Trustmark Corporation (TRMK) Q1 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's First Quarter Earnings Conference Call. 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.

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

Thank you, Joey, and good morning, everyone. Thank you for joining us. Also with us this morning we have Louis Greer, our Chief Financial Officer; Mitch Bleske, who is our Treasurer; and Barry Harvey, our Chief Credit Officer. And they will be available to help answer questions once I finish a few brief comments. Let me first start by sharing some of the first quarter 2012 highlights with you. First of all, we feel like we are off to a great start for 2012. Our total revenue increased about 10.3% to $130 million. We had very solid performance in our banking, our mortgage banking and our insurance businesses during the first quarter. In addition, credit quality continued to improve and did so significantly with lower net charge-offs and lower provisioning. Our net income available to common shareholders was $30.3 million, our diluted EPS was $0.47, an increase of about 24% from the prior quarter and 27% from a year earlier. We declared yesterday at our board meeting a $0.23 quarterly cash dividend. It will be payable on June 15. Our ROA for the quarter was a very impressive 1.25%. Our return on tangible common equity was 13.41%. Our efficiency ratio was just below 64%. I will tell you that, that ratio has been affected due to the acquisition of tax credits over the last 18 months. This has been a strategy that Mitch Bleske and his team in the treasury department have deployed with our lenders. It does have the effect of raising the efficiency ratio but it’s very beneficial on an after-tax basis. Let me point out that we completed during the quarter the acquisition of Bay Bank in Panama City, Florida. That solidifies our position in the Bay County market as #2 in deposit share. Now we added…

[Operator Instructions] Our first question is from Michael Rose with Raymond James.

Just a question on the expenses and I appreciate the commentary around breaking out what's core and what's not. I think if I remember on last quarter’s call you had indicated a goal to get that expense run rate down to the $75 million to $76 million, excluding OREO costs. Do you think that’s achievable obviously with the Bay Bank included? Is that an achievable run rate by the end of this year or is that more of a 2013 event?

I am going to let Louis comment. The answer, short answer is, we do think it’s achievable. There is some other costs in there that right now we are counting as core. Like mortgage buybacks that are part of that process and some other things. But, Louis, if you want to elaborate, please do.

Michael, we expect that run rate to be under 80, I think it’s more around $78.5 million going forward for the remainder of this year. And as Gerry mentioned, there are some costs related to our mortgage business. They are all elevated but we have included those in our core run rate.

Okay. And that would obviously both be a little bit higher because loan production is higher, correct?

Correct.

Well, not necessarily. Because buybacks have nothing to do with new current production. It has to do with all of the production that was done several years back.

This is on a run rate is what I was to trying to mention.

Fair enough. And then are we going to get to a point this year do you think that we’re on the non-covered side, runoff will slow enough so that you can actually see some inflection in the loan portfolio? Because it sounds like obviously things in Texas are going relatively well and maybe if you could speak to pipelines a little bit more.

Yes. Very good question and I think I commented at the end of the fourth quarter that the pipelines look better than we have seen them in about 4 years. And they still look extremely strong. The surprise that we had this quarter was a lot of the transactions did not close in the first quarter, number one. Number two, I mentioned the take outs of about $35 million in real estate area that was unexpected. It seems to be that some of the insurance companies, some of the long-term buyers of real estate product are now back in the market taking deals out at very, very low rates. So we continue to be very optimistic about our opportunity to grow loans once we start to see that demand and the actual usage and funding start to pick up. And I don’t think we are seeing anything significantly different than what we are hearing from other banks throughout the country.

And were utilization rates kind of in line with last quarter?

They actually were a little bit less than what we had hoped for. But, again, it’s a function of I think people’s sense as to whether or not the economy is getting better and they are ready to expand. I will tell you that we are seeing stronger growth and stronger utilization of existing lines from larger companies. Smaller companies and consumers continue to be very, very cautious in terms of increased borrowings.

