Trustmark Corp
NASDAQ:TRMK
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Trustmark Corp
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Good day, ladies and gentlemen, and welcome to Trustmark Corporation's First 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 first quarter earnings release, as well as the slide presentation that we will be discussed this morning are 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 Gerry Host, President and CEO of Trustmark.
Thank you, Joey. And good morning, everyone, thank you for joining us. With us this morning is Louis Greer, CFO; Barry Harvey, our Chief Credit Officer; and Tom Owens, our Bank Treasurer.
Trustmark reported net income of $36.8 million or $0.54 per diluted share for the first quarter, which represents a quarter-over-quarter increase of 12.5% when compared to core earnings and 17.4% when compared to the same period in the prior year.
I'd like to briefly provide you with an update on our financial results which are on Page 3 of our presentation. We continue to make advancements regarding balance sheet optimization, capital deployment and expense management.
During the quarter, we continue to run off maturing investment securities while repurchasing 2.5 million of our common stock. Loans held for investments declined $56 million or 0.7% from the prior quarter and increased $509 million or 6.4% year-over-year. Revenue totaled $149 million relatively in line from the prior quarter and up 3.7% from the prior year.
FTE net interest income totaled $105 million. Average to manage expenses and improved process were clearly evident in the quarter as core expenses which exclude ORE expense and intangible amortization remains well controlled.
Core non-interest expense in the first quarter totaled $100.2 million, a slight decline from the previous quarter. Credit quality continues to be a strength for Trustmark. Non-performing assets decreased 2.6 million or 2.3% compared to the prior quarter.
I briefly spoke to the loan portfolio, but I'd like to ask Barry Harvey to add some color to both loan growth and credit quality. Barry?
Gerry, thank you.
As you indicated Gerry, the loans held for investment declined $56 million during the quarter. We're still forecasting as we have previously for single digit loan growth for 2018. Q1 is typically a slower quarter for us as evidenced back in 2015 we were down $36 million during the first quarter. And still - and as of the end of 2015, we have very good growth year.
So that's not so unexpected to be a little bit slow in Q1. We are about 48 months into our cycle of growing CRE loans and therefore they are beginning to cycle through and they will be leading us and it will be a little bit chunky from time to time as it was in Q1.
We also did experience outside of what we anticipated some unexpected pay-offs and a little bit of slow funding which is not unusual for Q1 as well just because of weather and other potential delays.
When you’re looking at the actual changes and balances for the quarter, the other real estate secured decreased by $92 million as you can see, that's going to be multi-family projects that have either moved to the permanent market or they've been sold and then looking on down to the public finance side of it. We have a small decrease there about $17 million that’s going to be seasonal in nature.
So, with that in mind, I think we're comfortable with what we saw in the first quarter what was unanticipated and our forecasting process was, we had some CRE projects that did move out quicker than we had anticipated and the funding was a little bit slower.
Looking at the energy book, the exposure decreased $25 million during the quarter and outstandings decreased $31 million during the quarter. All of the decrease was based on payoffs and pay downs, so we're very pleased to see the energy book continue to reduce their size. Although we are initiating and willing to look at opportunities in that particular sector, we are glad to see some of the problem credits begin to move on through the process.
Looking on over to Slide 5. The credit risk management, ORE is down $3.7 million for the quarter. We took no additional loss in liquidating the ORE. Net recoveries, were net recovered $541,000 for the quarter. The loan loss reserve including the acquired loans increased from 92 basis points to 98 basis points, all of which we do very positively.
Looking over to Slide 8 on the acquired loan portfolio, acquired loans totaled $215 million of outstandings as of 03/31 continues to decrease over time. Our Q1 yield on that portfolio was 8.13% that included recoveries. The acquired loan book declined about $46 million during Q1, but beginning in Q2 we expect to see that moderate more to $15 million to $25 million what the scheduled payments and payoffs.
The unexpected which we had some out there in Q1 we can't foresee that, but on an adjusted amortization basis we expect to see going down $15 million to $25 million in Q2. The acquired loan, the provision for the acquired loan was only $150,000 during the quarter, so we're very pleased with the changes we saw on the acquired loan portfolio.
Great, thank you Barry. Let’s turn to the liability side and I’d like to ask Tom Owens to comment on deposits and the net interest margin. Tom?
Thank you, Gerry.
