Trustmark Corp (TRMK) CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.24.13 | About: Trustmark Corporation (TRMK)

Trustmark Corp (NASDAQ:TRMK)

Q2 2013 Results - Earnings Call Transcript

July 24, 2013 11:00 AM ET

Executives

Joey Rein - Director of IR

Gerry Host - President and CEO

Louis Greer - Chief Financial Officer

Barry Harvey - Chief Credit Officer

Breck Tyler - President of our Mortgage Company

Buddy Wood - Chief Risk Officer

Analysts

Kevin Fitzsimmons - Sandler O'Neill

Catherine Mealor - KBW

Preeti Dixit - JPMorgan

Blair Brantley - BB&T Capital Markets

Operator

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's second quarter earnings conference call. At this time, all participants are in listen-only mode. (Operator Instructions) Following the presentation this morning, there will be a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded.

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

Joey Rein

Good morning and thank you. I would like to remind everyone that a copy of our second quarter earnings release and supporting financial information is available on the Investor Relations section of our website at trustmark.com. During the course of our call this morning, 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 would like to introduce Gerry Host, President and CEO of Trustmark.

Gerry Host

Thank you, Joey, and good morning everyone, thanks for joining us. Also with this morning are Louis Greer, our CFO, Barry Harvey our Chief Credit Officer, Breck Tyler, President of our Mortgage Company, and Buddy Wood our Chief Risk Officer. We continue to build momentum and experienced revenue growth in excess of 7% during the second quarter we recorded solid financial results across our business lines and various geographic markets.

Let me cover with you some highlights of our second quarter of 2013. Highlights for the second quarter included net income of $31.1 million or $0.46 per share which produced a return on average tangible common equity of 14.09% and a return on average asset of 1.06%. As you may recall we completed our merger with BancTrust in February, and in March completed the operational conversion the second quarter was the first full quarter that included the financial results of the merger and I'm pleased to report net income attributable to BancTrust totaled $6.1 million in the second quarter which included $2 million after tax from recoveries on payoffs on acquired loans.

Also our Board declared a quarterly cash dividend of $0.23 per share payable September 15 to shareholders of record on September 1.

Let's review our second quarter accomplishments in more detail. First the balance sheet, average earning assets increased roughly $840 million in the second quarter reflecting the first full quarter following the BancTrust merger. Average total loans increased over $400 million while average investment securities increased more than $430 million. Average deposits increased approximately $940 million from the prior quarter.

Loans held for investments, our legacy loan portfolio, totaled $5.6 billion at June 30, an increase of $46 million from the prior quarter. Growth was broad-based by type as well as by geography. Construction lending expanded $34 million during the quarter due to growth in our Texas, Mississippi, Alabama and Tennessee markets. Commercial real estate loans increased $21 million, reflecting growth in Texas, Florida, Alabama and Mississippi. Other real estate secured loans grew $18 million principally due to growth in our Mississippi and Tennessee markets.

Increased lending public entities and school districts in Mississippi and Alabama was largely responsible for the $25 million growth in our other loan category. One-to-four family mortgage loans declined $15 million as we elected to sell the vast majority of our quarterly production of these lower rate, longer term mortgages in the secondary market rather than replace run-off in the portfolio. Commercial and industrial loans declined $38 million as growth in Alabama was more than offset declines in Trustmark's other markets during the quarter.

We are seeing organic loan growth and believe it will improve during the second half of the year. Our loan pipeline is encouraging. We have loans on the books that are beginning to fund primarily construction loans for multi-family and commercial real estate project in Houston, Memphis and Mississippi. Deposits of June 30th, totaled $9.8 billion down $92 million from the prior order. Much of this decline is a result of efforts to reduce pricing on single deposit accounts particularly in Alabama markets.

Turning to capital, Trustmark's total common equity was $1.3 billion at June 30th, down $26 million from the prior quarter. The $15 million growth in retained earnings during the quarter was more than offset by the $44.5 million net of tax declined in value in our AFS securities portfolio caused by rising interest rates.

We continue to optimize our capital base during the second quarter with a previously announced redemption of $33 million in high cost trust preferred securities acquired in conjunction with the BancTrust merger. Our solid capital base provides opportunity to support organic loan growth in an improving economy. Tangible common equity to tangible assets was 7.96% and total risk based capital 13.89% at June 30th.

Now turning to credit quality, we continue to experience significant improvement in credit quality as evidence by reduced net charge-offs and provisioning. Please note that the credit metrics, I will discuss exclude acquired loans and other real estate covered by an FDIC loss share agreement.

