Trustmark Corp
NASDAQ:TRMK
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Trustmark Corp
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Good day, ladies and gentlemen, and welcome to the Trustmark Corporation's Second 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. Please go ahead.
Good morning. I would like to remind everyone that a copy of our second quarter earnings release, as well as the slide presentation that will be discussed this morning is available on the Investor Relations section of our website at trustmark.com. During the course of our call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We would like to caution you that these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties, which are outlined in our earnings release and our other filings with the Securities and Exchange Commission.
At this time, I’ll turn the call over to Gerry Host, President and CEO of Trustmark.
Thank you, Joey, and good morning, everyone; and thanks for joining us. With me this morning are Louis Greer, CFO; Barry Harvey, Chief Credit Officer; and Tom Owens, the Bank Treasurer.
Trustmark reported net income of $39.8 million or $0.59 cents per diluted share in the second quarter, which represents a quarter-over-quarter increase of 9.3% and 25.5% when compared to core earnings to the same period in the prior year.
I’d like to provide you with a brief update on our financial results, which are on Page 3 of our presentation. We continue to make advancements regarding loan growth, balance sheet optimization, capital deployment and expense management.
Loans held for investment increased to $165 million or 1.9% from prior quarter and $382.9 million or 4.6% year-over-year. We continue to run-off maturing investment securities while repurchasing $5.4 million of our common stock. Revenue excluding interest and fees on acquired loans increased 2.4% linked quarter to total $147.5 million.
FTE net interest income totaled $108.4 million up 2.9% linked quarter and 1.4% year-over-year. Efforts to manage expenses and improve processes were evident in the quarter as core expenses which exclude ORE expense and intangible amortization increased 2.4% from the previous quarter to a total of $102.6 million.
Credit quality continues to be a strength for Trustmark. Non-performing assets decreased $7.2 million or 6.7% compared to the prior quarter.
I briefly spoke to the loan portfolio, but I’d like to ask Barry to add some color to both loan growth and credit quality. Barry?
Glad to, Gerry, thank you.
Just looking on Page 4, you can see as Gerry mentioned our loan growth for the quarter was $165 million year-to-date that's $109 million worth of loan growth. The growth given the second quarter starting with commercial construction we grew about $36 million, mostly Mississippi and Texas and that was - that was multi-family related and then we also grew on the wonderful family closed in, we grew about $50 million that was predominantly in our mortgage company.
Within the existing non-owner occupied bucket we grew roughly $49 million that was predominantly coming out of Alabama, but we do see growth in all of our markets and then as you can see in other loans, we grew around $23 million, that’s mostly going to be in Mississippi and Alabama that’s going to be a variety of type of C&I customers in the utilities, consumer finance et cetera.
Looking on the Page 5, I'm glad to see we have a continuation in our reduction in our non-performing assets, we had a nice reduction in non-accruals of $7.3 million during Q2, about $4 million of that was pay downs about $3.6 million of it was movement of problem loans in the ORE, and that's our long-term acute care facility that we've just talked about before, as up to credit we had several facilities that moved into ORE and that out of the non-accrual bucket.
And then also on a ORE we were able to - to get some of the ORE up a little bit came in, maybe a little profit on what we were able to sell, but that's a continued focus for Trustmark as to get the non-performing assets down to an acceptable level. When you look at net charge-offs and the ALLL, they appeared to be very reasonable for this point in the economic cycle.
Looking over to Page 6, with the acquired book it was down to a $173 million at this point, acquired loans decreased $42 million during Q2, the yield on the acquired loans was 9.96% cost of recoveries that we experienced dues that yield up about a third from where it would have been otherwise. The run-off in the - we expect in Q3 should be in at $20 million to $30 million range and the yield on that should be in that 6% to 7% range, borrowing any recoveries, we may experience.
Great. Thank you, Barry. Let’s turned into the liability side of the balance sheet, and Tom if you can comment on both deposits and the net interest margin.
Glad to Gerry.
So turning the Page 7, total deposits increased $97 million or 0.9% during the quarter. Total deposits increased $649 million or 6.2% from the prior year. We continue to maintain a favorable mix of deposits with 27% in non-interest-bearing and 60% in deposits and in checking accounts. Our cost of interest-bearing deposits rose 11 basis points representing a beta 44% for the quarter and 27% by cycle-to-date relative to the Fed's rate hike.
Turning to Page 8, net interest income FTE totaled $108 million - $108.4 million in the second quarter up 2.9% from the prior quarter, which resulted in a net interest margin of 3.57% million, an increase of 11 basis points from the prior quarter. Excluding acquired loans, the net interest margin was 3.46%, up 9 basis points from the prior quarter and 9 basis points from the prior year.
