Trustmark Corp (TRMK) 2018 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Trustmark Corporation's third quarter earnings conference call. (Operator Instructions) As a reminder, this call is being recorded.

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

I'd 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'll turn the call over to Jerry Host, President and CEO of Trustmark.

Good morning, everyone, and thanks for joining us. With me this morning along with Joey are Louis Greer, CFO; Barry Harvey, Chief Credit Officer; and Tom Owens, Bank Treasurer.

Trustmark reported net income of $36.3 million or $0.54 per diluted share in the third quarter, which represents an increase of 5.9% when compared to 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 continued to make advancements regarding loan growth, balance sheet management and expense control. Loans held for investments increased $68 million or 0.8% from the prior quarter and $340 million or 4% year-over-year. We continued to run-off maturing investment securities in an effort to better optimize our earning asset mix. Revenue excluding interest and fees on acquired loans increased 1.7% linked quarter and 5.8% year-over-year to total $150 million. FTE net income totaled $110 million, up 1.6% linked quarter and 1.1% year-over-year. Net interest margin excluding acquired loans was 3.5%, reflecting its fourth consecutive quarter of expansion.

Efforts to manage expenses and improve processes were evident in the quarter, as core expenses which exclude ORE expense and intangible amortization increased 0.2% from the previous quarter to total $103 million.

Credit quality continues to be a focus for Trustmark, and I would like to ask Barry Harvey to add some color to both loan growth and credit quality.

Barry?

I'd be glad to, Jerry. Thank you. Just looking over on to Page 4. As you can see, we had loan growth of $68 million during the quarter, and that year-over-year number is roughly $340 million. So we continue to have solid, steady loan growth. And I know, when we get to the questions, we will talk about some of the details around the loan growth itself.

Looking on to Page 5, as you can see, we've got our credit quality measures there. We're very pleased with our credit quality measures, outside of maybe one event we'll talk about later in some detail, I'm sure, but when you look at the -- all the trends, past dues, criticized, classified loans all move in the right direction at historical low levels for us. And we're very proud of those results. On NPLs, we're flat year-over-year. We ticked up a little bit this quarter. And we'll talk about some specifics on that, I'm sure, during the Q&A. On the nonperforming assets, we actually went down even though we ticked up a little bit on NPLs, and that's a result of moving out some more ORE. And we did that with -- by making a profit, which we're proud of that as well. The energy book is down $31 million from an outstandings perspective. Those were loans we were glad to see move out, and many of those are going to be in that classified category. So we were glad to see that occur.

Moving on to Slide 5 -- excuse me, to Slide 6. We'll talk a little bit about the acquired book. We saw a drop in balances of roughly $41 million during the quarter. The yield was roughly 11%. Obviously, that -- some of that is produced by recoveries. About 4.4% of that is off of recoveries. On a go-forward basis, we expect the yield to be between 6.5% and 7.5%.

Jerry?

Great. Thank you, Barry. And I guess, now turning to the liability side, Tom, would you please discuss the deposit base and the net interest margin?

Happy to, Jerry. So turning to Page 7. Total deposits declined $115 million or 1% during the quarter, reflecting normal public fund deposit seasonality. Total deposits increased $725 million or 7.1% from the prior year. Our cost of interest-bearing deposits rose 13 basis points, representing a beta of 52% for the quarter and 31% cycle-to-date relative to the Fed's rate hikes.

Turning our attention to revenue on Page 8. Net interest income FTE totaled $110.1 million in the third quarter, up 1.6% from the prior quarter, which resulted in a net interest margin of 3.59%, an increase of 2 basis points from the prior quarter. Excluding acquired loans, the net interest margin is 3.50%, up 4 basis points from the prior quarter and up 16 basis points from the prior year, driven primarily by our continued balance sheet optimization initiatives.

And now Louis will provide an update on noninterest income.