At June 30, 2013 non-performing assets totaled $192 million, a decrease of 4.8% from the prior quarter. Non-performing loans totaled $74.3 million, a decline of 10.8% from the prior quarter, while foreclosed other real estate, totaled $117.7 million a decline a 0.6%.

Recoveries exceeded charge-offs during the quarter, resulting in net recoveries of $771,000 in the second quarter compared to net recoveries of $1.1 million in the prior quarter. Provision for loan losses for the second quarter was a negative $4.8 million as a result of the net recovery position and improved credit quality within our loan portfolio.

Allowance for loan losses totaled $72.8 million and represented 1.48% of commercial loans, 0.84% of consumer and home mortgages, 1.31% of total loans held for investments, this represents a 158.8% of non-performing loans excluding impaired loans. Looking at the income statement, net interest income totaled $103 million in the second quarter, an increase of $10.3 million or 11.2% from the prior quarter. The net interest margin was 4.02% or 4 basis points higher than the last quarter, due to a significant increase in average acquired loan balances from the BancTrust merger as well as a favorable decline in the cost of interest bearing liabilities.

The yield of our acquired loans totaled 8.48% to the quarter and included recoveries of $6.5 million for loan payoffs. Approximately half of which were attributable to BancTrust. These recoveries represent approximately 2.66% of the total acquired annualized loan yields in the second quarter excluding the impact of acquired loans, the net interest margin compressed 11 basis points from the prior quarter to 3.55%. Given the current interest rate and competitive lending environment, we would expect the pace of decline in the net interest margin excluding acquired loans is slow and then flat.

Looking ahead, we could expect the net interest margin excluding the impact of acquired loans to decline roughly half as much in the third quarter than experienced in the second quarter or approximately 5 to 7 basis points.

Non-interest income totaled $43.7 million and included a contribution attributable to the BancTrust merger of $3 million. Mortgage banking production in the quarter totaled $424 million up 8% from the prior quarter, part in due to refinance activity from the home affordable refinance programs.

Mortgage banking revenue in the quarter totaled $8.3 million down $3.3 million from the prior quarter due principally to lower gains on secondary marketing loan sales caused by tightening spreads and reduced positive hit in affect hedge ineffectiveness. We would expect refi volumes to decrease over time as mortgage rates move higher. However, we are experiencing market share growth in many of our legacy markets in addition to opportunities provided by the recent BancTrust merger.

We are adding additional mortgage loan officers in selected markets and have fewer mortgage broker competitors. We also have a positive traction; we have positive traction through our corporate referral initiatives.

Mortgage banking continues to be a very important earnings contributor for Trustmark. Interest revenue for the quarter totaled $8 million, an increase of 10.7% from the prior quarter and an increase of 11.6% relative to the prior year.

This organic growth is due in part to increased commercial insurance sales as well as the continued firming of insurance rates. Wealth management revenue during the quarter totaled $6.9 million and included a $1.1 million contribution from BancTrust.

Fee income attributable to our banking business posted significant growth during the quarter. Service charges on deposit accounts totaled $12.9 million, up 10.7% from the prior quarter and included a $1.2 million contribution from BancTrust.

Bank card and other fees income totaled $9.5 million, an increase of $1.6 million or 19.7% from the prior quarter. Other income decreased $954,000 relative to the prior quarter due primarily to increased write-off of the FDIC indemnification assets resulting from the re-estimation of cash flows and loan payoffs.

Non-interest expense for the quarter totaled $107.2 million and included expenses of $11.4 million reflecting the first full quarter of operations following the BancTrust merger. It also included non-routine litigation expense of $4 million related to our previously announced proposed settlement concerning overdraft fees for debit card purchases and ATM withdrawals.

Salaries and employee benefit expense totaled $55.4 million in the quarter and included BancTrust related expense of $5.7 million. Excluding BancTrust related expense, salary and employee benefits totaled $49.7 million in the second quarter, up $1 million from the prior quarter.

Excluding ORE expense, CDI amortization and non-routine litigation charges or non-interest expense totaled approximately $95 million in the second quarter. We would expect a similar level during the next quarter.

To enhance productivity and efficiency, we continue to realize our branch network. In April, two of our Houston offices were consolidated into one new office. In May, five overlapping offices in the Florida Panhandle as a result of the BancTrust merger were consolidated.