Now Louis will provide an update on non-interesting income.
Thank you, Tom.
Non-interest income totaled a little over $47 million in the second quarter, which represented a quarter-over-quarter increase of about 1.3%. As you can see strength in our insurance and mortgage business is offset declines and other fee income areas. So we continue to have strong non-interest income, which represents about 31% of total revenues.
As you look on Page 9, non-interest expenses remain well-controlled with routine non-interest expense, which exclude ORE and intangibles, they totaled about $102.5 million in the second quarter, the increase was about 2.4%. The main drivers of the increase were principally
The main drivers of the increase were principally increased commissions associated with insurance and mortgage business as well as investments in technology. We are pleased with the progress today, but will remain focused on our expenses as we will continue to realign branches and delivery channels and make investments to enhance our customer experiences.
As for taxes, we expect our future effective tax rate to remain around 13% to 14%, it’s a little over 13% for the quarter. We remain well positioned from a capital perspective as noted on page 10, we have ample capitals for organic growth, and are focused on all methods of capital deployment including share repurchase.
Right. Thank you, Louis. I trust this very brief discussion of our second quarter financial results has been helpful. And at this time, we would be glad to answer any questions that you might have.
[Operator Instructions] And our first question comes from Daniel Mannix with Raymond James. Please go ahead.
Just want to start with the loan. So, the paydown seemed to have subsided on the CRE side and you had some good growth across real estate and consumer loans, but the C&I loan growth looks like it actually turned negative when you exclude energy. So, the first question I guess is, is the high single-digit loan growth guide still achievable for this year?
We’ll address that Daniel here in a second. We’ll just comment on the market overall. Obviously it's become very competitive, especially on the C&I side, as well as the public side. The real estate, commercial real estate, obviously it's still very strong, but very competitive market and then Barry, I guess do you want to add some color and give some indication as to what we're seeing for the remainder of 2018, I think that’d be helpful.
Daniel, I think the way we're viewing it is from a production standpoint, it's you know we're seeing some good production coming out of our CRE areas. But we are seeing and we do forecast and anticipate a risk amount of early payoffs coming to us in the second half of the year.
The guidance we're giving at this point based upon our latest forecast is going to be low- to mid-single digit growth during 2018. The biggest headwind there is not the activities we're seeing and the opportunities and what we're approving is just going to be those unanticipated early payoffs that are coming on the CRE book and based upon our most recent forecast.
And that's occurring for a number of reasons, which are very positive other the fact that the - that we're you know from a earning asset standpoint it diminishes our ability to generate earnings from - in the sense that these projects are coming off early one because the projects are going better than expected from the borrower’s perspective and the pro forma and therefore they're stabilizing quicker, are approaching stabilization quicker and moving out through either sell the property to read et cetera and it's moving out to that avenue or it’s moving to the permanent market, and because it has stabilized quicker.
So we’re constantly day-to-day updating our modeling as it relates to projects where they are when we think they're going to come out, having conversations with customers, but we do see, it is very fluid and we do see and project for the second half of the year an increase in some of the pay-offs that may be did in Q1, we didn't see paying off during 2018, we saw more than 2019 departure and there will be an 2018 departure in the second half of the year.
So for that reason, we are lowering our loan growth for 2018 to load up mid-single digits. But here again when you look at it from a production standpoint, we've got better production on the CRE side today than we did last quarter a year ago et cetera.
So we’ve got a lot of projects coming on the books, obviously there is equity that needs to be put in by the board before we get a chance to fund and what’s coming off the book is fully funded. So for those reasons, from the C&I, from the public finance side of it, it's steady but it's not going to be able to move the needle enough to get us back to the loan growth we've seen in the prior three or four years.
I guess just looking at it on a segment basis, is there a lot of variance between like CRE and C&I or both are kind of in that low-to-mid single-digit range?
There is a good bit of - there’s some variance there. We're going to see - we're going to continue to see some growth on the CRE side. We don't anticipate much in the way of growth from the C&I side or the public finance side - we had a lot of credits maturing this year more than normal.
And we've got part of that all the way in the first quarter. We still have a meaningful amount of public finance deals that will be maturing this year relative to prior years and future years. So, it's sort of - it's a bit of a headwind that hopefully we won't have again in 2019 but we will have in the remaining half of 2018.
But, we do see good solid production coming out of our CRE group, it’s just a matter of getting them on the books and getting them funded once the equity goes in.
Just one on expenses I guess, you guys had broadcasted that you're going to be at the top end of the core expense guidance range in the second quarter. I understand there's lumpiness in the timing of projects that you guys, the investments that you have going on. But, is that $100 million to $101 million still a good run rate or is that adjusted going forward?