Our next question is from Steven Alexopoulos with JPMorgan.

Before I move to my question, I just want to understand what you just said in response to the first question. Do you expect net loan growth over the next few quarters? I didn’t get the answer to that.

The answer is that we feel good about where the pipelines are. We do not -- we have seen significant decline in terms of the run off of the indirect portfolio, so we have most of that behind us. The big question is, how businesses feel about expansion at this point. We actually thought we would see growth in the first quarter. But what growth we did see, as I mentioned earlier, was offset by some take outs and some other payoffs. So it’s an ongoing process of replacing everything that’s coming out. Pipelines are healthy. It’s hard to say though exactly what will happen in terms of net growth.

Okay. My first question was, on the growth of the securities portfolio in the quarter, can you just talk about what you were buying and what's the average yield you are putting new cash into the portfolio?

Certainly. I will ask Mitch Bleske to answer that.

New purchases for the portfolio generally range from just agency mortgaged backed securities or agencies CMOs, as well as some agency CMBS. Mainly multifamily bonds whether it be Fannie Mae, DUS or project loans. The target duration of the overall portfolio is right around 3, 3.25 years with an average life of around 3.5. And we generally have stayed within that range really to be prudent. Of course our interest rate risk management profile, new yields, our range is anywhere between 190 to upwards of 225, really depending on the structure and term.

Okay. That’s helpful. And just one other question on the M&A landscape. Clearly couple of deals here under your belt recently. Can you talk about what opportunities might look like out there or sense of seller expectations here. How competitive the environment is? Just an update on that front would be great.

Okay. Yes, we continue to be very interested in any opportunities that we are able to uncover in terms of expanding the franchise. I will tell you that the, at least from our perspective, the seller expectation still remain relatively high. And that obviously as you know there seems to be increased interest and the good news is that we have plenty of capital. We have finished this other acquisition so that we are ready should an opportunity arise.

[Operator Instructions] Our next question is from Brian Klock with Keefe, Bruyette, Woods.

Gerry, just a couple of quick questions. Actually I may have the first one for Louis. On the loan yield, I guess when you strip out the accelerated accretable yield on the fourth quarter. Looks like loan yield went up about 6 basis points in the first. I guess how much of that was from the acquired Bay Bank loans? Have you have a yield after you’re marking the portfolio to market and everything and when the loan yields were from Bay Bank?

Bay Bank was very insignificant. We only had them for about 14 days. So very, very, very insignificant, Brian.

And then I guess, Gerry, on the mortgage pipeline, the warehouse pipeline. Another solid quarter from mortgage banking but even better than your fourth quarter. Maybe can you talk about the pipeline going forward and what you are kind of thinking about for the next, say 2 quarters, of what you see in the pipeline on the mortgage banking side.

Well, we have been pleasantly surprised by the fact that the volume has actually improved. As you know, things have tightened but we continue to have steady supply of people refinancing, that are qualifying. And so many of our markets we did not other than, I will say that other than, the forward market. We didn’t see the huge decreases in values during the economic time. So people, now what we are seeing are people coming in that feel a little bit better about the economy, their job situation. They are ready to step up to the next size house or newer house. And there is a market to sell their existing home and move up. Of course the other is, believe it or not, there are still people out there with 5% and 6% mortgages that are refinancing. So the volume continues to look good. The thing that would change that would be an increase in mortgage rates. As long as the rates remain low we would anticipate our volumes stay where they are and the profitability within the mortgage company remain very solid.

Okay. So actually with that, do you have the, from the production in the quarter how much was purchase versus refi volume?

What -- I don’t have that in front of me. I can tell you that about 40% of what we are doing is retail production. And about 60% is what we are buying wholesale.

Got it. Okay. And I guess just one last question. I think that Steve asked you about M&A. Thinking about such a significant amount of capital you still have to put to work, would you guys think about dividend or buyback here? I know that you have got a nice solid dividend yield already but maybe if those M&A opportunities don’t come up, would you think about anything on the dividend or on the buyback?

