people, and it takes some period of time to build your book in the commercial insurance business, generally somewhere between 2 to 4 years to get your book up and running and validated. And so we have made a conscious effort 4, 5 years ago to start hiring some younger people and have them develop their book, develop it outside of the banking footprint of the company. And there is good momentum in that business. We had, 3 years ago, upgraded the whole processing environment in the insurance business to completely paperless to come up with some efficiency. So combination of things, we feel like we're well positioned and there's been some disruption with bank-owned around insurance agencies in our marketplace. And we think there is continued opportunity to take advantage of that.

Great. And then just a question on the foreclosure other real estate owned expense or gain this quarter, I know it's hard to predict. But the past quarter just been a bit of an expense or minus expense, do you think it may go back to that or any thoughts around that?

Brian, this is Barry. I think in the past, we've given guidance as it relates to ORE expense as well as foreclosure as well as carrying expense. And I think this is how it's going to be predicated on some recoveries that may or may not -- excuse me, gains on sales that may or may not happen. We do have -- we do expect in the second half of the year that we've got a number of large properties under contract today that should close in Q3 and Q4, hoping to help us drive down our nonperforming assets as part of that. And we do have -- on a few of those, we do have some meaningful gains on sale, that if they do come to fruition, would impact those numbers. So we expect for those numbers to remain in line with what they've been historically subject to a gain or 2 on sale that we may experience, which may net that number down.

(Operator Instructions) And our next question comes from Matt Moonly (sic) [Olney] with Stephens.

It's Matt Olney. I want to go back to the discussion around capital management. It looks like the stock repurchase program was more active in the second quarter. Absent any M&A announcements, is it reasonable to assume that we could see more activity going forward from here?

Matt, this is Tom Owens. I think we talked on last quarter's call about activity to-date, the program was authorized back in '16 and activity to-date being relatively slow. And we talked about that being a function of robust loan growth in '17 -- '15, '16, '17 really. With the -- the other thing we talked about was the uncertainty of tax reform, right? Now we've gotten into '18, that uncertainty is in the past, we've been experiencing a bit slower pace of loan growth. And our capital levels that remain above our operating targets. So as Gerry discussed earlier, we do actively review all forms of capital deployment, including share repurchase. Conditions were such in the second quarter when you consider all those factors that we did have an accelerated share -- rate of repurchase. I think it's probably imprudent to put guidance on it, but if conditions in the third quarter, market conditions are similar to the second quarter, I would expect that you would see at least that pace of activity and perhaps more in the third quarter and going forward. But, again, it's all a function of our capital levels, the returns available and market conditions.

Great. That's great commentary. And then I want to go back to the discussion around loan growth and the early payoff you've been experiencing. And other banks are definitely talking about the same thing you guys are getting some paydowns or lower than expected on some of your construction projects. Can you give us a little bit more color about the -- where those are coming from, like what asset classes, is it multi-family, what geographies, and also better idea just how early are these loans moving off the balance sheet, is it 3 months sooner than expected, 6 months, 9 months, just help kind of frame it up for us?

Matt, this is Barry. I guess, kind of going back to the first question, the main category that you're going to see, things moving out for us is going to be multi-family. And those are going to -- it's going to be from a geographical standpoint, it's going to be loans that were originated, credits originated out of Texas, Mississippi and the Alabama markets. They're not necessarily -- the project may or may not be in that market, but the actual developer and our customer is based in that market predominantly. And those are the loan origination areas that are generating the business that -- Typically, what you're going to see is probably as much as 6 months ahead of schedule. Like I said, we're constantly in contact with our customer to understand the timing of when the project may move out. Most of these are going to be 36, 42, 48 months [out] projects depending on how big the project is with a couple of extension options based upon them meeting certain hurdles. And so your -- once a project COs, you have to begin watching it because if the pace and then the velocity of the lease-up is, if it's far out-ceding what we -- what the borrower pro forma-ed and what we pro forma-ed in addition to the borrower, then it obviously becomes on the watch list. And we need to be careful because it may leave us quicker than the last update we've gotten from the borrower. So we're very mindful of that. We're constantly, as mentioned earlier, updating our forecast on a regular basis, talking to our lenders. Our lenders are talking directly to our customers to get a sense of what their plans are and those plans are fairly fluid because they'd obviously like to fix a rate in a rising rate environment, long-term financing, nonrecourse, all the things that they want out of the permanent market, or if they're a type of merchant builder who typically sells their product and the opportunities to sell that product have increased greatly just because they're getting a lot of credit for the velocity by which the project is stabilizing as opposed to -- as opposed to waiting until it actually stabilizes.

Okay. Understood. That's great color. And then I guess, sticking on this topic, kind of a bigger picture question, what are your long-term thoughts on loan growth? I mean, if these payoffs and early paydowns remain a headwind, are there any other strategies you're considering, any other asset classes that are on the drawing board, just trying to understand kind of the long-term approach you guys have to loan growth the next several years?

Yes, there's a lot of different options. We're constantly evaluating to determine the -- how much they could contribute to the earnings of the bank. If we decide to enter a new line of business or lines of business, obviously in the areas where we have competency today, we're continuing to look for additional C&I lenders in markets that have opportunity. And we're pursuing those people on an ongoing basis and whether it be an individuals or whether it be as a group. And I think that's where you're going to see us being able to make some headway is bringing on some of those additional resources that can help us locate and obtain some additional C&I business. On the public finance side, we're very competitive, but we are disciplined, and most of that is all bid especially in Texas and some in Mississippi and in Florida, it's bid, but we are very competitive there. And there will be times during the year where we're more successful than others, and we're going to continue to head down, focused on looking at every opportunity, being competitive, we're able to look and see exactly who won the deal, what's the ROE for Trustmark, is that something we're willing to tolerate, if that's the market, if it's not, we'll continue to pitch at what we think is a reasonable rate and wait for a little less competition so we can be successful.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Gerry Host for any closing remarks.

Well, I'd like to thank everyone for joining us on the call and thanks for your questions. It really helps us to better articulate the Trustmark story. And I look very much forward to talking with you again in October about our third quarter results. And thank you, and have a great day.

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