Yes. Thanks, Tom. Looking at the noninterest income table, you can see that total noninterest income totaled about $47 million in the third quarter, which represents a slight decrease on a linked-quarter basis for about $300,000. When you look at most of the lines, including service charges, bank card income and wealth management, you can see they were all up for the linked quarter. When you look at mortgage, mortgage really had a strong quarter with volumes of over $400 million. Linked-quarter total mortgage revenues were down slightly just due to an adjustment to our fair value of loans held for sale for the quarter. So good quarter for mortgage. In total, noninterest income remains strong and represents about 31.5% of revenues excluding interest and fees on acquired loans.

Turning to Page 9, looking again at noninterest expenses. They remained well controlled, with core noninterest expense, which excludes ORE and intangible amortization, totaling a little under $103 million. I think our guidance last quarter was similar to the previous quarter right at a little over $102 million. The main driver of the increase were increased commissions associated with increased revenues in the brokerage and mortgage business as well as investments in technology.

While we were pleased with the progress to date, we will remain focused on expense management. We will continue to realign branches, delivery channels; and make investments to enhance our customers -- and would expect our fourth quarter core expenses to remain in line with the third quarter.

Next I'll mention our effective tax rate for the third quarter, which was less than normal due to our annual true-up when we file our 2018 tax return, a little under 11%. I'll tell you that we expect our fourth quarter effective tax rate to remain in the 12.5% to 13.5% range [with that].

We remain well positioned from a capital perspective, as noted on Page 10. We have ample capital to support organic growth; and are focused on the most attractive methods of capital employment, including our share repurchase program.

Jerry?

Thank you, Louis. And I hope you found this discussion of our third quarter financials helpful.

Before we go to questions, I'd like to briefly touch on the impact of the recent hurricane on Trustmark, and this is on Slide 11. On October 10, Hurricane Michael struck the Florida Panhandle, causing significant damages. Let me say, first and most important, all 80 of our Bay County associates have been contacted and are safe. And we have helped and worked to provide them with shelter and food as needed.

As of September 30, Trustmark had 1,786 loans with a balance of $240 million and exposure of $282 million. And this all -- was all in the FEMA designated disaster areas, which include 12 counties in Florida and 13 counties in Georgia. Efforts are now ongoing to contact these borrowers to offer assistance as well as to establish reasonable estimates of uninsured damage and to adequately assess potential risks to the bank.

Regarding our retail bank operation, the majority of the damage to our 8 Bay County branches was cosmetic and not structural. 6 Bay County branches and all ATMs have reopened following the storm, and we expect the 2 remaining branches will reopen as soon as power is restored. Trustmark remained open for business throughout the storm and the ensuing recovery process with mobile, online and telephonic banking for all of our customers.

At this time, we would be happy to address any questions that you have.

(Operator Instructions) Our first question comes from Brad Milsaps with Sandler O'Neill.

Maybe my first question is for Tom as it relates to the NIM. Interest-bearing deposit costs were up about 13 basis points linked quarter and sort of roughly 50% beta there. What does your outlook say? Are you starting to feel more pressure there from competitors? How are you thinking about how that deposit beta might go up or down over the next several quarters? And also, it looks like you're getting close to your 23% goal or so on the securities earning assets, so I just wanted to see if there's any alteration to that.

Brad, this is Tom. Thank you for the questions. So first of all, I would say that the continued acceleration in deposit betas is pretty consistent with what we've been modeling and thinking. As you indicate, we had -- and as I had pointed out in my talking points, the beta was essentially 52% in the third quarter. That was up from 44% in the second quarter and 36% in the first quarter. Our current projections are -- we're modeling 68% for the fourth quarter. And then as you get into 2019, we're actually modeling 82%. We're projecting a -- one more Fed hike here in '18, in December; and then 2 hikes in '19, 1 in December, 1 in June. That would take the Fed funds rate to about 3% by year-end '19, and that would take our cycle-to-date interest-bearing deposit beta to 46%. Your other question, as it relates to balance sheet optimization, as we've discussed in the past, yes, we intend to do that through year-end. That -- I think we -- if you looked at on average, in the third quarter, we were at about 23%; continue to trend lower. We've talked about a target of 21%. Whether we're there by year-end or not remains to be seen. We are considering the possibility of continuing that optimization initiative into maybe the first or second quarter of next year to arrive at that target of about 21%, but that remains to be seen at this point. So the lift, as we've discussed, we've been guiding to 2 to 3 basis points per quarter of lift from that initiative, and that has played out pretty much as expected. If you look at the linked-quarter increase in core NIM of 4 basis points, about 3 basis points of that is from balance sheet optimization. And if you look at the 16 basis points year-over-year lift in core NIM, about 12 basis points of that is from the balance sheet optimization. So it's been 75% or so.

