Trustmark Corp
NASDAQ:TRMK
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Trustmark Corp
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Good morning, ladies and gentlemen, and welcome to the Trustmark Corporation's Third Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. Following the presentation this morning, there will be a question-and-answer session. [Operator Instructions]. As a reminder, this call is being recorded.
It is now my pleasure to introduce Mr. Joey Rein, Director of Investor Relations at Trustmark. Please go ahead.
I’d like to remind everyone that a copy of our third 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 Web site 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.
Good morning, everyone, and thanks for joining us. With me this morning along with Joey are Louis Greer, CFO; Barry Harvey, Chief Credit Officer; and Tom Owens, the Bank Treasurer.
Trustmark reported net income of 36.3 million or $0.54 per diluted share in the third quarter, which represents an increase of 5.9% when compared 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 management, and expense control.
Loans held for investment increased 68 million or 0.8% from the prior quarter and 340 million or 4% year-over-year. We continue to run-off maturing investment securities in an effort to better optimize our earnings asset mix. Revenue, excluding interest and fees on acquired loans, increased 1.7% linked quarter and 5.8% year-over-year to total $150 million.
FTE net income totaled 110 million, up 1.6% linked quarter and 1.1% year-over-year. Net interest margin, excluding acquired loans, was 3.5% reflecting its fourth consecutive quarter of expansion.
Efforts to manage expenses and improve processes were evident in the quarter as core expenses which exclude ORE expense and intangible amortization increased 0.2% from the previous quarter to total $103 million.
Credit quality continues to be a focus for Trustmark, and I would like to ask Barry Harvey to add some color to both loan growth and credit quality. Barry?
I’d be glad to, Gerry. Thank you. Just looking or going to Page 4, as you can see, we had loan growth of $68 million during the quarter and that year-over-year number is roughly $340 million. So we continue to have solid steady loan growth and I know when we get to the questions, we’ll talk about some of the details around the loan growth itself.
Looking onto Page 5, as you can see we’ve got our credit quality measures there. We’re very pleased with our credit quality measures outside of maybe one event we’ll talk about later in some detail I’m sure, but when you look at all the trends; past dues, criticized, classified loans, all moving in the right direction and historical low levels for us and we’re very proud of those results.
On NPLs, we’re flat year-over-year. We ticked up a little bit this quarter and we’ll talk about some specifics on that I’m sure during the Q&A. On the nonperforming assets, we actually went down even though we ticked up a little bit on NPLs and that’s a result of moving out some more ORE and we did that by making a profit which we’re proud of that as well.
The energy book is down $31 million from an outstanding perspective. Those were loans we were glad to see move out and many of those are going to be in that classified category, so we were glad to see that occur.
Moving on to Slide 6, we’ll talk a little bit about the acquired book. We saw a drop in balances of roughly $41 million during the quarter. The yield was roughly 11%. Obviously, some of that is used by recoveries, about 4.4% of that is off of recoveries. On a go-forward basis, we expect the yield to be between 6.5% and 7.5%. Gerry?
Great. Thank you, Barry. And I guess now turning to the liability side, Tom would you please discuss the deposit base and the net interest margin.
Happy to Gerry. So turning to Page 7, total deposits declined 115 million or 1% during the quarter reflecting normal public fund deposit seasonality. Total deposits increased 725 million or 7.1% from the prior year. Our cost of interest-bearing deposits rose 13 basis points representing a beta of 52% for the quarter and 31% cycle-to-date relative to the Fed’s rate hike.
Turning our attention to revenue on Page 8, net interest income FTE totaled 110.1 million in the third quarter, up 1.6% from the prior quarter, which resulted in a net interest margin of 3.59%, an increase of 2 basis points from the prior quarter. Excluding acquired loans, the net interest margin was 3.50%, up 4 basis points from the prior quarter and up 16 basis points from the prior year, driven primarily by our continued balance sheet optimization initiatives.
And now Louis will provide an update on noninterest income.
Thanks, Tom. Looking at the noninterest income table, you can see that total noninterest income totaled about $47 million in the third quarter which represents a slight decrease on a linked-quarter basis for about $300,000.