Daniel, this is Louis Greer. You know in the third quarter, our insurance business has its higher watermark in revenues, so commissions are a little higher. So, I will give you guidance in the third quarter of about a $102 million, that's what we expect our run rate to be in the third quarter. So, just because of the seasonal in this - the insurance business, we have increased the commissions on those - on that line of business. So, we're looking around $102 million as our guidance for the third quarter.
And as far as some unexpected expenses in the second quarter, we finished a major conversion in our wealth management area of the company on July 2. I mean we had some outside expenses where we hired in some help to ensure that we hit our deadlines.
And so that pushed them up a little bit along with some commissions in both the insurance and brokerage side. I will tell you that we are in the process of a major conversion of some of our core systems related to loans to upgrade those that will be a process that will take place over the next 18 months to 24 months.
And so, you will see some choppiness, but there is still a very significant focus in the company on controlling and reducing expenses and utilizing some of this new technology to find ways to streamline the way we operate for the future.
And along those lines the controlling expenses you've talked in the past a little bit about a potential branch closures, we identified anything at this point?
That is not a one-time focus to close X number of branches. It is an ongoing process. We have a committee that meets every month to review overall branch performance, changes and transaction levels, volume levels, account levels. It looks at the market itself and we review that like I said every month to look for new opportunities to reduce the overall branches and branch expanses.
Our next question comes from Jennifer Demba with SunTrust. Please go ahead.
Gerard I just wondering about your appetite for M&A right now, the market’s not been very responsive to deals in the last couple of months, just wondering what you guys are seeing and what you thinking about right now?
Jennifer obviously there has been a number of deals announced as you're well aware and as you pointed out the market is questioning the earn back period and we're seeing more and more focus there. Our approach is this it’s around capital.
This company as you know you've covered us for a long time and now though remains more so on the conservative side, on the side that works towards a stable and predictive earnings stream. We try to be as transparent as we can. And so when we look at overall capital management and we may every month to look at different opportunities we're looking at levels, we're looking at risk you know for banks our size, DFA is no longer a reportable event, but we have maintained our processes around the DFA Stress Testing and is incorporated into our overall capital planning process.
And in doing that, we look to make sure that we have adequate capital through challenging times, but the rest of the process is really focused on where is the best deployment of capital, is it organic growth, is it some sort of buyback program or is it an acquisition.
So we look to be very disciplined in weighing those three options or any combination thereof and as you pointed out right now some of the things we’ve seen have been maybe a little bit pricy especially as we look to it as to how we would utilize our capital via our current stock price levels.
And so as a result, we remain very disciplined but we also are very aware of potential opportunities and are aware of opportunities that we hope might develop at some point and what that means, what I'm saying is that, yes, we’re very focused on looking for acquisition opportunities, but only if they make sense and we’re comfortable from cultural standpoint in terms of an acquisition and a financial perspective.
Our next question comes from Brad Milsaps with Sandler O’Neill. Please go ahead.
Maybe I want to talk about the margin a little bit. And, Tom just kind of curious I know we’ve talked in the past about kind of what you’re doing on the with the bond portfolio and I appreciate the comments around the loan book. Just kind of curious any update kind of how you're thinking about you know the size of the balance sheet and you know upon the securities portfolio down further and kind of what that means you know for the NAND as you think about the back half the year?
So you know our past guidance is been for very modest compression in core net interest margin potentially offset by realized deposit betas that are lower than modeled, and that’s - essentially what's come to pass in the second quarter. We've also guided to 2 basis points to 3 basis points per quarter related to run-off of the securities portfolio.
So, in addition to those two things in the first quarter, we had a rebound in loan fees to a more normal run rate, and we also experienced a favorable funding mix as we experienced the low average seasonal run-off of the public fund deposit balances.
So, those are basically the drivers of the linked quarter increase in core net interest margin. Going forward, I'd say it's become increasingly likely that we will continue to run off these securities portfolio through year end.
We've talked in the past about wanting to get down closer to the pure median in the neighborhood of say 21% securities to core earning assets. Our current projections, based on the guidance you've heard so far this morning, is that we would end the year at about 23% of core earning assets in the securities portfolio. So, I’d expect that you’ll continue to see 2 basis points to 3 basis points per quarter of accretion as the securities portfolio continues to run off.
So, this quarter, the loan yield, the core loan yield of around 4.60%, you’re saying that that’s a pretty normal level of fees in that yield, is that correct?
That’s correct.