Year-to-date, we've opened three new offices and closed our consolidated eight offices. We have an ongoing market optimization process to identify opportunities to refine our delivery channels which will enhance shareholder value. We anticipate completing our previously announced purchase of two branch offices in Oxford, Mississippi later this week. In addition, to the branch offices, we will soon select the deposit account of approximately $12 million from SOUTHBank.

As I said at the beginning of our call, we continue to build momentum in the second quarter. Revenue increased 7% to $143 million, credit quality continues to improve, we have expanded our marketplace in Alabama and that provide significant opportunities for growth.

We continue to be optimistic about opportunities going forward in all of our markets. At this time, I would be happy to take any questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions)

Our first question comes from Kevin Fitzsimmons with Sandler O'Neill. Please go ahead.

Kevin Fitzsimmons - Sandler O'Neill

I appreciate the outlook on the core margin. Can you give us some help in how to look at or how you are looking at the reported margin from here, should we just be thinking about this kind of pace accretion income as declining overtime and take the reported margin down by similar or greater amount, if you can just give us your best sense on that? Thanks.

Gerry Host

Kevin, what I would tell you is that we would anticipate the add-back from the acquired loans to continue for at least a couple of quarters. Although, that as you know, it's very unpredictable. But there certainly are loans that we are working on well in process of moving through either the [code] system or working with customers that we believe will continue to add some value.

As far as the margin relative to our core loan portfolio and our investment portfolio, we feel as though as we just gave guidance that we'll take some continued tightening primarily due to a very competitive loan environment and obviously, a repricing of asset run-off roughly $600 million a year, a pace of $600 million a year into lower yielding securities. But we do believe that the decline we've seen in the last two quarters of 11 basis points each in that core margin has slowed and will continue to slow and flattened.

Kevin Fitzsimmons - Sandler O'Neill

One quick follow-up, just in terms of the loan growth, when you mentioned the decline in C&I, you mentioned how growth in Alabama is getting offset elsewhere, can you just give us a sense on why we are seeing negative growth elsewhere, is that a matter of pay-downs, other people are taking loans from you or is that something that's deliberate that you are pulling back? Thanks.

Gerry Host

It actually is primarily pay-downs on lines. So loans are not going away but we saw in the second quarter about six specific companies that had significant pay-downs relative to the C&I portfolio.

So, again as those companies utilize those loans, we feel like we will see that volume come back. Pipeline for C&I looks good but it's probably one of the most competitive categories we are seeing out there. So, we are maintaining relationships, ensuring that we keep those loans, certain transactions, we are winning some and we are losing some.

The public market, it's always the sixth. We competed on last week and we won four of the six. The ones we didn't lose were rates that we just didn't win. So, very competitive market, we are in the middle of it. We did experience pay-downs primarily due to people reducing their line balances and we would expect to see those utilized in the future.

Operator

Our next question comes from Catherine Mealor with KBW. Please go ahead.

Catherine Mealor - KBW

On the provision, how should we think about provision going forward and how much lower you might be comfortable taking the reserve to one ratio? Can we see another couple of quarters of negative provision or do you think we are maybe path that we will just kind of see flat or maybe even zero provisioning to may be very modest provisioning as we move forward?

Gerry Host

I'll ask Barry Harvey to respond to that question.

Barry Harvey

Catherine, I would think as we move into the second half of the year we may see some continuation of negative provisioning. What's driving the provisioning or the negative provisioning is a result of our -- when you look our quantitative part of our loan loss reserve, we've got a 12 quarter rolling average of historical losses. As you can look back and see the losses, the quarterly losses that are rolling out back from '10 are going to be fairly high in terms of our loss experience versus what we are experiencing today. So as we roll on a quarter with leverage and losses, we roll off older quarters with much, much higher losses, then there will be a natural progression for the reserves to move downward, just based upon the way the model has been. So from that perspective I would anticipate making some negative provisioning over the next few quarters and then maybe some flattening out and just kind of depends on what the economy does after that.

Operator

Our next question comes from Steven Alexopoulos with JPMorgan.

Preeti Dixit - JPMorgan

This is actually Preeti Dixit on for Steve. Just wanted to ask you the TC ratio sitting around 8%, do you feel like you have capacity to do another deal here or will it be more of these one-off branch deals, maybe some color on what the opportunities, that looks like would be helpful?

