Trustmark Corporation (NASDAQ:TRMK)
Q4 2015 Results Earnings Conference Call
January 27, 2016, 11:00 AM ET
Joey Rein - Director, IR
Gerard Host - President and CEO
Louis Greer - CFO
Barry Harvey - Chief Credit Officer
Tom Owens - Bank Treasurer
Preeti Dixit - JPMorgan
Catherine Mealor - KBW
Good morning, ladies and gentlemen. And welcome to Trustmark Corporation's Fourth Quarter Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. 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 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 fourth quarter earnings release, as well as a 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 President and CEO of Trustmark, Jerry Host.
Thank you, Joey. And good morning, everyone, thanks for joining us. Also here with me are Louis Greer, our CFO; Barry Harvey, our Chief Credit Officer; and Tom Owens, our Bank Treasurer.
Let's begin by reviewing some highlights on Page 3 of the presentation material. 2015 was a year of significant achievements. Thank you to our associates for their hard work and thank you to our customers, communities and shareholders we have the privilege of service.
Looking at profitable revenue generation, loans held for investment growth was solid, increasing $642 million or 10%in 2015. This is the second consecutive year of substantial loan growth.
Looking at the core business revenue, excluding interest income from acquired loans increased $12 million despite the prolonged low interest rate environment that our industry continues to face.
Our insurance business had a record year, achieving the highest level of revenue in Trustmark's history. This achievement reflects the combination of realigned processes and structure, as well as investments and additional producers to support continued growth.
Mortgage banking also reported strong results with revenue increasing nearly 22% in 2015. These results also partially reflect growth investments made throughout the year. Our portfolio of complimentary fee income businesses performed well and counterbalanced seasonal and cyclical activity throughout the year.
As for the acquired loan portfolio, performance continued to exceed our expectations contributing to solid capital base and providing the flexibility to support additional growth.
Moving on to process improvement and expense management. We have and continue to focus on realigning the organization to position the corporation for continued success. During the fourth quarter, routine non-interest expense remained well controlled and totaled approximately $97 million down from both the prior quarter and year-over-year. This figure reflects both achieved costs savings, as well as reinvestments to support revenue growth.
As an example, we continue to realign our delivery channels. And in 2015, we consolidated eight banking centers and opened three. In 2015 we also introduced myTrustmark, our new consumer mobile banking platform and remained excited about the opportunities technology will play in enhancing the Trustmark banking experience.
Under credit quality, credit quality metrics continue to remain solid as criticized and classified loan balances improved from both the prior quarter and comparable period one year earlier. Nonperforming assets also declined on a linked quarter in year-over-year basis.
Overall in 2015 net income totaled 116 million which represented earnings per share of $1.71. Return on average tangible equity and return on average assets came in at 11.36% and 0.59% respectively.
I would also like to remind you that our Board declared a quarterly cash dividend of $0.23 per share payable on March 15, 2016 to shareholders of record on March 1.
If you will turn now to Slide 4, we will discuss the results in a little bit more detail. For the fourth quarter of 2015, average deposits totaled 9.4 billion yielding a total cost of deposits of just 13 basis points. Our well diversified, low cost deposit based reflects in part the sustainable relationships we have built over time.
In fact Trustmark maintains either a number one or number two deposit share ranking in 46% of the counties we serve. We’ve worked hard to develop these relationships over time and continue to view a positive base as a source of strength for the Trustmark franchise.
Turning to Slide 5, we'll look at Credit. As a reminder, unless noted otherwise these credit quality metrics I'll discuss exclude acquired loans and other real estate covered by FDIC loss share agreement. Relative to the comparable period one year earlier, we saw material improvements in many of our credit metrics including credit size and classified loan balances as well as non performing assets.
In 2015 net charge-offs totaled $10.4 million while provision for loan loss is totaled $8.4 million. When considering the relationship of net charge-offs to provision for loan losses, it's held to review a couple of data points. Non-performing loans, the total loans, which include loans held for sale improved significantly to 76 basis points from year end 2014 to 2015, while allowance for loan losses to non-performing excluding the impaired loans increased to approximately 210% during the same time period.