Perfect. That's very helpful. And then just to follow up with Barry. You alluded to it a few times in your remarks, but just curious if we could get a little more color on the couple problem loans you alluded to in the release, also just kind of the moving parts. It looked like most of your provisioning this quarter came out of the Tennessee region. And most of your charge-offs came out of Mississippi, but you had a provision reversal in Mississippi, so I'm just kind of curious if you could kind of give us a little color on those moving parts.

Sure. Would be glad to, Brad. On the provision side, as you've alluded to, we had 2 credits that we made provisions for that led us to the $8.7 million worth of provisioning for the non-acquired loans. In reality those 2 credits were 8 -- were $9.8 million by themselves. So obviously, outside of those 2 credits, we would not have had a provision for the quarter. So I think that gives you a sense of how specific it is to those credits. One of those credits, as you indicated, is out of Tennessee. The company operates in a couple states and -- but it came through our Tennessee market. And that's where it was originated through, and we had a specific reserve established for that impaired loan. And that was also one of our new non-accruals for the quarter, which we had a couple of those that were sizable. And then the other additional provisioning was made on one Texas credit that we've talked about previously that is going through a bankruptcy, going through a liquidation. So we expect fully during Q4 for that Texas credit to be fully resolved, and hopefully, no additional provisioning will be required. And then the Tennessee credit that's in question, we expect that to be resolved during the fourth quarter as well. And those reserves, most of which will be fully used, and that loan will be resolved during the quarter as well. As it relates to the charge-off side of it, on net charge-offs, we were up a little bit over where we've been historically. And there again, that was an energy credit we had reserved for many -- several quarters ago as an impaired loan and we were able to get a resolution there. We were able to get paid down, but then we did have the remaining portion which was charged off. That was about $4.4 million worth of charge-off on that one loan. Obviously, our charge-offs for the quarter were -- was $4.1 million. So without that one commercial credit -- energy credit that we charged off, we would not have had any charges-offs for the quarter as well.

Okay, yes. Barry, just so I'm clear: The 2 credits totaled $9.8 million and it required a provision. Pretty much all the provision this quarter was against those 2 loans. Is that -- did I understand that correctly?

The provision was $9.8 million, and our provision for the bank as a whole was...

$8.7 million, okay.

And so dealing with non-acquired. So you can sense that all the provision, plus some, related to those 2 credits. And both of those credits, it's our full intention for those to be resolved during Q4 so we -- going forward we won't be dealing with those.

Our next question comes from Daniel Mannix with Raymond James.

Just wanted to start off by peeling back the layers on the slight moderation in loan growth in the quarter. So how much of that would you say was due to elevated paydowns? Also, looking at C&I growth, if I exclude energy, it looks like it was actually pretty healthy and could be positive for the year. And you've talked in the past about the relative unattractiveness of C&I loans, so can you talk about what you're seeing there, as far as pricing and pockets of potential opportunities?