And what would you anticipate say LIBOR, the fed continues to move, would you expect to see that move up by - you know I’m just kind of curious over the difference between the fees and what the actual moving rates did for loan yield this quarter, compared to the first?
Compared to the first. So, another way to I guess to answer that question would be you know if you look at the 44% realized beta on the deposit side, the realized beta on the LHFI core loan side would be about 60%.
When you adjust for the rebound in loan fees to a more normal level, if you back that out, which you really shouldn't on a run rate basis going forward, but for the sake of understanding the dynamics in the second quarter relative to the fed rate hike, you'd have a realized beta of about 48%.
Okay.
LHFI beta a little bit higher than the interest-bearing deposit beta.
Okay, great.
And really those have sort of been in a dead heat here. You know if you looked over the last four quarters or five quarters and if you looked at cycle to-date beta, when you look at the LHFI beta and compare to the interest-bearing deposit beta in any given quarter one maybe 4% or 5% higher than the other. If you look at it over a smooth say trailing four quarters, it's been pretty much a dead heat.
Now going forward what we're projecting are as far as fed rate hikes we use in market implied forward so basically we have one hike between now and year end; 50% probability of recurring in September; 100% probability that it occurs by December; and then two hikes in 2019 one hike in 2020.
And we're projecting that on the deposit side the cycle to-date beta increases from 27% currently to about 33% by year end 2018l 43% by year end 2019; and 47% by year end 2020. So, we're projecting that deposit betas will continue to accelerate.
And I could just maybe ask one follow-up on mortgage banking. You guys - it looks and you gave a lot of detail here, but the mortgage line is sort of before hedging up maybe 10% year-over-year production or gain on loan sale revenue up about the same. I'm just curious that's kind of counter to what's going on in the environment? Can you just kind of talk a little bit about how you can sustain that and maybe things are doing on the mortgage side to sort of offset what's going on in the bigger picture?
Yes. I’ll do that Brad. We've had a conscious effort since the acquisition bank trust in 2013, to build out the retail side of our mortgage operation and become less dependent on our brokerage business. So, we've actually have been somewhere - where retail was maybe, roughly 40% of our total and 60% brokerage we're really doing closer to 75% retail 25% brokerage.
And we have been very successful with attracting and retaining originators in a very stable markets that have done well in terms of growth. Well, you know you say well, how do we how do we buck the trend in the industry. We have seen obviously in some of the larger markets, shortness of supply and product that that is tempered thing. But in the markets that we're in, we continue to see a solid supply of the demand is there, and we’ve been able to get our, our share with other market with more retail originators.
So feel good about how we have positioned ourselves but certainly understand that so we look forward there are some challenges in the housing industry overall which will affect mortgage volumes.
[Operator Instructions] And our next question comes from Brian Zabora with Hovde Group. Please go ahead.
I had a question on the insurance commissions, nice quarter year-over-year, up about 10%. Can you give us a - some details on trends of the business, and if you think that double-digit growth can be maintained going forward?
Brian I think the growth is there as a result of work that we have been doing over the last several years, Scott Woods who head that area for us has had a focused effort on bringing in some younger people, and I’ll be - and it takes some period of time to build your book in the commercial insurance business, generally somewhere between you know two years to four years to get your book up and running and validate it.
And so we - we have made a conscious effort four years, five years ago to start hiring some younger people and have them develop their book, develop that outside of the banking footprint of the company and there's good momentum in that business. We had three years ago upgraded the whole processing environment in the insurance business to completely paperless to come up with some efficiencies.
So, combination of things, we feel like we're well-positioned and there's been some disruption with bank-owned insurance agencies in our marketplace and we think there is continued opportunity to take advantage of that.
And then I had just a question on the foreclosure of the other real estate owned expand - or gain this quarter you know it's hard to predict, but you know the past quarter has been a bit of an expense or moderate expense. Do you think it may go back to that or you know any thoughts around that?
I think in the past we've given guidance as it relates to ROE experience as well as book for foreclosure as well as carrying expense. And I think this is all going to be predicated on some recoveries that may or may not - excuse me gains on sale that may or may not happen.
We do have - what we do expect in the second half of the year that we've got a number of large properties under contract today that should close in Q3 and Q4 hoping to help us drop down or non-performing assets as part of that and we do have own - on a few of those we do have some meaningful gains on sale that if they got a number of large properties under contract today that should close in Q3 and Q4. Hopefully to help us drop down our non-performing assets as part of that.
We do have, on a few of those we do have some meaningful gains on sale that if they do come to fruition would impact those numbers. So we expect those numbers to remain in line with what they’ve been historically subject to a gain or two on sale that we may experience which may net that number down.
