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 First Quarter Earnings Conference Call. [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 the 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'd like to introduce Jerry Host, president and CEO of Trustmark.
Thank you, Joey, and good morning, everyone. Thanks for joining us. With me this morning are Louis Greer, CFO; Barry Harvey, our Chief Credit Officer; Duane Dewey, Chief Operating Officer; Tom Owens, our Bank Treasurer; and Breck Tyler, President of our Mortgage Company. I would like to briefly update you on our financial results, which are located on Page 3 of our presentation.
Loans held for investments increased to $159 million or 1.8% from the prior quarter and $481 million or 5.6% from the previous year. Net interest income, excluding acquired loans, totaled $106 million, a 0.9% increase linked-quarter and 5.7% increase from the prior year.
The net interest margin, excluding acquired loans, increased to 3.6%, an increase of 10 basis points from the prior quarter and 23 basis points year over year. Core noninterest expense, excluding ORE and intangible amortization, totaled $103 million or 0.6% increase from the prior quarter.
Credit quality remained solid as nonperforming assets declined 8% from the first quarter and 18.2% year-over-year. Net charge-offs represented 0.09% of average loans. During the first quarter, we repurchased approximately $36.9 million or $1.2 million shares of our common stock, which completed the $100 million share repurchase program we announced in 2016. I'd also note that on April 1 of this year, we announced a new $100 million share repurchase program, which will expire March 31, 2020.
At this time, I'd like to ask Barry Harvey to provide additional detail around both loan growth and credit quality. Barry?
Thanks, Jerry. Glad to. Looking at the loan growth on the held for sale, excuse me, on the held for investment, you can see that we increased $159 million during Q1. That's, we're off to a good start relative to what we have given guidance wise of mid-single-digit loan growth, and that's what we believe the year will entail.
First quarter of last year, as you can remember, was a quarter in which we have a, quite a bit of unexpected payouts on our CRE books. So it got us off to a slow start. This year, we're moving along as expected. Our loan growth came primarily in our commercial construction book, our other construction and from a variety of different project types as well as geographies.
I'm sure we'll be talking about that in the Q&A later. We did have a little modest growth in our residential builder book as well as C&I and public finance, but the great majority of our growth did come through of the construction or commercial construction. Looking at the energy book. The outstandings continued to drift downward, becomes less and less material.
Obviously, with the commodity price where it is today, these companies are doing a little better, and hopefully, we can see progress in that regard. Looking over to Slide 5. The credit quality measures, they continue to be at historically low levels, past dues, criticized classifieds. Net charge-offs, provisioning levels continue to be very low relative to historical standards.
We continue to see improvement in our NPAs both, as Jerry mentioned, nonaccruals were down about 8% for the quarter. ORE was down about 7%, and balances are carry value performance, of the quarter, so we're very pleased to see that particular attribute.
Our credit quality measure continue to move downward. On loan loss reserve we're about 88 basis points, which is when we look at our peer group from an OCC perspective, we're at the mean or a little better than the mean.
So while it appears low to a historical standards, we are in line with our peers. As it relates to CECL, we continue to make good progress there. We're on schedule. We're beginning to do some paralleling at least as it relates to the quantitative part of our loan loss reserve under CECL, and we're working through our qualitative aspects.
We're on track where we expected to be at this point and expect to be fully parallel in beginning 6/30 and then progressing through the remainder of the year. Jerry?
Good. Thank you, Barry. As we look at the liability side of the balance sheet, Tom, I'd ask that you make some comments around changes in the deposit base and in the net interest margin.
Thanks, Jerry. Turning to Slide 6. Deposits totaled $11.5 billion at March 31, an increase of $170 million or 1.5% from the prior quarter and an increase of $559 million or 5.1% from the prior year. Linked-quarter average balance growth was driven primarily by personal accounts and normal seasonal inflows into public accounts.
Our cost of interest-bearing deposits rose nine basis points, representing a beta of 43% for the quarter and 34% cycle to date relative to the fed's rate hikes. Looking at revenue on Slide 7. Net interest income FTE totaled $108 million in the first quarter, which resulted in the net interest margin of 3.63%, a seven basis point increase from the prior quarter. Excluding acquired loans, the net interest margin was 3.60%, an increase of 10 basis points from the prior quarter and up 23 basis points from the prior year, driven primarily by our continued balance sheet optimization initiatives.