When you look at most of lines including service charges, bank card income and wealth management, you can see there were all up for the linked quarter. When you look at mortgage, mortgage really had a strong quarter with volumes of over 400 million.
Linked-quarter total mortgage revenues were down slightly just due to an adjustment to our fair value of loans held for sale for the quarter, so good quarter for mortgage. In total, noninterest income remains strong and represents about 31.5% of revenues, excluding interest and fees on acquired loans.
Turning to Page 9 and looking again noninterest expenses, they remain well controlled with core noninterest expense which excludes ORE and intangible amortization totaled a little under 103 million. I think our guidance last quarter was similar to the previous quarter right at a little over $102 million.
The main driver of the increase were increased commissions associated with increased revenues in brokerage and mortgage business as well as investments in technology. While we were pleased with the progress to-date, we will remain focused on expense management. We will continue to realign branches, delivery channels and make investments to enhance our customers. And we’d expect our fourth quarter core expenses to remain in line with the third quarter.
Next, I’ll mention our effective tax rate for the fourth quarter, which was less than normal due to our annual true-up when we file our 2019 tax return, a little under 11%. I’ll tell you that we expect our fourth quarter effective tax rate to remain in the 12.5% to 13.5% range.
We remain well positioned from a capital perspective as noted on Page 10. We have ample capital to support organic growth and are focused on the most attractive methods of capital deployment, including our share repurchase program. Gerry?
Thank you, Louis. I hope you’ve found this discussion of our third quarter financials helpful. Before we go to questions, I’d like to briefly touch on the impact of the recent hurricane on Trustmark and this is on Slide 11.
On October the 10th, Hurricane Michael struck the Florida Panhandle causing significant damages. Let me say first and most important, all 80 of our Bay County associates have been contacted and are safe and we have helped and worked to provide them with shelter and food as needed.
As of September the 30th, Trustmark had 1,786 loans with a balance of $240 million and exposure of $282 million, and this was all in the FEMA designated disaster areas which include 12 counties in Florida and 13 counties in Georgia. Efforts are now ongoing to contact these borrowers to offer assistance as well as to establish reasonable estimates of uninsured damage and to adequately assess potential risk to the bank.
Regarding our retail bank operation, the majority of the damage to our eight Bay County branches was cosmetic and not structural. Six Bay County branches and all ATMs have reopened following the storm and we expect the two remaining branches will reopen as soon as power is restored. Trustmark remained open for business throughout the storm and the ensuing recovery process with mobile, online and telephonic banking for all of our customers.
At this time, we would be happy to address any questions that you have.
We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Brad Milsaps with Sandler O’Neill. Go ahead, Brad.
Hi. Good morning.
Good morning, Brad.
Maybe my first question is for Tom as it relates to the NIM. Interest-bearing deposit costs were up about 13 basis points the linked quarter, so roughly 50% beta there. What does your outlook say? Are you starting to feel more pressure there from competitors or how are you thinking about how that deposit beta might go up or down over the next several quarters? And also it looks like you’re getting close to your 23% goal or so on the securities earnings assets. Just wanted to see if there’s any alteration to that?
Hi, Brad. This is Tom. Thank you for the questions. So first of all, I would say that the continued acceleration in deposit betas is pretty consistent with what we’ve been modeling and thinking. As you indicate, we had and as I pointed out in my talking points the beta was essentially 52% in the third quarter. That was up from 44% in the second quarter and 36% in the first quarter. Our current projections are we’re modeling 68% for the fourth quarter. And then as you get into 2019, we’re actually modeling 82%. We’re projecting one more Fed hike here in '18 in December and then two hikes in '19; one in December, one in June that would take the Fed funds rate to about 3% by year-end '19 and that would take our cycle-to-date interest-bearing deposit beta to 46%.