I said all this to highlight the improvement of non-performing assets relative to the current reserve, which represents a level management considers commensurate with the inherent risk in the loan portfolio. At December 31, 2015, the allowance for both held for investment and acquired loan losses totaled $80 million and represented 1.06% of the held for investment and acquired loan portfolio.
Now turning to Slide 6. We'll be looking at our loans held for investment portfolio. At December 31, 2015 loans held for investment totaled $7.1 billion, an increase of approximately $300 million from the prior quarter and $642 million for the year. Growth throughout the year was generally diversified across our five-state franchise as we maintained share in our legacy markets and expanded in markets with greater growth opportunities.
Looking at our energy portfolio, Trustmark has no loan exposure or the source of repayment or the underlying security of such exposure is tied to the realization of value from energy reserves. Additionally, as of December 31, 2015, Trustmark had no non-performing or non-accrual loans in its energy portfolio.
At quarter end, Trustmark's total energy exposure and outstanding balances were $416 million and $213 million, respectively. Should oil prices remain at current levels or below for a prolong period of time there is a potential for downgrades to occur. We'll continue to monitor the situation as appropriate.
Now looking at Slide 7, let's discuss the performance of our acquired loan portfolio. At December 31, 2015, acquired loans totaled $390 million, a decrease of approximately $29 million from the prior quarter. As a result of our most recent re-estimation of cash flows, we expect the yield on acquired loans excluding recoveries to be in the 5.5% to 6.5% range for the first quarter of 2016. We also anticipate during the first quarter that acquired loan balances excluding any settlement of debt declined by approximately $25 million to $30 million.
Let's look at revenue highlights by turning to Slide 8. Net interest income for the fourth quarter totaled $104 million and resulted in a net interest margin of 3.74%. Excluding acquired loans and yield maintenance payments, the net interest margin in the fourth quarter totaled 3.4%. In the fourth quarter, non-interest income totaled approximately $39 million.
Insurance and mortgage banking continue to perform well during 2015, but were both impacted by seasonal decline in revenue in the fourth quarter. Excluding the impact of the net hedge ineffectiveness, mortgage banking revenues in the fourth quarter increased 6.8% year over year.
Turning now to Slide 9, we'll review non-interest expenses. In the fourth quarter, excluding ORE and intangible amortization of $1.4 million, routine non-interest expense totaled approximately $97 million, down from both the prior quarter in year-over-year. Salaries and benefits expense declined late quarter, primarily because of seasonally lower insurance and mortgage production commissions.
As I mentioned earlier on the call, we believe technology such as myTrustmark will play a pivotal role in the overall Trustmark banking experience and view this delivery channel as a compliment to our branch network.
With that said, we continually review our branch footprint to ensure the customers relationships are maintained in opportunities are present to further enhance these relationships. This approach has proven successful and over the past three years has resulted in 27 consolidated offices and eight new offices.
Now looking in Slide 10, capital management. Trustmark continues to maintain a solid capital base and remains well positioned to meet the needs of our customers and provide long term value for our shareholders. At December 31, 2015 Trustmark’s tangible equity to tangible asset ratio was 8.79%, while the total risk based capital ratio was 14.07%. As always we’ll remain prudent and diligent in the evaluation of all capital deployment opportunities.
Looking now to Slide 11, we’ll conclude with our strategic priorities. As I mentioned in the beginning of the call, 2015 was a year of significant achievements but as we look forward to 2016 there is still a lot of work to be done. We’ll continue to focus on expanding sustainable customer relationships while also creating long term value for our shareholders. We believe the strategic priorities in place align our activities with our focus and we’ve contributed to the value of Trustmark's franchise.
At this time I would be happy to take any questions.
[Operator Instructions] Our first question is from Preeti Dixit of JPMorgan. Please go ahead.
Could you give us a quick update on how the $213 million of energy balances splits between services, midstream, etc.? And I know overall criticized and classified loans were down this quarter, but did you see any migration in the energy book specifically?
Preeti, I'd like Barry Harvey to give you a little bit more detail on that.
I'd be glad to Jerry. Preeti, I guess just starting off, our energy book is of a reasonable size and we feel positive about it while not being oblivious obviously to what’s going on in the marketplace. So we view this credits from a working capital - non-working capital perspective in terms of how we categorize them and then how we risk rate on then and how we reserve on.
