Trustmark Corp
NASDAQ:TRMK
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Trustmark Corp
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Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's 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 fourth quarter earnings release, as well as the slide presentation that we will be discussing this morning is available on the Investor Relations section of our website at trustmark.com.
During the course of our call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We would like to caution you that these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties, which are outlined in our earnings release and our other filings with the Securities and Exchange Commission.
At this time, we'll turn the call over to Gerry Host, President and CEO of Trustmark.
Thank you, Joey. Good morning, everyone, thank you for joining us. With us this morning is Louis Greer, our Chief Financial Officer; Barry Harvey, our Chief Credit Officer; and Tom Owens, our Bank Treasurer.
Trustmark reported net income of $15.8 million or $0.23 per diluted share in the fourth quarter. Adjusting for one-time charges related to the deferred tax asset valuation, Trustmark earned $32.7 million or diluted earnings per share of $0.48 which represents a quarter-over-quarter increase of 11.6%.
For the full year Trustmark's net income totaled $106 million which represented diluted earnings per share of $1.56 again after adjusting for one-time and non-routine charges, we are at $131 million or diluted earnings per share of $1.92.
I'd like to briefly provide you with an update on our strategic priorities which are on Page 3 of our presentation. We continue to make advancements regarding profitable revenue generations. Loans held for investments increased $163 million or 1.9% from the prior quarter and $719 million or 9.2% year-over-year.
Revenue totaled $148 million relatively inline from the prior quarter and up 5.3% from the prior year. FTE net income totaled $109 million up 0.2% from the prior quarter. The efforts to manage expenses and improve processes were evident in quarter, as core expenses which exclude ORE expense and intangible amortization remained well controlled.
Core noninterest expense in the fourth quarter totaled $100.8 million in line with the prior quarter of $100.7 million. Credit quality continues to be a strength for Trustmark. Nonperforming assets decreased $6.8 million or 5.8% compared to the prior quarter.
I briefly spoke to loan growth, but I'd like to ask Barry Harvey to add some color to both loan growth and credit quality. Barry?
Be glad to, Gerry.
Looking on Page 4 of the slide-deck driven with long growth as you can see during the Q4 we had loan growth of $163 million and year-to-date $719 million. So we're very pleased with the loan growth we were able to achieve in both Q4, as well as for the year 2017. About two-thirds of that growth year-to-date was from CRE and one-third was from C&I and public finance, those being our main three areas of growth and within the portfolio.
The growth was diversified as it relates to markets. The energy book we're glad to say we saw some decrease in the energy book throughout the year. Year-to-date exposure decreased $60 million, whereas balances year-to-date decreased $45 million. We were pleased to see the reduction in that particular portfolio.
As it relates to credit quality, the various categories you would normally think of past dues, criticized, classified continue to be at historical low levels. Nonaccruals we had three nonaccruals during the quarter which were about $38 million that we were able to work down other nonaccrual credits during the year and that led us to about $18 million increase in nonaccruals for year-to-date. We felt pretty good about that given the three large ones that occurred in the first quarter, second quarter and then one this quarter as well.
And so overall I think we feel positive about the progress we've made given the three increase. ORE was a positive story as well down $19 million year-to-date. MPAs given the increase in the three large nonaccruals ended up being flat for the year which we felt like was a positive. Net charge-offs, year-to-date were $9.6 million, $9.4 million that came two credits that we charged down this quarter. So outside of those two charge downs basically net charge-offs for the year were about $200,000. So we’re pleased with the overall charge-offs for the year.
Looking at the acquired book, the book is down to $262 million as of 12/31. Their Q4 yield was $9.27 million. Going forward we always talk about the yield that's controllable which we expect that to being about 6% to 7% going forward and starting in the Q1 of 2018. Never can quite account for what we may come up with as far as a recovery here and there which reduced the yield as it did in Q4. The runoff we would anticipate that being and at $15 million to $25 million range starting in Q1 of 2018.
Great, thank you Barry, appreciate your comments.