Turning to Page 7, total deposits increased $398 million or 3.8% during the quarter primarily due to an increase in public fund balances. Total deposits increased $871 million or 8.6% in the prior year. We continue to maintain a favorable mix of deposits with 27% non-interest bearing and 60% of deposits are in checking accounts. Our cost of interest bearing deposits rose 9 basis points representing a delta of 36% from the first quarter and 23% cycle to-date relative to the feds rate hike.
Turning our attention to revenue on Page 8, net interest income-FTE totaled $105 million in the first quarter down 3.5% from the prior quarter which resulted in a net interest margin of 3.46% a decrease of two basis points from the prior quarter. Excluding acquired loans the interest margin was 3.37% up two basis points in the prior quarter and down one basis point from the prior year.
And now Louis will provide an update on non-interest income.
Thanks Tom.
As you can see on Slide 8 for the quarter non-interest income total of $47 million which represents a quarter-over-quarter increase of about 6.5%. The strength in our revenues from a mortgage and insurance businesses offset seasonal declines in our other fee income areas. Trustmark's non-interest income continues to represent about 31% of our total revenues.
As you can see on Page 9 as Gerry mentioned, non-interest expenses remain very well controlled with routine non-interest expenses, again which exclude our ORE expenses intangible amortization totaled a little over a $100 million in the fourth quarter, down slightly from the previous quarter and in line with our previous estimates. While we are pleased with our progress to date we continue to remain focused on managing expenses. We will continue to realign our branch and delivery, networks and channels and make investments to enhance our customer experience.
Now as for taxes during the quarter, our effective tax rate was 12.9, 5% and in line with our previous guidance. If you look at Page 10, Trustmark's remains well positioned from a capital management perspective. We have ample capital to support organic growth, share repurchases as well as M&A. We continue to remain focused on most attractive net use of capital performance. Gerry?
Thank you, Louis. We hope that the discussion of the first quarter financial results are helpful to you, but at this time we’d like to open it up for questions. So operator, if you could do that?
[Operator Instructions] And our first question today comes from Brad Milsaps from Sandler O'Neill. Please go ahead with your question.
I wanted to kind of follow up on some of the margin and balance sheet discussion. I appreciate the color you provided in terms of the public funding that you typically get this time of the year. I also noticed from the average basis the – a lot of the wholesale funding was down quite a bit. It looks like you traded some of that for more interest bearing type deposits. Can you talk about how, does that continue to play out as the year moves along or does that – or do those borrowings come back in as maybe your loan growth picks up, because it looks like you really benefited from a mix change on the right side of the balance sheet does that helps you out long term and was curious how that kind of you know if you look out how that helps or hurts the NIM as you move through’18?
Yes, Tom?
So yes, what you see there, the decline in borrowings is a function of two things really, one is the decline in the securities balance during the quarter. The other is the seasonal public fund inflow of deposits and we did experience a bit more public fund info in the first quarter than is typical for seasonal.
We did have a couple of what I'll call relationship wins during the quarter. So those you would expect to persist, but largely the pattern here at Trustmark is this time of year right now about April is about the peak and public fund positive balances. And what you should expect to see is a decline from this point through say a low point in October, November.
Now in terms of so taking that dynamic into consideration, you would expect to see an increase in borrowings to compensate for that. I will say though that if we continue our current practice of non-reinvestment of securities portfolio cash flows that that should largely offset the run off of public fund deposit balances. So the net of those two things would be that you would see short term borrowings remained at about their current level. And then from there it's just a question of the relationship between loan growth and deposit growth going forward and obviously the differential there would impact term borrowings.
And maybe bigger picture question, I mean do you think kind of all the puts and takes you can build upon this quarter's core NIM improvement, just curious any loan piece that impacted this quarter or do you think this kind of 337 number is something you can kind of build off of as you move through ’18?
So, first quarter is pretty clean in terms of loan fees and yield maintenance payments, so it is pretty comparable on both a linked quarter basis and a year-over-year basis. So if you think about the guidance we've given in the past which is with respect to core net interest margin a very modest compression. Potentially offset by realized deposit betas that are lower than modeled that basically would come to pass. I mean year-over-year our core net interest margin is off 1 basis point.
I would expect those dynamics to persist, but now you also have the dynamic of, if we continue to run off the portfolio the investment portfolio through year end you should continue to see some accretion to core net interest margin as a result of that and I'll call that about 2 to 3 basis points per quarter.
Our next question comes from Jennifer Demba from Sun Trust. Please go ahead with your question.