Gerry Host

Thank you. We do think that, well we know that our focus right now is on expanding the opportunities afforded in Alabama because of the $2 billion acquisition there. We continue as most other banks in our acquisition status. We continue to look at opportunities out there. It would depend on the size of the transaction as to whether or not we felt it, so we would have adequate capital. To do transaction that we have done in the past, in the $500 million range, we think we will be building capital, and it would be sufficient to handle those. Should we see something larger? We have to look at our options that would be available to us.

Preeti Dixit - JPMorgan

Okay, that's really helpful. And then could you give us some more color on the higher mortgage production this quarter, maybe how much is coming from refi versus purchase and also your outlook on volumes and the gain on sale margin, it would be helpful? I think your margin was about 180 basis points this quarter.

Gerry Host

Sure, Breck Tyler will answer that.

Breck Tyler

This is Breck. As you indicated our first quarter volume was $392 million, that's about 66% refi. In the second quarter, the $424 million was 54% refi. So we're very encouraged by the purchase activity. About 55% of our monthly volume is retail internally generated. That gives us opportunities as rates move higher to spin a little bit more emphasis on the REIT that the third-party side to make up that volume, in fact if even rates go up and the volumes go down overall.

So again as Gerry indicated, we're very encouraged in terms of the BancTrust opportunities. We will expand the Alabama footprint and some very significant markets backfilling the Florida markets that we have been in previously. Over the last five years or so, we've kind of been in a holding pattern in the Memphis market just due to the challenges there of housing and now we're aggressively expanding our origination platform.

We see continued Houston opportunities to expand our retail production. And as Gerry indicated, we are seeing market share growth in our legacy markets, love it due to the market share we have in the banking side significant servicing portfolio to leverage also a pretty strong referral process. So yes, as Gerry indicated gain on sale margins do decrease as rates move higher and refis go lower and those are challenges throughout the industry, but we are encouraged by the opportunities that Gerry indicated and I have alluded to.

Preeti Dixit - JPMorgan

That's helpful. Is there a kind of a long-term gain on sale margin we should think about for you guys?

Breck Tyler

We're really not sure what the new norm is going to be with the changes in the marketplace and the different market players that are there. We feel like the new norm will be higher than what we've experienced over the last 15 years, but we're just not certain, but we probably continue to see some decrease in gain on sale margins from here as rates go up and refis decrease and competition continues to decide.

Operator

We'll move on to our next question now which is from [David Bishop]. Please go ahead.

Unidentified Analyst

Turning back to the mortgage side, I mean, obviously, non put volume production right now, are you going to close at a point or does it become a point here pretty soon or you would start to think about put volume net production?

Gerry Host

Great question, thank you and yes. We are, we came a little bit lately about booking a 15-year production once rates dropped below 3%. Now that we're back above those levels, we believe that this production coming out of mortgage company present some opportunity, put some of these products back on the balance sheet. We're feeling you compare this even though we've had very, very high quality mortgage loan portfolio. When you compare the changes that had taken place in the industry over the last couple of years that we're booking much higher quality paper and now that the yields are backup again, it does provide us an opportunity to put some of this back on the balance sheet.

Unidentified Analyst

Got it. And then I think in the earnings preamble you talked about growth in the pipeline in terms of multi-family and commercial real estate, which markets were those again and maybe some color on those eligible markets in terms of those opportunities?

Gerry Host

Well, we're actually seeing growth in the Texas market and the Alabama market and Tennessee would rank third and then Alabama next we're actually -- of course we're early into that market. We are working with our new group of lending offices over there. We have a number of senior credit officers that have gone into that market as well as a few leaders to work with our new Alabama associates and we are starting to see deals that they may not have been able to look at in the past available to us, they have just not yet come to fruition.

The other thing I would say is that we talked two quarters ago about feeling good about some of the construction projects that we're involved in and that had come through the pipeline had booked. We are not really seeing the benefit of that because our programs required it as most banks said that the lenders utilize their cash in the projects first before they start borrowing down [on their lines].

And as the market is tightened, we have also seen the requirement at least from our perspective for a high percentage of cash into the transactions that we are doing and the effect is then to delay when these loans draw down. And I think during the third and fourth quarter of this year those projects are at a point where we will start to see increased utilization on those lines. Barry, are there any other comments you think should be added?

Barry Harvey

No, other than the fact Gerry that I think when we talk about competition and how competitive is on the C&I side and it is very competitive from CRE side as well, but there maybe one or two less players just because there are several banks. We still have quite a bit of CRE that they're trying to work down from to the levels they currently are. So it does present an opportunity for us to be in there among a few less banks from deal to deal looking at it and we have focused on a very, very strong developers who are as we said earlier putting in many cases 30%, 35% to 40% of their own money into the deal before we get opportunity to fund. So it has delayed our funding which will eventually occur and will come quicker when it does, but it has put us probably six months behind when they would normally begin to fund on those projects we have on the books.