Your other question as it relates to balance sheet optimization, as we’ve discussed in the past, yes, we intend to do that through year end. I think if you looked at on average in the third quarter, we were at about 23%; continue to trend lower. We’ve talked about a target of 21%. Whether we’re there by year end or not remains to be seen. We are considering the possibility of continuing that optimization initiative into maybe the first or second quarter of next year to arrive at that target of about 21%. But that remains to be seen at this point. So the lift, as we’ve discussed, we’ve been guiding to 2 to 3 basis points per quarter of lift from that initiative and that has played out pretty much as expected. If you look at the linked quarter increase in core NIM of 4 basis points, about 3 basis points of that is from balance sheet optimization. And if you look at the 16 basis points year-over-year lift in core NIM, about 12 basis points of that is from the balance sheet optimization. So it’s been 75% or so.
Perfect. That’s very helpful. And then just to follow with Barry, you alluded to it a few times in your remarks but just curious if we could get a little more color on the couple problem loans you allude to in the release. Also just kind of moving parts, it looked like most of your provisioning this quarter came out of the Tennessee region, most of your charge-offs came out Mississippi but you had a provision reversal in Mississippi, so just kind of curious if you could kind of give us a little color on those moving parts?
Sure. I’d be glad to Brad. On the provision side, as you’ve alluded to, we had two credits that we made provisions for that let us to the $8.7 million worth of provisioning for the non-acquired loans. In reality those two credits were $9.8 million by themselves. So obviously outside of those two credits, we would not have had a provision for the quarter. So I think that gives you a sense of how specific it is to those credits.
One of those credits as you indicated is out of Tennessee. The company operates in a couple states but it came through our Tennessee market and that’s where it was originated through, and we had a specific reserve established for that impaired loan and that was also one of our new nonaccruals for the quarter which we had a couple of those that were sizable.
And then the other additional provisioning was made on one Texas credit that we’ve talked about previously that has gone through a bankruptcy, gone through a liquidation, so we expect fully during Q4 for that Texas credit to be fully resolved and hopefully no additional provisioning will be required. And then the Tennessee credit that’s in question, we expect that to be resolved during the fourth quarter as well. And those reserves most of which will be fully used and that loan will be resolved during the quarter as well.
As it relates to the charge-off side of it, net charge-offs we were up a little bit over where we’ve been historically. And there again that was an energy credit we had reserved for several quarters ago as an impaired loan and we were able to get a resolution there. We were able to get paydown, but then we did have the remaining portion which was charged off. That was about $4.4 million worth of charge-off on that one loan. Obviously, our charge-offs for the quarter was 4.1. So without that one commercial credit, energy credit that we charged off, we would not have had any charge-offs for the quarter as well.
Okay. Thanks, Barry. Just so I’m clear, the two credits totaled 9.8 million and it required a provision – pretty much all the provision this quarter was against those two loans. Did I understand that correctly?
The provision was 9.8 and our provision for the bank as a whole was 8.7 [ph], and so dealing with non-acquired. So you can sense that all the provision plus some related to those two credits and both of those credits is our full intention for those to be resolved during Q4. So going forward we won’t be dealing with those.
Okay, great. Thanks. I’ll hop back in the queue.
Our next question comes from Daniel Mannix with Raymond James. Go ahead, Daniel.
Hi, guys. Good morning.
Good morning, Daniel.
Just want to start off by peeling back the layers on the slight moderation in loan growth in the quarter. So how much of that would you say was due to elevated paydowns? Also looking at C&I growth, if I exclude energy it looks like it was actually pretty healthy and could be positive for the year. You’ve talked in the past about the relative unattractiveness of C&I loans. So can you talk about what you’re seeing there as far as pricing and pockets of potential opportunities? Thanks.
Daniel, this is Barry. I’d be glad to. I guess starting off with just talking about loan growth in general and kind of cover the waterfront there. As you see, it’s $68 million. We continue to see strong growth. And when you look at it from a GAAP perspective, you’re going to see where the balances are as of 9/30. What we focus on is where the growth really occurs and where that matters is on the CRE side where obviously you have growth in some categories that also – why you have some migration into other categories. So with that in mind, the loan growth that we’re seeing in commercial and residential homebuilders is very strong.