So that’s kind of a little bit of back drop to of how we view the portfolio at this point and the reason that is the case is because of the mix we do have. And from an exposure standpoint, we got upstream which is going to be about $2.9 million basically non-existent. We’ve got a few consulting companies who operate in that space but as far as, as Jerry indicated earlier, as far as actually getting repaid based on what’s in the ground or lending on what’s in the ground that’s not the case.
On the midstream, we are about $171 million worth of exposure which makes up about 41% of our entire energy book. Downstream were about $52 million which makes up about 12% of our energy book and then oilfield services were $190 million which makes up about 46% of our entire energy book.
From a balance standpoint upstream is $1.3 million, midstream is $78 million, downstream is $13 million, oil services was $120 million making up the total of $212 million worth of outstandings in the energy book.
Okay, that's really helpful. And then any color on downward credit migration in the quarter?
Sure. We had one credit in the - coming out of the oilfield services category that we – that was material that we migrated down from a past category and then but that was the only change during the quarter. We’ve got - like every bank does we've got a very detailed process by which we're obtaining interim financial statements, spreading those statements, analyzing them, seeing what they’re telling us, looking to see, getting the monthly borrowing bases for the working capital credits and recalculating those borrowing bases, looking to see if we have breaches.
Obviously, if we do, addressing those with the customers, even more forward looking we're getting projections from the customers on a regular basis, comparing those to the actual when we get them in, looking to see if any of their projections would lead to a covenant break in the future addressing that as it presents itself.
So we're trying to be as proactive in dealing with our operating companies and that’s what our energy exposure is made up of operating companies, whether it be working capital or non working capital.
Okay, that's really helpful. Do you have the reserve broken out for what it is on the energy book? I'm just trying to triangulate the pressure we are seeing likely on services companies as E&P companies cut CapEx and maybe how that would impact your reserving going forward if you think there's going to be upward pressure on the overall reserve ratio.
We've not specifically taken our energy book out from a reserving perspective and handle it separately. So it is part of our overall reserving process and like I had indicated earlier its more based upon the category it falls in, working capital, non-working capital, and that drives along with the risk rating how we actually reserve but we've not broken that out and we've not presented that information separately at this point.
If we see it a further deterioration in our book overtime we will be quick to carve that portfolio out, establish any specific a reserving unique to it that is necessary but we've not done so at this point.
To your other question regarding CapEx obviously what we saw as everybody did in the early part of '15, when the downturn started in the fourth quarter of '14 and moved down into '15, we saw a very, very quick reaction, all of our customers to cut variable expenses everywhere they could and of course CapEx is a big part of that both in '15 and then of course CapEx is fairly non-existent in '16 projections.
Okay, very helpful color there. And just switching gears to expenses, obviously a great story there this year. You've been able to hold expenses pretty flat despite the investments you've been making. Maybe some color on how you think 2016 shapes up in light of any additional investment spend?
Preeti, this is Louis Greer. Certainly you hit a good point. We kept our core expenses in '15 very flat at $389 million as we go in to 2016, as you look at our salary and benefit line item, you see that it slightly went up about 3.5 million this year, that’s strictly pertaining to expenses related to our cap, I’ll let you know that we reduced our headcount during 2015, 119 million as a result of continued consolidation of branches, as well as the utilization of technology as you had mentioned.
We're focused on continuing to do that throughout '16. And we expect that we could hopefully keep our core expenses relatively flat in 2016, I’ll give you a range of about 97 million to 98 million as a run rate potentially for 2016.
And I'll add a little color, this Is Jerry. We have talked within the corporation sections, we've talked within the corporation about the changes overall in the economy, the challenges of a continued low interest rate environment and obviously what’s happened in the stock market and the impact overall.
And so there is very much a focus on utilizing the technology spends that we've made over the last five years to improve overall efficiency and process in the company while really at the same time maintaining a focus on how we can better serve our customers. When they want it, where they want it and that means we have to realign the delivery channels within the company.
You do it too quickly I think you risk losing relationships. You do it at the right speed as reflected in some of the statements we made earlier about the number of offices we've consolidated. While at the same time, opening new offices in areas that we think provide us some real advantage and staying focused on those areas within our footprint that provide growth and hiring loan officers, relationship managers that can help us grow are all things that we have to do to keep the company strong, viable and continue with earnings growth.