We believe that one of our greatest strength is our low cost core deposit franchise. Tom, If you would please give us a little color on deposits and the net interest margin.
Happy to Jerry.
So turning to Page 7, total deposits increased $346 million or 3.4% during the quarter. This was primarily driven by a normal seasonal upswing in public funds deposits. Total deposits were up $521 million or 5.2% from the prior year. Continue to maintain a favorable mix of deposits at about 28% excuse me on interest-bearing and 59% deposits in checking accounts.
So our cost of deposits rose three basis points during the quarter while our cost of interest-bearing deposits rose five basis points representing a cumulative beta for the year of 27% relative to the Fed rate hikes.
Turning our attention to Slide 8, net interest income totaled FTE totaled $109 million during the quarter relatively flat from the prior quarter which resulted in a net interest margin of 3.48, an increase of one basis point from the prior quarter and excluding acquired loans was 3.35 core net interest margin at 3.35 up one basis point from the quarter and up four basis points from the prior year.
And now Louis will provide an update on noninterest income.
Thanks Tom.
As you can see on the table on Page 8, noninterest income totaled about $44 million in fourth quarter and about $185 million for 2017. For 2017 that represents an annual increase of 6%. For the linked-quarter noninterest income was slightly down principally due to seasonal declines and insurance for the quarter and was offset by increased mortgage revenues due primarily to lower hedge an ineffectiveness for the quarter. I’ll remind you Trustmark's noninterest income remains very diversified and it continues to represent 30% of total revenues.
Let's turn to Page 9 and talk about expenses as Jerry mentioned earlier. Our core noninterest expenses remain very control with routine noninterest expenses totaling about little less than $101 million in the fourth quarter and was line with our prior quarter and with our previous estimates we gave you.
While we are pleased with the progress to-date we remain focused on expense management. We will continue to realign branches and delivery channels and make investments to enhance our customer experiences.
As for taxes, I'd like to point you to Note 8 of our financial stat sheet for the impact of tax reform that occurred in the fourth quarter. In addition the elimination of a prelease previously tagged as deferred tax valuation allowance.
I’ll remind you that as you can see on Slide 9 that our future effective tax rate beginning in 2018, we’d expect to be 12% to 14%.
And on Slide 10, I will mention capital from a capital perspective we have amplest capital to support organic growth and are focused on the most attractive methods of deploying capital. So Jerry?
Thank you, Louis.
I trust that this brief discussion of our fourth quarter financial results along with our press release and stat sheet that we released yesterday afternoon has proven helpful to you. And at this time I would be glad to address any questions that you have.
[Operator Instructions] And our first question today comes from Catherine Mealor from KBW. Please go ahead with your question.
I wanted to start on the balance sheet, it looks like you all lowered your securities portfolio a little bit this quarter. Can you just give us a little bit more color on that and on your outlook for further reductions in that portfolio?
Sure, I’ll ask Tom Owens and he'll address that Kath.
So yes we didn't reduce the portfolio somewhat during the fourth quarter. We looked at the market environment, the prospects for the Fed continuing to hike and the flattening of the yield curve. Reinvestment and securities cash flows became a less attractive form of capital deployment.
The other thing to keep in mind is we’ve carried a somewhat larger disproportionate large investment portfolio relative to peer and that made a lot of sense during the low for long interest rate environment. But as we've continued to absorb excess liquidity with robust loan growth that combined with prospects for further Fed tightening and yield curve flattening has caused us to reconsider for the time being continued reinvestment securities cash flows.
So that's an actively monitored tactical decision and the decision as to whether we continue to allow the portfolio to runoff or not will very much be a function of what happens with the market and interest rates and the economy and our loan growth.
And so is there a percentage of securities to average earning asset that you think is appropriate as a goal over the next year or so?
So if you look at our securities turning assets today is about 27%. If you look at the peer median is about 22%, and again as carrying the larger securities portfolio is a function that sort of a legacy function of us.