And now Duane will provide an update on noninterest income.
Thank you, Tom. Noninterest income totaled $41.5 million for the first quarter, a decline of $2.1 million linked-quarter, principally due to the decrease in mortgage banking noninterest revenues. As disclosed on Page 7, mortgage banking revenues declined by $2.3 million linked-quarter, principally due to the increased negative hedge ineffectiveness of $3.7 million and reductions in gains on sale of loans of $1.6 million. Offsetting these decreases were other net mortgage revenues, which increased by $2.8 million, representing the fair value change in loans held for sale.
Interest commissions, or excuse me, insurance commissions were solid in the first quarter totaling $10.9 million, an increase of $1.3 million principally due to seasonal premiums and new business. In addition, service charges and bank card fees reflect the seasonal linked-quarter decline of $1.4 million. Louis will now cover expenses on Slide 8 and capital management on Slide 9.
Thank you, Duane. As Jerry mentioned earlier, our core noninterest expense for the quarter remained well-controlled. And you remember, core expenses exclude ORE and intangibles and only totaled a little over $103 million. I think previous guidance we gave in the prior quarter was about a 2% increase, and we only went up six basis points.
And I'll tell you, that I'm expecting our core noninterest expenses for the second quarter to increase approximately 1% to 2%. I know we'll have a question on the efficiency ratio going up 3% for the quarter, and I'll tell you that primarily, that's related to the hedge net ineffectiveness. Now looking at Slide 9. Trustmark continues to remain solid capital position during the first quarter.
As Jerry mentioned, we purchased approximately $37 million of our outstanding stock, which completed the $100 million repurchase program that was put in place in the first quarter of 2016. And as you're aware, we announced a new program that began on April 1 of $100 million that will expire on March 31, 2020. This program is subject to market conditions, and management discretion will be implemented through open market purchases or privately negotiated transactions. Jerry?
Great. Thank you, Louis. I trust that this brief discussion of first quarter financials has been helpful. And at this time, we would be glad to answer any questions.
[Operator Instructions] The first question is from Daniel Mannix of Raymond James. Please go ahead.
Hey, guys. Good morning. Thanks for taking my questions. So the reported in core NIM were up pretty nicely in the first quarter as you talked about. Can you update us on what your expectations are for the year?
And secondly, it looks like you guys got rid of a slide in the deck, so excuse me if I missed this somewhere else. But can you tell us how much equity accretable yield there was in the first quarter and what the schedule is, your expectations for the rest of 2019? Thanks.
Yes. We'll ask Tom Owens to answer this net interest margin question. We have removed the accretable yield deck mainly because balance has gotten so low, and the effect is so insignificant that I just didn't feel it was necessary. But be happy to give you detail on that, unless you want to, you're ready to do that.
I'd just tell you on Note 4 in our financial stat sheet, we do disclose the accretable yield related to those acquired loans. So I'd just point to that Note 4 in our financial stat sheet that includes those numbers. And I'll tell you that the acquired loan yields were about 7.45% for the quarter. It includes a very small amount of recovery of about $250,000.
And I think the acquired loan ran off about $15 million. That's what we expect continuing throughout the year, hopefully. That's $93 million outstanding as of March 31. So by the end of the year, we expect that to be almost nothing.
Okay. Tom?
Thanks, Jerry. So Daniel, good morning. This is Tom. Regarding core net interest margin, yes, we had a nice first quarter with the increase to 3.60%, and that was a bit better than expected.
However, there's a few things to keep in mind. One is there is a normal volatility to the relationship between loan yield and interest bearing deposit cost. And I would remind you that in the fourth quarter, for example, on a linked-quarter basis, we had no increase in core NIM because we essentially had a compression of the spread between loan yield and interest bearing deposit cost.
So we had a bit of a normalization of that in the first quarter, the 15 basis points linked-quarter increase in loan yield is at the sort of the high end of the recent quarterly range in terms of quarter-over-quarter change, and the nine basis point increase in interest bearing deposit cost is sort of at the low end of the trailing four quarter range.