[Operator Instructions] And our next question comes from Matt Olney with Stephens. Please go ahead.
I want to go back to the discussion around capital management. It looks like the stock repurchase program was more active in the second quarter absent any M&A announcements. Is it reasonable to assume that we could see more activity going forward from here?
Matt, this is Tom Owens. You know I think we talked on last quarter's call about you know activity to-date, you know the program was authorized back in 2016 and activity to-date being relatively slow and we talked about that being a function of robust loan growth in 2017; 2015, 2016, 2017 really you know with the whole thing we talked about was the uncertainty of tax reform, right.
And now we've gotten into 2018 that uncertainties in the past, we've been experiencing a bit slower pace of loan growth, and our capital levels that remain above our operating targets. So as Gerry discussed earlier we do you know actively review all forms of capital deployment including share repurchase.
Conditions were such in the second quarter when you consider all those factors that we did have an accelerated share rate of repurchase, I think you know it's probably imprudent to put guidance on it, but if conditions in the third quarter market conditions are similar to the second quarter, I would expect that you would see at least that pace of activity and perhaps more in the third quarter, and going forward. But again it's all a function of our capital levels, the returns available, and market conditions.
And then I want to go back to the discussion around loan growth and the early payoffs you've been experiencing and other banks are definitely talking about the same than you guys are, getting some pay-downs earlier than expected on some of your construction projects.
Can you give us a little bit more color about where those are coming from, like what asset class, is it multi-family, what geographies and also better idea. Just how early are these loans are moving up at the balance sheet, is it three months sooner than expected, six months, nine months, just help kind of frame it up for us?
I guess kind of going back to your first question of the, the main category that you're going to see things moving out for us, it’s going to be multi-family. And those are going to, it's going to be from a geographical standpoint, it's going to be loans that were originated, credits originated out of Texas, Mississippi and the Alabama markets.
They're not necessarily the project may or may not be in that market but the actual developer and our customer is based in that market predominantly and those are the - of the loan origination areas that are generating the business, that typically what you're going to see is probably as much as six months ahead of schedule.
Like I said we we’re constantly in contact with our customer to understand the timing of when the project may move out most of these are going to be 36-month, 42-month, 48-month projects depending on how big the project is with a couple of extension options based upon them meeting certain hurdles.
And so you're - once the project see offs, you have to begin watching it, because if it's - if the pace and then the velocity of the lease up is far out ceding what we pro - what the borrower performed and what we performed in addition to the borrower, then it obviously becomes on the watch list and we need to be careful because it may leave us quicker than the last update we've gotten from the borrower.
So, we're very mindful of that. We're constantly as mentioned earlier, updating our forecast on a regular basis talking to our lenders, our lenders are talking directly to the customers to get a sense of what their plans are and those plans are fairly fluid, because they'd obviously like to fix a rate in a rising rate environment, long-term financing, non-recourse all the things that they want out of the apartment market or if they're a type of merchant builder who typically sales - sells their product and the opportunity to sell that product have increased greatly just because they're getting a lot of credit for the velocity by which the project is stabilizing as opposed to - as opposed to waiting to it actually stabilizes.
And then I guess sticking on this topic, kind of a bigger picture question, what are your long-term thoughts on loan growth? I mean, if the - if these payoffs and early pay downs remain a headwind, are there any other strategy that you're considering, any other asset classes that are on the drawing board? Just trying to understand kind of the long-term approach you guys have to loan growth the next several years.
Yes, there is a lot of different options we're constantly evaluating to determine the - how much they could contribute to the earnings of the bank, if we decided to enter a new line of business or lines of business.
Obviously, in the areas where we have competency today, we're continuing to look for additional C&I lenders in markets that have opportunity and we're pursuing those people on an ongoing basis and whether it be in individuals or whether it be as a group, and I think that's where you're going see there us being able to make some headway is bringing on some of those additional resources that can help us locate and obtain some additional C&I business.
On the public finance side, we're very competitive, but we are disciplined, and most of that is [albeit] especially in Texas and some in Mississippi and in Florida it's been. But we are very competitive there and there will be times during the year where we're more successful than others and we're going to continue to you know head down focused on looking at every opportunity being competitive where we're able to look and see exactly who won the deal, what’s the ROE for Trustmark, is it something we're willing to tolerate, if that's the market, if it's not, we'll continue to pitch at what we thinks a reasonable rate and wait for a little less competition, so we can be successful.
This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Gerry Host for any closing remarks.
Well, I'd like to thank everyone for joining us on the call and thank you for your questions. It really helps us to better articulate the Trustmark story. And I look very much forward to talking with you again in October about our third quarter results. And thank you, and have a great day.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.