Well, we are constantly thinking about capital. But it’s a nice position to be in. It’s far better to be here then not have enough. And I would say that our focus really is moving the balance sheet within areas where we can grow new loans, and I know we hadn’t shown that in the first quarter. But that’s where there is a focus, there is a focus on opportunities to grow the franchise. And they need to be acquisitions that we know in the long run are going to add value, not necessarily just a financial transaction. Okay? And then after that, if the opportunities don’t arise then of course we have got to look at either dividend or buyback. Right now those are not the priorities. The priorities are growth through acquisition and through making new loans. Our payout ratio is about 57% which is relatively high. I would like to see it become a lower percent of earnings before we start thinking about increasing the regular dividend. It’s nice that we have been able to keep that dividend throughout this cycle. And not everybody, as a matter of fact most banks can't say that. As far as the repurchase, it certainly is something that we stay very close to in terms of understanding maybe the value in doing that. But as I stated, this time we’d really like to find growth for the balance sheet.

Our next question is from Jennifer Demba with SunTrust Robinson Humphrey.

Just wondering about your net charge-off ratio going forward. It was obviously very low this quarter. Just wondering what's your expectations are in the next few quarters and how comfortable you feel running the reserve down further?

Jennifer, I am going to ask Barry Harvey, if he will take that question and answer it.

Jennifer, I guess, to your second question first, actually, we've grown the reserve consistently still at this point and we're reserving ahead of net charge-offs including this quarter. So at this point we haven’t begun the process of moving the reserve downward. We would see that in the future. There would be potential for that and likelihood of that as we began to work through some of our Florida portfolio that we have heavily reserved. If we do well there then there will be some excess reserves that will free up and come out of the reserves. So that will be something that we do anticipate happening, but it hasn’t to this point. On the net charge-offs, I think this quarter was a little bit unusual in the sense that when it comes to, for example, most of our charge-offs in the past have come through the revaluation of impaired loans or new impaired loans. We had very, very few new impaired loans this quarter. And on the revalue side, we revalued about 11% of the $61 million worth of impaired loans we have. So it was a little bit light in terms of this quarter’s worth of revaluation versus what we will see in the second quarter. And then in the fourth quarter the volumes are a little heavier to be revalued. So we would anticipate that those 2 quarters would result into higher write-downs as a result of that process. So I think for those reasons and the lack of problems, new problems identified in Florida, those are really the predominant reasons for the lower net charge-offs in the first quarter. We would not annualize that number but we do anticipate charge-offs being lower this year than last year. Probably more in that 30 to 35 basis point range versus say the 50 we experienced last year, or the 13 you saw in the first quarter.

Our next question is from Kevin Fitzsimmons with Sandler O'Neill.

Gerry, you all had a statement in the 10-K about the impact, of the potential impact from Durbin and you are just really a hair below the exemption threshold, the $10 billion. How should we think about that going forward? I mean should we start building in a reduction, I think it was in the $6 million to $8 million annually which I guess would be under card fees. But should we start building that starting next quarter or is there a lag time from when you cross that $10 billion threshold?

Kevin, good question and something we think a lot about. As far as the timing of crossing the threshold, we can think of it in 2 ways. One a sizable acquisition that is going to push us across that threshold, and as we understand for Durbin purposes, it is the assets at the holding company level as of year-end and then a 6 months after that before you change your interchange pricing. As far as timing-wise relative to an acquisition, when might that happen, you’ve heard my comments and you know as well as I do that you never know when a transaction can take place. As far though as organic growth, I think we have some optionality there. Mitch, obviously has a very liquid, relatively short portfolio. He has your cash flow quarterly is what, $90 million?

Probably close to about $150 million.