And Daniel, this is Barry. I'd be glad to. I guess, starting off with just talking about loan growth in general and kind of cover the waterfront there. As you can see, it's $68 million. We continue to see strong growth. And when you look at it from a GAAP perspective, you're going to see where the balances are as of 9/30. What we focus on is where the growth really occurs. And where that [matters] is on the CRE side, where obviously you have growth in some categories that also -- why you have some migration into other categories, so -- but with that in mind, the loan growth that we're seeing in commercial and residential homebuilders is very strong. So we still have strong commercial loan growth on the construction side, and we have strong homebuilder growth on the 1-4 family side. We were up $112 million between those 2 categories from a growth perspective. Now obviously we have projects that they [CO]. They complete, and they move down into the existing buckets. But from the standpoint of where we grew, we're still growing in a very attractive way in both commercial construction as well as residential construction with homebuilders. We also saw solid loan growth again in our mortgage portfolio. There again this is coming out of our mortgage company. We saw $57 million worth of growth in our 1-4 family from the financing portfolio; and that was as expected and good, solid growth. When you look at nonowner occupied; and when you look at other real estate, which are other real estates, predominantly multifamily, you're going to see decreases there, but those are not unanticipated. Those are stabilizing projects or projects that have stabilized that are moving to the permanent market or being sold. And so we fully expect that to be the way it's going to work on a go-forward basis. You're going to see growth continue on the construction side, both commercial and 1-4 family. And then you more than likely are going to see some negative numbers in the existing categories as more projects move out than actually are moved down from the construction bucket. As it relates to C&I, we did see a decrease. When you look at C&I, we're looking at both C&I plus other loans. And you're going to see a decrease there in that combination of about $26 million. All of that decrease came from 2 sizable substandard energy credits which moved out during the quarter. So actually over 26% -- those 2 loans made up over $26 million. So without those, we would have had some growth in our C&I category. It's still extremely competitive. It's still extremely aggressive in terms of pricing; typically going to be seeing LIBOR plus 175, maybe LIBOR plus 200 on those type of opportunities, but it is very competitive from the standpoint of the number of banks pursuing those. The structures are reasonable to aggressive. The pricing is very aggressive.

Got it. Really helpful. And just to clarify there: You're saying that the other real estate secured segment is multifamily loans.

Yes, your multifamily and your REITs are going to be in that bucket. And we don't have much in the way of REITs, so it's going to be you're going to see your multifamily projects, whether it'd be student housing or apartments, that have -- either they've got a certificate of occupancy, and at that point -- or they'll begin paying P&I. And at that point, we're moving them down into the existing category from the construction category.

All right, okay, great. And then just really quickly on the earning asset growth expectation, with the securities book continuing to runoff here. Are we looking at low to mid-single-digit growth for the year? I mean it looks like that might even be a little difficult.

Yes. I think what we've guided to for the loan portfolio for the -- for '18 was -- once we got past the first quarter, we'd been guiding to low to mid-single digits. I think we expect to see low single digits for the remainder of what we're going to end up being for '18. And then in '19, I do think our expectation is, one, we're going to see more growth in '19 obviously than what we've seen in '18 and really for a couple reasons. We've got -- within our public book, our public finance book, we've got less overhead to clear, meaning we've got less deals that are rolling off during '19 than we did in '18. And that was obviously when -- as those things roll off, we've got to cover that just to remain flat. So we have less to cover in '19 than we did in '18. And then we do expect to see an improvement in our ability to obtain C&I business, which is very difficult. And then on the CRE side, we did see a decent amount of unexpected payoffs that occurred during the first quarter and into the second quarter. I think we're -- with our projections, I think we're better -- we're more comfortable that we not only know what's scheduled to move out. We've also got baked in some unanticipated payoffs, so for that reason, I think we feel more comfortable that we're going to see us -- the amount of growth we have in '19 pickup from what we experienced in '18.

Our next question comes from Jennifer Demba with SunTrust.

Two questions just curious about your exposure to loans, other loans, in the limited-service restaurant and parts distributor industries; and also curious about your appetite for share repurchases at this point going forward.

Barry, why don't you take the loan question? And I'll take the share repurchases.

Okay, I'll be glad to, Jerry. As -- Jennifer, we have very limited exposure to the limited-service restaurant group. I think we're about $34 million there. I'm going to double check my number before I finish the question, but the -- our exposure there is very limited. There's really -- we've got 2 credits that make up the majority of that, and that number also includes the credit in question that we have reserved for very heavily during the quarter. So from that standpoint, I think we're -- we don't have any concerns that we have a systemic problem or anything of that nature as it relates to limited-service restaurant business. That's not somewhere where -- we do a lot of business for a variety of reasons, but nonetheless our exposure is limited there.