I meant to say 119 associates versus [indiscernible]. A small correction and Joey pointed that out to me. I said million instead of associates or full-time equivalents. So I apologize for that.
[Operator Instructions] And our next question comes from Catherine Mealor of KBW.
I just wanted to follow-up on Preeti's energy questions. Just one more for you. It's if you think about the portfolio, have you done any – I know you don't break out the reserve, but have you done any stress testing in that portfolio into distressed, what could happen in that portfolio if oil prices remain at these current levels for a lot longer time, what level of provisioning we could see in that kind of scenario?
Hey Catherine, this is Barry. Let me address that in a couple of ways. We have looked at our portfolio, one, to determine the correlation with the oil prices and their particular services they are providing. When you look, for example, obviously when you look at our portfolio mix, the area of most interest is going to be the – since we are not in the upstream, it's going to be the oil field services where we've got about 46% of our exposure. When you look at that, about 78% of our outstandings in the oil services area are not related to drilling. They're related to providing services where there is vessel services, where there is air transportation, two producing wells.
So from that perspective there is a correlation undoubtedly between how our portfolio performs and the commodity price. But some of it a little less directly related. So we've gone in and tried to understand what's the correlation and from there we looked to see, how's the portfolio performing.
And when you talk about the portfolio overall, let me give you a couple of performance managers that I think might be indicative of how things are going thus far. And we're talking most of our customers are going to be calendar year end. So when you look at the last nine months or the nine months during 2015, you can see that the great, great majority, almost of our borrowers have positive EBITDA during the first nine months of '15.
And then a large portion of our – the same customers during the first nine months of 2015 have a fix charge coverage of 1.1 or greater. So they've got room for some further deterioration. We fully expect the revenues to continue to be stressed. They've done a lot of the expense reduction that can be done. So it's going to continue to be a squeezing process.
But nonetheless we feel good about where are today knowing that as things deteriorate, we need to be quick to change our grades, reserve more for those credits, and move forward. And if we have, eventually have some non-performing loans, we'll have to impair those and write them down the value to the normal process.
And one thing on the margin, how should we think about the margin going forward? I guess one is a scenario, we get a couple of rate hikes this year or maybe more likely that we remain in a lower for longer rate scenario? How are you thinking about further NIM, core NIM pressure off of this 3.40% level?
Catherine, I'm going to ask Tom Owens instead to answer that. We've a lot of work and as you would imagine incorporated that into our DFAS testing, but – Tom, if you would kind of add a little color.
So Catherine, our guidance there really is unchanged at this point. We've given guidance that we would expect low single-digit percentage compression in core of net interest margin year-over-year. If you look at fourth quarter of '15 versus fourth quarter of '14 and bearing in mind that there is some noise in each of those quarters from the yield maintenance payments in the investment portfolio, year ago margin adjusted for that was 347 approximately. Fourth quarter '15 adjusted for that is 340, so that’s about 7 basis points compression year-over-year that’s about two percentage compression on core and net interest margin.
We would expect that to be the case going forward. Obviously to your question about perhaps, what happens if the fair continues to tightened versus continued low for long, it’s interesting. You look at the yield curve is actually flattened somewhat since the Fed tightened in mid December. That is obviously not helpful.
At the same time the increase in the Fed funds rate and therefore the increase in yields on floating rate loan that in itself is helpful. I think the big wildcard is what happens with the deposit cost going forward.
So you got a couple of dynamics there that could go either way which up is why I think for the time being the prudent thing to do is continue to sort of stick to the guidance. But again I think you see it in the numbers we continue to believe that growth in core earning assets of mid to high single digits will more than offset the low single digit percentage compression in core net interest margin, so that you will get core net interest income year-over-year should continued to rise.
Okay. Very helpful. Thank you
[Operator Instructions] I'm showing no additional question. This will conclude our question and answer session. I’d like to turn the conference back over to Mr. Jerry Host, for any closing remarks.
Thank you, Operator. And I’d like to just thank everyone for joining us today and for your interest in Trustmark. We look forward to providing you with an update on the company at our second quarter 2016 call. This now concludes our call.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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