$150 million, excuse me. $150 million cash flow available. So if we started to see loan demand pickup and push to higher yielding assets, we can easily shift out of the investment portfolio through normal cash flow. We have kept discipline within the deposit pricing. And that’s really kept us from growing CDs. And so I would say that buying an acquisition, staying below that $10 billion level is something that is manageable yet can create a more profitable mix for the company. I would say though that in the long run we are going to go over that mark and the numbers that you have are fairly accurate in terms of the impact on our income.

So does timing work the same if it’s done organically, in other words if say just on an organic basis you crossed it next quarter, the trigger wouldn’t happen until a year-end and then 6 months after that. Or is that just for acquisitions?

No, Kevin, that’s for whether it’s acquisition or organic growth. That is our understanding.

So either way we are still looking really a year out plus at this.

Yes, yes. Probably July 1 to 13.

Okay. Just one quick follow up. The margin, obviously very strong here. Maybe, Louis, if you can just kind of comment about the sustainability of it. I know there are a lot of levers on the funding side and I know you guys are primarily looking more at the NII side at managing it. But seems like the margin just persistently is defying gravity here and just wondering how you all are looking at it.

I will give a little color and then let Mitch really jump in because he is the one that sleeps with this net interest margin sensitivity under his pillow every night. And that is, you are right, it’s unusual but I would say that it is very much a function of a pricing discipline. We have great communication between lending officers and also the deposit gatherers within the company when it comes to pricing. I would argue, I haven’t made this comment during this call but some of the lack of growth is a function of us not winning deals on price. We had a $15 million deal last week that came to committee. And the loan office and his pipeline had a 90% probability of close on that. And we lost the deal. We lost the deal at the table because another bank came in and undercut at an unbelievable low level for 15 year fixed. So why is our margin so strong? It’s a combination of solid, low cost core funding and disciplined pricing and Mitch really watching reinvestment of his securities portfolio while maintaining a risk profile so that if we do see a turn in rates, we will be well protected. So Mitch, add to that if you would, please.

The margin for this quarter at 4.19% versus what we define as a core margin in before the core of 4.10%, so we are up 9 basis points as we look at. The 3 positives to that and unfortunately not all of these are probably something that’s sustainable, but still a positive nonetheless. We would just see a decrease in the premium amortization related to the investment portfolio which we cited on our stat sheet. That was about a 7 basis point positive impact on the quarter. In terms of the direction of that, of course we don’t know. We are at the mercy of interest rates there. Although we do hope to see somewhat modest impact going forward and those 0 would be our hope in limit the volatility. We also saw, as we discussed, higher loan yields on some covered loans related to the Heritage acquisition. And that was probably upwards of 5-6 basis points for the quarter as well. And as you recall, we had a revaluation of the cash flows in Q4 which bumped the yield on those covered loans and then we have seen the benefit of that here in the first quarter. Again, something we don’t expect to continue at this pace. Also, we have seen a modest decline in deposit costs which we continue to feel that that becomes more and more challenging as we remain in this interest rate environment. And we try to identify opportunities to bring those costs down. But as you hear from I am sure any other bank, that there is a continual challenge for officers on the field. That is all being offset and probably what I have been mentioning for call after call, by just a continued repricing of all of our fixed rate assets at the bank. Whether it be fixed rate loans, mortgage assets, or investment portfolio assets, given that we are right around 3%, with pricing close to 2% as I discussed earlier. On top of that as Gerry mentioned, we are seeing increased competition for loans. And while we continue to be disciplined we obviously are evaluating each loan opportunity on its own basis and trying to determine that it’s the right direction for us to go to compete. And so in terms of the direction we do still expect, all else equal, a modest decline in our margin. But we are going to remain at this point as we can, to try to maintain at an adequate level.

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

Well, thank you, operator. And all I would like to say is we feel good, we had a great quarter. The challenge ahead as we have talked about is loan growth, maintaining the margins, staying focused on other resources of revenue and something we talk about every day, and that is making sure we control our expenses. So we appreciate your interest and we look forward to visiting with you again next quarter. Thank you.

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