Jerry. If you want -- yes, you go ahead and look that up. I'll answer -- yes, I'll answer the share repurchase. And Tom, feel free to jump in. We have an overall capital management process in the organization that we've talked about before that looks at the use of capital with organic growth, anticipated M&A needs, our ongoing dividend plans and then repurchase. And as you'd probably recall, we have a $100 million authorization. It's [good through] margin next year. You didn't see any repurchase activity through the end of the third quarter, but obviously you've seen some movement in the overall stock market. And when you look at that in conjunction with our long-term outlook and vision relative to how we view our stock, I think you can see that -- or anticipate what might we'd be looking at for the fourth quarter. So all 4 of those aspects of capital utilization are looked at on a very regular basis. And obviously, with this backup in the market, we're going to take advantage of opportunities whenever we can.

And Jerry, just to circle back around Jennifer. The -- our total exposure in that limited-service categories is $44 million, not $34 million. And that does include the credit in question, which probably gets us down more to $34 million remaining after that credit is fully resolved, which we expect it to be during Q4. So it's really a few, a handful of number of credits that make that up. And we've looked at all those, and we're very comfortable with what -- I'm not so sure if the problem credit is specific to the industry as it is -- as much as it is to the company itself.

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

This is Brandon Steverson on for Matt. I wanted to go back to the expenses. I appreciate that, earlier, you gave commentary on the fourth quarter core expenses expected to be in line with the $103 million we saw this quarter. And just doing quick math, I think that puts us at about a 2.5% expense growth year-over-year for 2018. Is that a reasonable expectation for 2019 as well kind of just looking forward? Or is the -- is there going to be a pullback in IT spending that we've seen -- that could make that number a little lower?

Well, first of all, as far as IT spending, we have spent a significant amount over the last 6, 7, 8 years upgrading a variety of systems in the company that we've talked about. The world we live in, though, I think, demands that you stay current with your systems with cyber security. And so from that perspective, we can see a leveling, but I don't see any significant pullback in IT expenses. And Louis, you may want to comment on projected [going forwards].

Well, Jerry, I'll just comment certainly I don't think we're ready to give any guidance on '19 yet. We're still on our strategic planning process and budgeting process, but as you can see on Page 9, we maintained that expense -- core expense number for about 5 quarters at $100 million. And you can see, in the second quarter, it came up to about that $103 million. Third quarter was about $103 million, so we do expect to maintain that through the fourth quarter. And again, we don't want to offer anything for '19, as we're in our planning process today.

Understood. And then last one for me, can you just remind us how much of your loan book gets exposure to shared national credits?

Yes. There is...

Sure. I'll get -- let me just get the number up now. Sure. This is Barry. I'd be glad to. When we look at our shared national credits, what we've got from an exposure standpoint, we're going to be about $1.2 billion. From an outstanding standpoint, we're going to be about $792 million. And that's as of 9/30.

Our next question comes from Catherine Mealor with KBW.

And I apologize. I've been jumping in and off the call, so if this has already been asked, then I can just go back to the transcript, but wanted to ask about your loan-to-deposit ratio being so low versus your peers in the low 80s. Any thoughts as to how you -- how that should be trending over time as you balance in your balance sheet remix efforts?

Yes. Catherine, this is Tom. I would expect that to -- that ratio to trend higher. Mentioned early on in the prepared comments talking about the growth in deposits year-over-year, we've had pretty good success in attracting public fund deposits at rates that are substantially accretive to earnings. And so really I think, absent that, you would have seen a more gradual increase in the loan-to-deposit ratio. So going forward, I would expect that to be the case, that it would continue to trend higher. And hopefully, that's a helpful answer. Was that a...

Yes, yes, that's great. And I think all of my other questions were asked and answered.

(Operator Instructions) At this time, there are no further questions in the question queue.

Great. Thank you, operator. And thank all of you for joining us this morning on our third quarter call. We look forward to visiting with you in January to go over our fourth quarter and year-end results.

And again, thank you much, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. And you may now disconnect.