You look four years ago for example, we had a loan to deposit ratio of 67%. Today it’s about 87%. What we’ve done is grow the rest of the balance sheet around the securities portfolio. But now that we have the loan to deposit ratio that’s in the mid-80s combined with the other things I discussed in terms of what's likely to happen with interest rates and the shape of the yield curve, it may make sense for us to continue to allow these securities portfolio to runoff.
Just to give you an example. We cash flow about $50 million a month from these securities portfolio. So annually that's about $600 million. So if hypothetically we were to allow the securities portfolio to runoff for the remainder of the year, would be 500 million to 600 million lower and if you do math that would take us from 27% of earning assets down to about 22% of earnings assets which is about to peer median.
So that’s the way to think about it. Mathematically the decision has not been made yet, and as I said it’s an actively monitored balance sheet management decision that we're making.
And one follow up on the margin, is there any impact that you expect from the FTE adjustment with the lower tax rate for your margin and then do you have an outlook for you margin maybe kind of - as we look how the securities strategy may impact it and then maybe even outside of that just kind of core margin outlook. Thanks.
Absolutely, so just one off effect of tax reform and the lower effective tax rate, the math on that turns out to be about a six basis point compression in our reported core net interest margin, again that's sort of geography. You make it up from the lower tax rate lower than the income statement.
With respect to trends in our core net interest margin, you think about the guidance we've given last couple of years which is basically very modest, compression and core net interest margin with some potential upside depending on how realized deposit betas compared to modeled, projected deposit betas and that's what come to path. Right, if you look at for the full year 2017, core net interest margin at 336 versus full-year 2016, 337. That’s essentially what's come to path that continues to be our guidance that you would see that type of dynamic.
So, in terms of loan growth, LHFI growth, we’re projecting similar growth to what we've had over the last couple of years. We're projecting very modest dilution to core net interest margin with some potential upside from actual realized deposit betas.
And so you do the math on all that, and you get to a 2018 projection that looks similar to the 2016 and 2017 which basically resulted in mid-to-high single digit growth in both earning assets and core net interest margin.
Now obviously if we did continue to ratchet back on reinvestment and securities cash flows, that becomes a headwind to earning assets growth which you do the math on math and that puts you into the - I’ll call it low to mid single-digit growth in earning assets.
But again that's a tactical decision that will be evaluated and made going forward. We’re not necessarily guiding to continued runoff of the securities portfolio but it is possible depending on how the other dynamics of the balance sheet and the economy and interest rates comes past.
Our next question comes from Peter Ruiz from Sandler O'Neill. Please go ahead with your question.
This is Peter Ruiz for Brad this morning. I just wanted to see if we could first maybe touch on your outlook for loan growth in 2018, and maybe what the pipeline kind of looks like today, and if there is maybe any opportunity to accelerate beyond the current mid single-digit macro effect and maybe into a higher single digit.
Peter, Barry Harvey will answer that question.
Peter I think our goal is how single digit for 2018, we've got a cover some runoffs that is from the acquired book and already get there but we anticipate achieving that goal of half single digits. We've got a meaningful amount of CRE that is on the books today that were front throughout 2018 that will help us get there.
And then we do have expectations of continuing to grow in both C&I, public finance, as well as our consumer areas. So that is our expectation for 2018 is to be in a half single-digit net of the runoff.
Maybe turning to the acquired loan reserve. The negative provision here for that book has been pretty consistent over the last several quarters, but it's obviously shrinking to almost to de minimis amount in terms of the acquired loan reserve. What do you guys thinking about what that looks like for the net provision and where you want that to end up maybe by year end.
The reduction that has occurred quarter-over-quarter that's one is course through Q4 so there will be no other consistent reductions coming out of the acquired loan reserve. So what you would anticipate on a go forward basis would be a need for additional reserving on the acquired loans just like you would for the nonacquired portfolios.
So the reserve will based upon changes in credit quality within that nonacquired book, you'll see changes just like you will with recoveries et cetera, no different than what you see with the - acquired and nonacquired are going to function the same way on a go forward basis. This is going to be based upon the changes in credit quality and then of course on the acquired - on the nonacquired side its going to be based upon loan growth it’s going to drive the provisioning.