Gerry Host

Yeah, the only other thing I'm going to add Dave is that we have remained extremely disciplined as the economy has begun to recover relative to our lending practices both with structure, quality and pricing and where we from time to time are getting looks and criticism about slow growth. We remain disciplined. We are comfortable with what we are doing. We are growing in the categories. We have the capacity to grow in and have the opportunity. We are not chasing deals outside of our markets, outside of our experiences, and as a result we continue to fight that battle of paydowns on these acquired loans. Without that, we would have seen growth this quarter and we do feel good about where the pipelines are, but we will continue to be disciplined in our lending practices.

Operator

We have a question from Blair Brantley from BB&T Capital Markets.

Blair Brantley - BB&T Capital Markets

I had a quick question about kind of the operating expense run rate going forward and how we should kind of think about it in terms of how much more cost savings are from BancTrust and what your kind of targeted number might be for the near-term?

Gerry Host

Great, Blair. Thanks. Louis Greer will answer that.

Louis Greer

The question is the expense run rate going forward as well as the cost saves from BancTrust. I think as Gerry mentioned in his comments that we had [$100 million] roughly $11 million worth savings from BancTrust. You annualize that you are looking around $44 million, $45 million. If you remember, BancTrust had a run rate of somewhere between $58 million and $60 million. So we've accomplished somewhere between 23% and 24% of cost saves in their original run rate and we're looking at we acquired BancTrust.

So I think we're almost there on BancTrust on our cost saves. So their run rate is going to be about [$11 billion] a quarter. When you look at trust market, I think Gerry mentioned in his comments, when we look at core expenses with your total expenses less ORE expenses less our CDI and I think CDI on a quarterly basis is roughly 2.5 and I think this quarter we had about $5 million. Hopefully we will expect that going forward. So reconcile that, I think Gerry mentioned about $95 million run rate per core expense. If I remember that excludes ORE expenses as well as CDI amortization.

Blair Brantley - BB&T Capital Markets

Okay, and your OREO bucket, how much is BancTrust this quarter?

Louis Greer

I am sorry, I didn't hear that.

Blair Brantley - BB&T Capital Markets

In your OREO bucket, how much is BancTrust for this quarter?

Louis Greer

And you wanted the expenses or balances?

Blair Brantley - BB&T Capital Markets

The balances, I am sorry.

Louis Greer

It's going to be about $45 million of the OREO.

Blair Brantley - BB&T Capital Markets

Okay. And then let me get some question on theory, are you guys seeing any increase from the non-bank compensation for that, so there is credits from insurance company, or anything else like that?

Louis Greer

It's limited, when we do it's in our Houston market, but predominantly it's still going to be traditional banks or the majority of the competition even in the Houston market that we see, but outside of Houston, we see very little competition from our non-banks or CRE projects.

Gerry Host

I will add though that we are seeing and some of the larger participations and we do not have that large a book. We are seeing that some of the larger lead participants are taking more of a particular deal at renewal and squeezing out some of the smaller participants. So that I guess is one area, of other area of competition per volume.

Blair Brantley - BB&T Capital Markets

And then in terms of rates have you seen any new change of rates at this point with the [slicking] of yield curve, any color on that, those competitions have failed pretty fast?

Gerry Host

On the C&I side we really haven't, I mean what we do see that we haven't chased is there are some banks that are providing continued provide lower rates and longer terms and those are deals we're not chasing. But from the standpoint of most floating rate product still remains extremely competitive.

Blair Brantley - BB&T Capital Markets

And then in terms of some other fix rate theory, (inaudible) has there have been any change, there?

Gerry Host

I think Barry mentioned there are quite as many players that have ability to get slightly higher yields and where we've been over the last several years has been good as far as committing to those deals we're actually working with customers on swaps and are very competitive there.

Blair Brantley - BB&T Capital Markets

Okay. Thank you very much.

Gerry Host

Thank you.

Operator

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

Gerry Host

Thank you, operator and thank you all for joining us today and we feel like we've got good momentum going, we're pleased where we are relative to the BancTrust transaction and believe we will see continued momentum and opportunities in that market. And again we appreciate you joining us today and look forward to our third quarter conference call.

Operator

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

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