So that worked on our favor. In terms of sustainability going forward, in terms of our guidance for the full year, we would maintain our guidance in terms of growth in core NII. We had put a range on that of 2% to 4% for year-over-year growth, midpoint of 3%. We feel that's still appropriate.
The other thing to keep in mind here since our last earnings call is that yield curve is flat by 25 basis points. So you think about the fundamentals of the lift that we've been getting from new loans going on the books, for example, at higher coupons, listing weighted average coupon on the loan portfolio. Some of that is going to see some headwind now from the flatter yield curve. And then last thing I'd say is we do use market-implied forwards in terms of our forecast.
And as you know, the market is now pricing in about a 50% probability of the next Fed move being a rate cut as compared to a rate hike. And so obviously, that would create some pressure; if that were to occur late in the year, less pressure. So we're maintaining our guidance for the time being. If, in fact, this interest rate environment and this flat yield curve prevails through the remainder of the year, is there potentially a bit of upside to that if the yield curve steepens? Probably so, but I think the appropriate range to be thinking about is 2% to 4% and probably 3% as a midpoint.
That's great color. Thanks, guys. If I could ask one more here on fee income. Mortgage actually saw a pretty good quarter there, insurance commissions, of course, but service charges were down.
It looks like bankcard and other fees were as well, sequentially speaking. Can you walk us through the moving parts of fee income and how you expect that to trend for the rest of this year? Has anything changed since last quarter? On a total basis, I see about 30% of fee revenue as a percentage of total revenue. Is that a decent number on an overall basis moving forward? And again, just kind of running us through the moving parts there. Thank you.
Yes. I think I'll start, and then other members of the group can fill in. I think the overall projection that we've given in terms of fee revenues as a percent of total revenues is a fairly solid number. There's going to be some seasonality and volatility, minor volatility in those categories.
Service charges on the positive count is something that continues to, to evolve from an industry perspective, and I don't see us being significantly different. Insurance has been a good growth engine for us now for the past several years. The wealth management group has been steady. We've spent a lot of time, effort, money in upgrading that whole area.
Duane Dewey has made some changes organizationally that we think will help that in the future. One of the ones that creates volatility, the one that creates the most volatility, I think, is mortgage company. And Breck, if you would maybe comment on what you're seeing there.
Sure. Thank you, Jerry. Daniel, as you mentioned, I think you alluded to our linked-quarter increase net of MSR was positive of $1.4 million. I would like to make a couple of comments on the gain on sale, so we'd make sure we understand.
I may have to get a little granular with you here. But Duane mentioned, we were down $1.6 million on a linked-quarter basis, and just a couple of things that happened that were somewhat unique. Due to the timing of the closing in the first quarter, we delivered $62 million less in Q1 versus Q4, and our sellable volume was really only $10 million less. And this is, if you look at the line other net, that is valuing the portfolio of loans or the pipeline of loans delivered in the second quarter.
So you see it, those are just layered deliveries of loans going into the second quarter, which we've definitely seen in that line, other net. And this line is simply marking to market those loans we sold in the first quarter for delivery in the second quarter plus our locked pipelines. So we have an attractive pipeline we would, still going forward. But the second component this quarter on gain on sale that I just want to clarify, so that no one just determines what the margin might be on gain on sale is, as you know, there are multiple components to gain on sale of the loan line.
And one component, which is usually not volatile, is the present valuing of the future value of the retail loans or the servicing of the retail loans that were delivered in that quarter. I know that's a mouthful, but Q1 loans delivered for closings, actually, in November, December and January and actually, locked in a couple of months before that. And if you remember, we had a two-day downdraft, which was unusual in rates. Therefore, the weighted average coupon on these loans that delivered in Q1 was higher than the market rate at 5:00 on March 29.
So these loans were in the money, so to speak, from a refinanced standpoint. So the model value, that servicing value's significantly less. So I state that because that's an unusual phenomenon, and again, I wanted to clarify that $1.6 million difference. So as we all know, you can't simply look at gain on sale divided by loans delivered and assume a margin comparison quarter-over-quarter.
So I know that was a lot, but I wanted to clarify that, and that's something that doesn't happen very often. One of our strategic initiatives starting back in 2014 was to really grow our retail production. Third party is extremely competitive. It's been that way for the last four years.