On your M&A interest at this point, size and geography, geographic wise and what you're seeing in terms of pipeline or conversations?
Jennifer, this is Gerry. I'll answer that question. In terms of size and geography, we still remain interested in deals in the $300 million to $3 billion size although we're not limited, limiting ourselves to that range that's just the focal point. Primarily in the southeast, we are looking at opportunities in some of the better growth markets for new footprint.
And we're also looking at opportunities within existing markets that would have a consolidation element to them. As far as the pipeline, it remains I think good as we have seen for the last several quarters. I would, I think you can look at the numbers and see where pricing expectations are, I think they're still relatively high. Many of the opportunities out there are PE based opportunities which present can present a particular challenge. So we remain very interested, but we want to make sure that any acquisition we do, we are very comfortable is a long term value to the franchise.
And question on branch rationalization you guys have done some of that in the last couple of years. So what do you think is remaining over the next couple of years for you to do and if you could give us an idea of what types of branches you tend to be consolidating or are you exiting your market altogether or you're just combining, just consolidating somewhere here where you have more scale?
We have a group that meets on a very regular basis that would be monthly. To look at the specifics around various branches in the system and look at not just a ranking of branches, but specific markets and the composition of branches, ATMs and other delivery channels in terms of some markets are more accepting of the digital channels that we have deployed over the last several years and that impacts the transaction volumes in the branch. So we look very closely at transaction volumes our market as a whole and how can we reconfigure that market well retaining and being able to service that existing customer base and they grow as well.
So it is not and end game if you will, it's a continuous process of reconfiguring the markets and that's how we approach it. I think you could expect that we're going to continue to consolidate to work expenses out of the markets, but we're very concerned about maintaining the customer base, the deposit base, and providing opportunity for growth in those growth markets.
Our next question comes from Daniel Mannix from Raymond James. Please go ahead with your question.
I just wanted to start with loans here, so you noted the higher level of pay downs in the CRE portfolios headwind in the quarter. We've heard a few of your peers say that they're starting to see those pay downs flow still at elevated levels, but slowing down nonetheless. Can you tell us what you've seen so far this quarter and how that's trending?
Daniel, this is Barry. We're seeing that as well. Really that, we had a somewhat of a January effect where all of a sudden we saw quite a few projects that we were touching the customer on in the month of December and it was kind of status quo and they were probably scheduled to go out actually in 2019 and then all of a sudden in January, during that January and mid-February timeframe we were being notified of it moving out during Q1 of this year which was a little bit, which was a little bit surprising, but nonetheless we understood the rationale.
And I think it's a combination of things that are happening in the marketplace. In the permanent market, there's an appetite to, from time to time, provide some construction. And that occurs from time to time. And some of the companies who do the permanent financing and permanent guarantee financing, they occasionally do bridge loans.
They'll do some things that might move a project out away from the bank quicker than historically you'd see it happen. Normally, you’d see those stabilize and then move to the permanent market. Occasionally, there'll be some bridge financing that'd get there quicker.
And then there's also on the sales side where the projects are being sold, stabilization is important. Obviously to maximize the price, they're being so far. But there are occasions where the buyer will look at the velocity of which it's stabilizing and give the seller credit for it, having reached stabilization from a pricing standpoint, while in reality it hadn't quite got there.
So there's all of those types of factors that would potential lead for the seller to sell it sooner than they might would otherwise and still almost maximize the price they could have gotten had it been stabilized.
So for those types of reasons, we are seeing from time to time projects move out in the industry a little quicker than it would have normally. We had seen trend of unexpected payoffs, subside somewhat during second half of February-March, and then little ways into the April time frame.
So, we were hoping that that is the case throughout the rest of the year. And then we've got of course forecasted payoffs that will occur, but we're hoping not to see too many more and unanticipated payoffs or at least let it be a little more sporadic than it was in Q1.
Looking at the C&I loan growth, it looks like energy loan massed the pretty good quarter there. Can you talk about what you're seeing in terms of demand and whether Tax Reform has had an impact on pricing so far?
I think as it relates to the demand side, it's been scarce obviously an outside, I think all banks are struggling to find a meaningful amount of opportunities. And as you can imagine, when the deals are somewhat scarce, it's very competitive not only from a pricing standpoint but from a structure standpoint.
And so, we're trying to remain disciplined, but yet avail ourselves of every opportunity we have and kind of have the bullion between the attractive pricing we're able to get on the CRE side and maybe the less attractive pricing we see sometimes on the C&I side and still have an acceptable ROE for the bank.