So we still have strong commercial loan growth of the construction side and we have strong homebuilder growth on the one-to-four family side. We were up $112 million between those two categories from a growth perspective. Now obviously we have projects that CO, they’re complete and they move down into the existing buckets. But from the standpoint of where we grew, we’re still growing in a very attractive way in both commercial construction as well as residential construction with homebuilders. We also saw solid loan growth again in our mortgage portfolio. There again this is coming out of our mortgage company. We saw $57 million worth of growth in our one-to-four family permanent financing portfolio and that was as expected and good solid growth.
When you look at non-owner occupied and when you look at other real estate which in other real estates’ predominately multifamily, you’re going to see decreases there but those are not unanticipated. Those are stabilizing projects or projects that have stabilized that are moving to the permanent market or being sold. And so we fully expect that to be the way it’s going to work on a go-forward basis. You’re going to see growth continue on the construction side both commercial and one-to-four family and then you’re more than likely going to see some negative numbers in the existing categories as more projects move out than actually are moved down from the construction bucket.
As it relates to C&I, we did see a decrease. When you look at C&I, we’re looking at both C&I plus other loans and you’re going to see a decrease there in that combination of about $26 million. All of that decrease came from two sizable substandard energy credits which moved out during the quarter – actually over 26%. Those two loans made up over $26 million. So without those we would have had some growth in our C&I category. It’s still extremely competitive, it’s still extremely aggressive in terms of pricing. Typically going to be seeing LIBOR plus 175, maybe LIBOR plus 200 on those type of opportunities. But it is very competitive from the standpoint of the number of banks pursuing those. The structures are reasonable to aggressive. The pricing is very aggressive.
Got it, really helpful. And just to clarify there, you are saying that the other real estate secured segment is multifamily loans?
Yes, multifamily and REITs are going to be in that bucket.
Got it.
And we don’t have much in the way of REITs, so it’s going to be – you’re going to see your multifamily projects whether it will be student housing or apartments that have either – they’ve got a certificate of occupancy and at that point they’ll begin paying P&I and at that point we’re moving them down into the existing category from the construction category.
Okay, great. And then just really quickly on the earnings asset growth expectation with the securities book continuing to runoff here. Are we looking at low to mid-single digit growth for the year? It looks like that might even be a little difficult.
Yes, I think what we’ve guided to for the loan portfolio for '18 was once we go passed the first quarter we’ve been guiding low to mid-single digits. I think we expect to see low-single digits for the remainder of what we’re going to end up being for '18. And then '19 I do think our expectation is one where we’re going to see more growth in '19 obviously than we’ve seen in '18. And really for a couple of reasons we’ve got within our public book, our public finance book we’ve got less overhead to clear, meaning we’ve got less deals that are rolling off during '19 than we did in '18 and that was obviously – as those things roll off we’ve got to cover that just to remain flat. So we have less to cover in '19 than we did in '18.
And then we do expect to see an improvement in our ability to obtain C&I business which is very difficult. And then on the CRE side, we did see a decent amount of unexpected payoffs that occurred during the first quarter and into the second quarter. I think with our projections I think we’re more comfortable that we not only know what scheduled to move out. We’ve also got baked in some unanticipated payoffs. So for that reason I think we feel more comfortable that we’re going to see the amount of growth we have in '19 pickup from what we experienced in '18.
All right, very helpful. I’ll hop back in the queue. Thanks, guys.
Thank you.
Our next question comes from Jennifer Demba with SunTrust. Go ahead, Jennifer.
Thank you. Good morning.
Good morning.
Two question. Just curious about your exposure to other loans in the limited service restaurant and parts distributor industries. And also curious about your appetite for share repurchases at this point going forward.
Barry, why don’t you take the loan question and I’ll take the share repurchase.
Okay. I’ll be glad to, Gerry. Jennifer, we have very limited exposure to the limited service restaurant group. I think we’re about $34 million there. I’m going to double check my number before I finish the question. But our exposure there is very limited. We’ve got two credits that may up the majority of that and that number also includes the credit in question that we have reserved for very heavily during the quarter.