Margins are very thin, and so we're wanting to grow our retail production. And in 2014, we were right at $616 million; 2018, $972 million, so significant increase over this four-year period. And we're very pleased with our production and our support team. Give you a little bit more color here.
We have 60 producers. We produced $972 million last year, and that's about $1.350 million per producer per month. And in our market, that, we feel like that's very attractive. It shows some efficiencies.
But our average loan balance is slightly below $200,000, and I think that just shows our commitment to, for the housing and FHA, VA and the GSE. So good fee income, a lot of loans, but we feel optimistic in being able to continue to grow our retail production. A lot of it depends on rates, but we're excited about where we are and where we're going there. As you know, we have a full service platform, meaning we're production secondary in servicing.
That's important to us for a lot of reasons. One is we're in control of our price. So when there are dislocations in the marketplace, we don't have to sell to wherever the price of the upstream investor is. We can go straight to The Street, Fannie and Ginnie and so forth.
Obviously, servicing our own portfolio keeps us in contact with our bank customers, the tremendous referral base for us, and it allows us to provide portfolio loans for loan growth. So we feel like our technology is leverageable at this time. We have attractive labor cost, excellent referral base, we're really excited about where we are and going forward.
Thanks, Breck. I'm just going to say this. I'm glad I was on the call today. I think I learned more on the call, the details, then I did at the internal financial review.
So thank you for that color.
Yes. That's great detail. Thank you. That's it for me.
Thanks, gentlemen.
The next question is from Brad Milsaps with Sandler O'Neill. Please go ahead.
Hey. Good morning, guys. This is actually Peter Ruiz, on for Brad. Appreciate all the color there on mortgage.
I just wanted to maybe go back to the NIM real quick and maybe touch on loan yields. Like you mentioned, loan yields were up nicely this quarter. Can you kind of walk us through some of the dynamics there? And what was the driver of the larger expansion and maybe what that looks like going forward?
Okay. I think what we'll do is, maybe ask Barry to start, and Tom, add any color, if necessary.
Sure. Be glad to, Jerry. I think from a mix standpoint on the loan yields, we're seeing it remain extremely, course competitive on the C&I side. And on the public finance side, we're seeing a little bit of leveling out of the decline and the pricing than what we're seeing for a period of time on the CRE and beginning to see some green shoots occasionally or opportunities to move back up on the pricing there from the standpoint of the spread aspect of it.
But we continue to see that to be something we're focusing on doing, obviously, as much variable rate lending as we can and as little as little long-term fixed rate as possible. And I think that, that mix between variable and fixed is continuing to be pretty evenly spread across the new production as well as the portfolio itself. Tom, did you have a few comments?
Yes. Peter, again, I would just reiterate that there is a normal sort of volatility quarter-to-quarter, and so yes, it was a good quarter. Again, do have some concerns about the flatter yield curve here and the ability to continue the lift that we've been getting from new loans as they go on the books relative to the existing portfolio weighted average coupon. And again, that's a challenge that the industry is facing.
That's great. I appreciate that. And so maybe just on the flatter yield curve and then just maybe what the impact there is in terms of your balance sheet optimization efforts. I think the goal previously has been securities at about 21% of earning assets.
So has any of that changed as the yield curve has changed? And what's your outlook there?
So that's a really good question. And what I would, I guess, a few thoughts on that. First, yes, we believe here in the second quarter, we will reach 21% of earning assets, which has been our goal. Second, we're kind of at a key inflection point.
You look, you look a lot of the lift that's been achieved from the runoff securities portfolio. You know how the math works. I mean, you're running off some lower yielding assets at the same time that you're running off the denominator, the earning assets, so it gets both sides of the equation. But we're in relatively equilibrium right now as it relates to the balance sheet.
And by that, I mean that we've essentially paid down our borrowed funds to the extent that we want to, to the extent that we still have a modest borrowed funds position, it's very accretive, very attractive funding. We want to maintain that. And we're now at a position where we're slightly long at the Fed, meaning we have excess reserves. And as you know, we'd be earning the interest on excess reserves rate, which is currently 2.40%.