We are actively pursuing every C&I opportunity we see, but they are limited. And the ones we're seeing of course are very, very competitive. But we're out there making calls very aggressively looking for opportunities. But at this point, really through the second half of last year and all of the first quarter, it's been fairly slow in terms of deal flow, and then it's been very competitive.
And if I could just squeeze one more in there. Nice job on the expense control again this quarter. Is that guidance of a 100 million to 101 million in core expenses still good for the year?
Daniel, this is Louis, and I'll tell you for the five previous quarter, we feel our estimate, we're going to continue to give guidance between that 100 and 101, but we do have a couple process improvement projects coming online in the second quarter that could take us to the upper end of our guidance for the same quarter.
This is Gerry and I'll add a little color. We should complete a major overhaul or system conversion within our wealth management group beginning July the 2, is when we go live. That is causing us to utilize outside resources which will be temporary in nature to complete that project, the way we want it done within the time frame.
The other project we have is a conversion of a base loan and deposit system. That will be a two year project, again, at the beginning of the year. We will from time to time utilize some outside resources as well to assist our existing personnel as opposed to hiring people to complete those projects.
So this is very common on the some choppiness within the loan portfolio. You'll see a little bit of the choppiness in expenses, but as Louis pointed out, there maybe quarter-to-quarter where we push the upper range and then work our way back down to things from where we are in the project and the amount of outside resources we'll use.
[Operator Instructions] Our next question comes from Brian Zabora from Hovde. Please go ahead with your question.
Just a question on deposit side. Wanting to get a sense on the pricing of those public funds and how much of the increase this quarter was related to the inflow of those public funds versus the rest of the deposit mix.
I don't know that we've, in the past, given specific pricing on public fund deposits. But with respect to the inflow in the first quarter, it was about 300 million. Again, that is largely seasonal.
I spoke earlier about it being a late fourth quarter, and then in the first quarter phenomenon. So I'd say in total the seasonality of that this year has been somewhat larger than years past. As you can imagine, the betas on public fund deposits, I know we've spoken past calls about the relative betas.
If you look at the relationship between personal, non-personal, and public deposits, non-personal - I'll just say cycle to date - that these data are non-personal deposit, it's been about double that of personal deposits and the data on public fund deposits has been about double that of non-personal. So just to give you a sense sort of order of magnitude of the relative price sensitivity of those deposits.
But again, public fund deposits are accretive relative to borrowings and there are often times other profitability aspects to the relationships, fees or services performed.
And then a follow up going forward, maybe if public funds come down a little bit, maybe you see less movement of - I guess quarterly movement in those kinds of funds. But maybe just any sense of how the pricing is now, do you think that - the betas that you're seeing in the other areas, do they continue to kind of march higher?
Yes, we believe they do. I think our thinking is not dissimilar from the industry as a whole. I'd tell you that through the fourth quarter of '17, for example, if you looked at our aggregate deposit betas, cycle to date were 19%.
Through the first quarter of '18, that rose to 23%. We are currently projecting that by year end, we are consistent with the market thinking there'll be two more fed hikes here. In calendar '18, we're projecting that this cycle to date beta would rise to 36%.
So we do think we have appropriately conservative assumptions in our forecast model, and we have been experiencing accelerating betas and anticipate that that will continue.
And just lastly, just a question on the securities brought on your plan to potentially kind of decrease that over the year. Is there a point where the yield curve maybe you see yields increase in the longer end that it may slow that, or is this just - where you'd like to just get to a point - you talked about maybe 22% of average running assets. Is that more of a goal versus whatever you have in this type of yield?
Well, you hit it right on the head. I mean, as we've said on our last call, I mean, that is a tactical decision that we continuously monitor. What I'd say is that the conditions, market conditions and shape of the yield curve, and continued increases in rates have not adjusted our thinking at this point about continuing to ratchet back on reinvestment.
And, yes, we do believe if we continue that practice through year-end, we'd bring our securities to earning asset percentage down to about 22%, 23% which would be more consistent with peer median.
And we do think also, Brian, if you look at sort of the way we have timed it and what's happened with interest rates, is actually an accretive activity if you look at it over a three year period. And that's even before considering the liberation of capital that might be used to for share repurchase.
And our next question comes from Catherine Mealor from KBW. Please go ahead with your question.
Just a follow-up, you mentioned this share repurchase activity, can you just talk about your outlook for that and how aggressive you think you may get on the buyback?