So from that standpoint I think we don’t have any concerns that we have a systemic problem or anything of that nature as it relates to limited service restaurant business. That’s not somewhere where we do a lot of business for a variety of reasons but nonetheless our exposure is limited there. Gerry, if you want --
Yes, you go ahead and look that up. I’m going to go ahead and answer the share repurchase and Tom feel free to jump in. We have an overall capital management process in the organization that we’ve talked about before that looks at the use of capital with organic growth, anticipated M&A needs, our ongoing dividend plan, and then repurchase. And as you probably recall we have $100 million authorization that’s good through March of next year.
You didn’t see any repurchase activity through the end of the third quarter but obviously you’ve seen the movement in the overall stock market. And we look at that in conjunction with our long-term outlook and vision relative to how we view our stock, I think you can see that or anticipate what might we be looking at for the fourth quarter. So all four of those aspects of capital utilization are looked at on a very regular basis and obviously with the backup in the market, we’re going to take advantage of opportunities whenever we can.
Gerry, just to circle back around, Jennifer, our total exposure in that limited service category is $44 million, not $34 million. And that does include the credit in question which probably gets us down more to 34 million remaining after that credit is fully resolved which we expect it to be during Q4. So it’s really a handful of number of credits that make that up. We’ve looked at all those and we’re very comfortable with them. I’m not so sure if the problem credit is specific to the industry as it is – as much as it is to the company itself.
Thank you.
[Operator Instructions]. Our next question comes from Matt Olney with Stephens. Go ahead, Matt.
Thanks. Good morning, guys. This is Brandon Steverson on for Matt.
Hi, Brandon.
Hi. I wanted to go back to the expenses. I appreciate that earlier you gave commentary on the fourth quarter core expenses expected to be in line with the 103 million we saw this quarter. And just doing a quick math, I think that puts us in about 2.5% expense growth year-over-year for 2018. Is that a reasonable expectation for 2019 as well kind of just looking forward or is there going to be a pullback in the IT spending that we’ve seen that could make that number a little lower?
First of all, as far as IT spending, we have spent a significant amount over the last six, seven, eight years upgrading a variety of systems in the company that we’ve talked about. The world we live in though I think demands that you stay current with your systems with cybersecurity. And so from that perspective we can see a leveling but I don’t see any significant pullback in IT expenses. And Louis you may want to comment on projected --
Gerry, I’ll just comment certainly I don’t think we’re ready to give any guidance on '19 yet. We’re still on our strategic planning process and budgeting process. But as you can see on Page 9, we maintained that core expense number for about five quarters at 100 million and you see in the second quarter it came up to about that 103. Third quarter was about 103. So we do expect to maintain that through the fourth quarter. And again don’t want to offer anything for '19 as we’re in our planning process today.
Understood. And then last one for me. Can you just remind us how much of your loan book is exposure to shared national credits?
Sure. This is Barry. I’d be glad to. When we look at our shared national credits, what we’ve got from an exposure standpoint we’re going to be about 1.2 billion, from an outstanding standpoint we’re going to be about 792 million and that’s as of 9/30.
Great. That’s all for me. Thanks, guys.
Thank you.
Our next question comes from Catherine Mealor with KBW. Go ahead, Catherine.
Thanks. Good morning.
Good morning.
And I apologize; I have been jumping in and off of calls. So if this is already been asked then I can just go back to the transcript. But wanted to ask about your loan-to-deposit ratio being similar [ph] versus your peers in the low 80s. Any thoughts as to how that should be trending over time as you balance in your balance sheet remix efforts? Thanks.
Catherine, this is Tom. I would expect that to – that ratio to trend higher. Mentioned early on in the prepared comments talking about the growth in deposits year-over-year. We’ve had pretty good success in attracting public fund deposits at rates that are substantially accretive to earnings. And so really I think absent that you would have seen a more gradual increase in the loan-to-deposit ratio. So going forward I would expect that to be the case that it would continue to trend higher. Hopefully that’s a helpful answer.
Yes, that’s great. I think all my other questions were asked and answered. Thank you very much.
Okay.
[Operator Instructions]. At this time, there are no further questions in the question queue.
Great. Thank you, operator, and thank all of you for joining us this morning on our third quarter call. We look forward to visiting with you in January to go over our fourth quarter and year-end results. And again, thank you much and have a great day.
The conference has now concluded. Thank you for attending today’s presentation. And you may now disconnect.