And Barry I would add to that the bank trust portfolio diminished tremendously and has - most of that and most of left is reliance and so that’s right the reevaluation of the cash flows for bank trust is most…
Yes, just to put in perspective…
Most of those losses were inline.
That's right. We're down to $262 million portfolio for acquired and of course when we moved to rely a center was around 118 is what we moved in at time of acquisitions. As Louis said the majority of what we have and remaining in that book is going to be from the recent acquisition.
[Operator Instructions] Our next question comes from Jennifer Demba from SunTrust. Please go ahead with your question.
Question on Huntsville obviously they've had a big announcement since you’ve completed your acquisition last year, just wondering what that means for your loan growth there. And then my second question is on details on the net charge-offs you had during the fourth quarter? Thanks.
Jennifer, I will - it's Jerry and I will address the Huntsville acquisition. One of the reasons we found Huntsville the market and the bank to be attractive to us was that. Number one, the bank had been around for quite some time so it was a truly a core franchise in what we viewed as the market that had great growth potential and that as you alluded to is beginning to play out.
So, although it is a relatively small portion of our overall loan book, we view it as a market that has some really good growth potential and have begun to ramp up resources in that market not only from a commercial lending perspective but very much so from a mortgage perspective.
So, we did see really good opportunity there at this point is a small portion of our growth but is one of those that one of those markets that has much potential for us. So we're adjusting resources accordingly.
On the detail relative to the charge-offs Barry I'd ask that you address that question.
Jennifer as we mentioned in the press release we had two commercial credits that we charged down to value during the fourth quarter. One of them was the healthcare related credit that we talked about previously that we actually moved to nonaccrual in the second quarter got updated values working with our other participants during the third quarter and as we got the final piece of that and during the fourth quarter we were able to write that down to value based upon updated collateral values. And so that was something we had reserved for in the third quarter and actually took the write-down the value in the fourth quarter.
And then the other one was a credit that as we mentioned in the press release that had been sub-standing for quite a while. During the quarter we’ve got one of the participant who actually leads the credit with us in this particular facility. And we made the determination that it should be on nonaccrual - move to nonaccrual.
We had updated values on all the collateral went ahead and wrote it down to value during the quarter. And those two combined one it’s going to be $4.8 million, the other is $4.6 million. So you can see that that's $9.4 million of our year-to-date charge-offs of $9.6 million. So, as I mentioned earlier outside of those two net charge-offs outside of that is about $200,000 for the bank.
What industry was the second credit in?
The second credit is a distributor of parts.
Our next question comes from Daniel Mannix from Raymond James. Please go ahead with your question.
So just wanted to start a loan growth, C&I loans look pretty flat in the quarter. Can you give us a sense of what the line utilization is and how that’s been trending the first few weeks in this year?
The line utilization for us has remained very consistent over time. We have not seen a lack of line utilization or any significant increase in utilization, so it stayed consistent over the last several years from that standpoint. So it's really just going to be a matter of - as far as C&I goes, we’ve had some good success during 2017 in several of our different lines of business, markets, as far as moving business over from other entities it’s just a lack of activity and lending opportunities that we've been seeing really for the last couple of years on the C&I side.
The deals we do see are very competitive and which is fine. The structure is very competitive, the product is very competitive, we are active in pursuing all of that business. But what we have seen in the last couple years is really just been a slowdown in the opportunities. Now that maybe a function of lack of expansion by the companies themselves or the expansion that is occurring being from the cash and liquidity and the balance sheet.
So hopefully some of the tax law changes that allow for some acceleration depreciation things of that nature we'll begin to bring forward some more opportunities for us to land on the C&I side where they'll be you know equipment et cetera. So, we're hopeful in 2018 that the volume of activity on the C&I side will pick up.
Want to turn back in the prepared remarks you talked about controlling expenses. Can you provide us an updated outlook for expenses in 2018?