So from this point forward, the decision, in terms of optimization, the decision to reinvest securities cash flows or not. It will be more a function of the shape of the curve and our view on the path, forward path monetary policy. So what I would say is you're looking at a differential that's relatively modest at this point, right, given how flat the curve is versus earning 2.40% at the Fed. So balance sheet optimization in that sense will have run its course.
And then, of course, over the remainder of the year, what comes into play, we'll have some public fund deposit seasonal runoffs, and then you get down to the relationship between loan growth and deposit growth in terms of the extent to which we do or do not work down that excess position at the fed.
But what you'll see is if we do continue to run off the securities portfolio, you'll just see that show up essentially as an earning asset in a different spot in the stat sheet. So it's not going to have the impact on the denominator in terms of earning assets. So it's, I'd call it continued balance sheet optimization, but the fundamentals of it are different.
It will no longer be a headwind to earning assets. It will be a question of optimizing earning assets within the considerations that I've talked about.
[Operator instructions] The next question comes from Catherine Mealor of KBW. Please go ahead.
Thanks. Good morning. One follow up just on the balance sheet optimization. If we look at borrowing, borrowings came down a lot this quarter.
How do you think about the kind of seasonality of, that your higher public funds with your borrowing, with the borrowing averages and your expectations for having optimal borrowing position would be for you moving forward?
Great question, Catherine. This is Tom. So as I said, we have a modest excess reserves position at the fed right now. Peak to trough in any given year, right now, March, April is peak balance time in terms of these public fund deposits.
They do have seasonality to them, call them, call it peak to trough somewhere between $300 million to $400 million in any given year. And so when we think about our current long position at the fed, when we think about the seasonal runoff of those deposits through, the trough tends to be about November.
Absent the other things, right, the relation just the fundamental relationship between loan growth and deposit growth, we would project currently that when we get to that trough in November, we're going to be about neutral, which is to say no excess reserves at the Fed, but which is also to say, as I mentioned earlier, maintaining a modest borrowed funds position because when you look at the cost of those funds, it's very accretive. Is that helpful?
It does. Yes, that's very helpful. Okay. Great. And then one more question on the expense side. Occupancy, I noticed, was down a little more than expected this quarter. Can you give us any color there? Was anything kind of one-off? And then Louis, how are you thinking about your expense guide for the rest of the year?
Well, Catherine, as we continue to optimize our market optimization, I think we have in the pipeline today to our, about seven branches in the next quarter while we'll be opening...
Close.
To close. That we'd look to close, and we're opening a couple of new branches.
Net branches.
Yes. So net, we're looking about five closures, net closures in the second quarter. So we continue to look at that continually. And as I said earlier, I think our expense base set up for the second quarter, we'll look we've got quite a few technology programs going today.
As Jerry mentioned in the previous quarter, I think we're replacing our legacy loan and deposit system. As most of those expenses are capitalized, there are some fewer expenses that are occurring throughout the second and third to fourth quarter. So I expect our core expenses, excluding ORE and amortization and intangibles, to increase anywhere from 1% to 2% in the second quarter.
Okay. Great. One more, if I may, just on buybacks. How, are you finishing your last authorization and reupped it? How are you thinking about how active you'll be in the next authorization given how well your stock has done this year?
Well, I'll start, and either Louis or Tom can add, Catherine. The additional $100 million authorization is kind of what we had with the previous one that it's an option to overall capital management that when there is opportunity as we see fit, as management sees fit within certain guidelines that we have, we've put on ourselves, we'll, it's there for us to take advantage of it and to utilize as we need. So it's one of those things that is difficult to predict. It depends on the market.
It depends on where our stock price is relative to the overall market in our peer group. But it's, again, it's a tool that we can use to manage capital along with the steady dividend growth as we see it, and we've given some guidance there as to what we think organic growth would be. And then, of course, the opportunity that might arise from a potential acquisition.
Great. Helpful.
Thank you, Catherine.
[Operator instructions] There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Jerry Host for closing remarks.
Thank you, operator, and thank you all for joining us today. I hope some of the detail we've provided has been helpful. We feel extremely optimistic about the remainder of the year and the opportunities. Despite the fact, as Tom mentioned, that we have a very different interest rate forecast, we feel like we have the ability to adapt, continue to grow the company.
And we appreciate your support, your interest, and we look forward to the second quarter earnings call in late July. Thank you, all.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.