Let me start Tom, and then you add the color to it. The way we approach share buyback Catherine is in a total view of utilizing capital, so it includes opportunities to acquire and how much we might need there. The organic growth in the company and what if anything we might think about relative to the dividend so that's one component of it.
And then within that Tom and his team have developed the model that I think really kind of help oversee and govern our activity relative to buyback through I think fluctuations within the market. So, Tom I’ll let you add to that if you can.
So as Gerry indicated we do have a rigorous analytical approach to share repurchase. We do employ dividend discount model valuation and we are looking for a certain threshold IRR. And as you would imagine, we're also looking at earn back of tangible book value dilution.
We were fortunate in the first quarter to take advantage of the downdraft in financial prices in general and repurchase some shares. So, you know the authorization is for 100 million, expires March 31 of '19. We're at about 3.25 million to-date which seems kind of slow, but I think about the environment that we were in, in 2017 for example we have pending tax reform and the uncertainty around ultimately whether there would be passage and where tax rates would look like.
As you can imagine when you're trying to get a dividend discount model valuation and you have that uncertainty in terms of what your future earnings stream might look like, which is a function of something beyond your control like tax legislation.
We felt it prudent to sort of error on the side of caution and not chase the market increase in financials prices generally, but obviously the dust has settled here. There has been some retracement in financials. And I would expect that we will continue to be diligent and where the opportunity presents itself continue to repurchase.
So it seems as you’re really more opportunistic for pullbacks in the price, as opposed to if we did see financial started outperform again than you would most likely be a - you'd be less likely to be more active in the repurchase activity, even though your capital is building at a faster pace with tax reform?
I think that's fair, but you do make an important point there which is our capital continues to build and we're projecting that it will continue to build and our capital ratios are above our operating targets at this point. And so we are mindful of that.
And so all else equal that would tend to make us a little more aggressive rather than a little less aggressive. As long as we can earn a reasonable IRR on that but we will maintain our discipline around that.
And we've been fortunate that with the robust loan growth that we've achieved has been and continues to be attractive spreads and returns. And so, you know share repurchase so to speak is it is competing with lending right, and returns available there. So we're all always mindful of that dynamic as well.
Our next question comes from Matt Olney from Stephens. Please go ahead with your question.
This is Brandon Steverson on for Olney. I wanted to follow up on the securities question from earlier, if loan growth is softer than the guidance you've laid out for 2018, would you continue to shrink the securities book. Or is that strategy dependent at all upon loan growth.
So those two strategies are independent, I would imagine that when you think about the market conditions that might lead bank lending in general to be softer, might also make the deployment of capital through the reinvestment of securities cash flows more attractive which is to say perhaps there would be an environment where the Fed would slow-down a bit on their pace of tightening.
And so you might find that those two things are related. So even though I'm telling you they are separate decisions, the consequences of one might lead to a market that's a little more attractive for us on the other.
And then last one from me on mortgage, some of your peers have talked about seeing improved gain on sale margins in the mortgage business. Is that consistent with what you guys saw this quarter? And then what is the outlook for mortgage rates that you'll see going forward?
Let me comment, this is Gerry, and let me comment on the gain on sale. We saw good volume within the first quarter, despite the fact that we've seen some increase in overall rates primarily because we have been building out the retail portions of our mortgage operations until we’ve been very successful there.
As far as gain on sale, I think that clearly is a function of the market and it is a challenge to project very much driven by volumes. And as far as the mortgage servicing rates and the gain we have there, we do hedge our MRS - I mean our MSR. So we're trying to minimize the impact on the income statement from quarter to quarter. However, I have been fortunate over the last 15 years that it has contributed to the - to our earnings.
And in terms of looking forward clearly we are watching rates like everyone else's and that will impact the mortgage business. But we have expanded as I mentioned retail producers in some very good markets. And would anticipate that we will continue to grow that business a better rate than what we see going on in the industry as a whole. Tom, if you want to add.
Ladies and gentlemen at this time, we'll conclude today's question-and-answer session. I'd like to turn the conference call back over to Mr. Gerry Host for any closing remarks.
Let me say that we appreciate very much you calling in and being part of this call and your questions. I hope you found this meeting, this call helpful to you in better understanding the company and the positives. And our next planned call will be on July 25 that we will be giving official notice prior to the call and we hope you'll be able to join us again then. So thank you again and have a great day.
Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.