Daniel, sure I think our forecast for 2018 on a quarterly basis is try to remain around that $100 to $100 million in expenses so we’re going try to keep those relatively flat in 2018. And that's core expenses excluding ORE and amortization.
[Operator Instructions] Our next question comes from Brian Zabora from Hovde Group. Please go ahead with your question.
Question - in the press release you mentioned in myTeller and piloting some technology and branches, just could you touch on how you think about the branch network or think about trimming or just kind of supplements to branches just any thoughts around that?
As I think the industry as a whole takes a look forward relative to the important of physical branch locations we are as well. We have a group that we call our market optimization team that meets on a monthly basis to review information about activity within our branches, our branch structure, what's happening to competition around specific branches and how we can adjust not only personnel, but overall branch structure within a particular market.
So, we are - we will look - as we look forward, couple of things we have to do. We have to balance the physical locations with the new digital channels that we have begun providing both from an Internet standpoint to deposit taking ATMs to remote deposit capture to the myTeller which we have unique situation in our Memphis market where we’ve partnered with Starbucks, and actually have in myTeller sitting there in the Starbucks with someone that assist customers in utilizing this new technology to get used to it.
So we look at it holistically but the trend overall is going to be to operate with fewer branches that will be staffed with people that have the ability to support and service customers a very broad range of products and delivery channels.
And then just on the tax reduction, how you think about that with the first capital deployment, does it increase your appetite for M&A or just any thoughts around that as well?
View that as maybe two different questions, we just finished with the conversation about branch optimization and new digital channels and that kind of falls under the realm of overall technology and how our industry is transforming itself. So, that we anticipate that a portion of the tax savings will go to further investments in technology to support a broad range of businesses.
Our insurance business right now has - gone completely paperless and they operate really on a digital platform and supporting their customers that area has been upgraded. We’re upgrading our wealth management operating system to a fully digital platform now and we plan to have that ready to go out in July of this year to go live. We've upgraded both our business and our retail digital platforms for our customers and in the mortgage area we continue to upgrade systems there to allow to capture opportunities through the Internet and other digital channels.
So, as we transform we will be investing a portion of this money into technologies that allow us to stay relevant and stay focused and stay meaningful to our customer base. As far as the question around M&A, we feel like we have really solid capital levels that will allow us to do a sizable transaction. The challenge has been finding the right opportunity that we think add earnings momentum or the opportunities to be in higher growth markets, and we continue to look for those on a very, very regular basis.
[Operator Instructions] Our next question comes from Casey Haire from Jefferies. Please go ahead with your question.
This is Elan Zanger on for Casey. Just one from me on these - you guys called out the BOE income in the press release that has kind of popped up the last few quarters I think in 2Q was related to an acquisition. Just trying to get a sense if this is something you guys see going forward? Thanks.
I'll briefly comment and ask Louis to add little color. That is come from a number of debts that has happened both with associates and with directors. A very, very difficult as you would imagine to project. So, it is not something that we primarily give guidance on but when it does happen, we do want to make it where it did come from. So Louis if you want to add a little color to that.
Yes, I’ll just add we have about $250 million book of account of life insurance as well as investment type. $150 million of that is investment tied borrowing where we’ve invested and then the other is related to some benefit plans that do support pretty good time and debt benefits and that part as Jerry mentioned unusual year related to that can't predict it, so as long we comment but we do have a sizable book as most banks are sized.
Elan any other questions.
No, that’s it from me thanks guys.
And ladies and gentlemen at this time, I'm showing no additional questions. I'd like to turn the conference call back over to Jerry Host for any closing remarks.
Thank you, Operator. And thank you all for joining us today. We appreciate your interest in Trustmark. We hope that you found this conversation helpful and provide you an understanding of some of the variances in the numbers. We feel very good about the economy especially as it relates to what we've all struggled through, I think in the last 8 or 10 years. A lot of positive signs. We feel like the company is well prepared to take advantage of those and we plan very much on doing that.
So, again we thank you for joining us. And we look forward to talking with you again at the end of our first quarter. So, thank you all and have a great day.
Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.