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 Third 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 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 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, and thanks for joining us. With me this morning are Louis Greer, CFO; Barry Harvey, Chief Credit Officer; Duane Dewey, Chief Operating Officer; and Tom Owens, Bank Treasurer. We're pleased to report solid financial results for the third quarter as Trustmark again proved its ability to successfully navigate a challenging interest rate and competitive environment. We remain focused on our strategic initiatives, evidenced by continued loan growth and minimal increases in core noninterest expenses.
Let's review some of the highlights from the quarter, which are shown on Slide 3. Loans held for investments increased $106.9 million or 1.2% from the prior quarter and $476.6 million or 5.4% from the previous year. The net interest margin, excluding acquired loans, was 3.61% in the third quarter, up 1 basis point linked quarter and 11 basis points year-over-year. Noninterest income totaled $48.3 million in the third quarter, a 2.6% decrease from the previous quarter, but a 2.6% increase from the same period last year. Revenue, excluding interest and fees on acquired loans, totaled $154.5 million, down 0.6% linked quarter and up 3% year-over-year.
Under expense management, core noninterest expense, excluding ORE and intangible amortization, totaled $105.3 million, an increase of 0.3% from the prior year and 2.5% year-over-year. Credit quality remained solid as net charge-offs represented 0.01% of average loans.
At this time, I'd like to ask Barry Harvey to provide some color to both loan growth and credit quality. Barry?
Be glad to, Jerry. Looking on Slide 4, you can see we grew $107 million worth of loan growth during the quarter. The growth was primarily going to be in the other construction category. We can, I'm sure, talk later during the Q&A about kind of where the migration occurred and some of the changes that show up in the GAAP accounting and be glad to do that. We're still on track for our mid-single-digit loan growth, as we've guided The Street previously. Our energy book is modest at $132 million, and it's trending downward.
We look over to Slide 5, you can see that our credit quality metrics remain at historical low levels, whether you're talking about past dues, criticized classifieds, et cetera. Nonaccruals did increase by $6 million during the quarter. It was the one credit migrated to a nonaccrual status. And we really had little or no other activities to speak of. The loan loss reserve remains adequate at 90 basis points.
Jerry?
Thanks, Barry. And turning to the liability side of the balance sheet, I'd like to ask Tom Owens to discuss our deposit base and the net interest margin. Tom?
Thanks, Jerry. Looking at Slide 6, deposits totaled $11.3 billion at September 30, a decrease of $312 million from the prior quarter and an increase of $297 million or 2.7% from the prior year. Linked-quarter average balance decline of $248 million was driven by $310 million decline in public fund balances, with commercial and personal accounts increasing by $62 million. Year-over-year, average balance growth of $269 million or 2.4% was driven primarily by a $449 million increase in personal and commercial accounts, which more than offset the $180 million decline in public fund balances.
Our cost of interest-bearing deposits declined 3 basis points from the prior quarter as we proactively repriced certain deposits in response to the Fed's 2 rate cuts. Noninterest-bearing deposits represented 26% of average deposits in the third quarter. Turning to Slide 7. Net interest income FTE totaled $111.7 million in the second quarter, which resulted in a net interest margin of 3.66%, a 2 basis point increase from the prior quarter. Excluding acquired loans, the net interest margin was 3.61%, up 1 basis point from the prior quarter and up 11 basis points from the prior year.
And now Duane will provide an update on noninterest income.
Thank you, Tom. Turning to Slide 8. Noninterest income totaled $48.3 million for the third quarter, a decrease of $1.3 million from the previous quarter and an increase of $1.2 million from the prior year. Mortgage loan production in the third quarter totaled $566.2 million, up 36.7% from the prior quarter and 42.4% year-over-year. Gain on sale of loans totaled $8.5 million in the third quarter, up $2.9 million from the prior quarter. This increase was more than offset by negative net hedge ineffectiveness of $3.7 million.
Insurance revenue totaled $11.1 million in the third quarter, and wealth management revenue totaled $7.7 million, both unchanged from the prior quarter. Of note is, in the third quarter, noninterest income represents 31.3% of total revenue.
Louis will now cover expenses on Slide 9 and capital management on Slide 10.
Thank you, Duane. As Jerry mentioned earlier, core noninterest expenses, which exclude ORE and intangible amortization, totaled about $105 million for the third quarter, relatively flat linked quarter and up about 2.5% this time last year. Salary and benefits increased around $550,000 linked quarter, primarily due to higher commissions as a result of increased productions. Service and fees increased $829,000 from the previous quarter due to technology investments as well as certain professional fees.
Other expenses declined $1 million linked quarter, primarily to -- linked quarter to $10.8 million. This line item includes a recovery of $1.6 million in litigation-related expenses included in prior periods. Other expenses also reflected contributions totaling $1.1 million related to Trustmark's participation in the state of Mississippi's Children's Promise Act, which provides a dollar-for-dollar Mississippi state tax credit to individuals and business for donations to eligible charitable organizations. I would expect core expenses in the fourth quarter to be in line with the third quarter.
Now turning to Slide 10. Trustmark continues to maintain solid capital position. During the third quarter, Trustmark repurchased approximately $4.5 million worth of common stock or about 139,000 shares of its outstanding common stock. At September 30, Trustmark had about $82.5 million in remaining authorization under the existing repurchase program, and that expires on March 31, 2020.
Jerry?
Thank you. Thank you, Louis. Our strategic priorities are guided by our vision and our mission and provide a practical framework for us to continue meeting the needs of customers and creating long-term value for our shareholders. At this time, I'll be glad to address any questions, and as the group would, any questions that you might have. Thank you.
[Operator Instructions]. Our first question comes from Daniel Mannix with Raymond James.
So just want to start with the loan growth. You teased a little bit there on the construction bucket. I'm trying to figure out, so was the growth there driven by less payoffs? Was it more -- or was it more production?
Daniel, this is Barry. It was driven by more production. And what's a little bit hard to see from the GAAP reporting is where the true growth occurred. We did grow about $217 million in commercial construction, about $211 million migrated down into nonowner-occupied and we grew about $16 million in the 1-4 family builder spending.
The one thing it did that does make it a little bit hard to understand is on the owner-occupied increasing -- or staying where it did, and that's the result of a reclassification that was required by the call recording instructions that came out recently, where we were able to reclassify some senior living facilities that were providing both health care and/or maintenance services to customers from nonowner-occupied to owner-occupied. So that's just a reclassification that occurred, but our growth came from commercial construction as well as 1-4 family builder lending, and it was all based upon increased production.
That commercial construction growth came in at the industrial, apartments, senior living; and as far as geographically, it was in Houston, Atlanta, Dallas and Springfield, South Carolina.
Okay, great color. If I back out energy, C&I loans were down a little bit. How much of that was line pay-downs versus maybe lower production?
Sure. It was pay-downs as opposed to lower productions. We decreased $42 million in C&I. That was all in our -- it was all originated out of our Tennessee market. It was the result of really several things. There was some refinancing of some credits where some of the larger banks took larger positions, and some of the smaller banks were not asked to participate in the new facility. We also had one refinance that was upsized that we opted to not participate in just because of the fast growth that was occurring. And then we had a few payoffs -- or pay-downs as a result of some business combinations.
So it all was out of our Tennessee market. But nonetheless, it was all things that we -- when the refinancings occurred and we were not part of the new facility, that was fine. And then we opted out and then we had some business combinations that resulted in the lack of a need for additional financing where we were paid off or paid down on those.
Got it. Okay. So it seems like you're still looking at pretty good growth on real estate side and C&I a little more tough sledding. Do you expect that to continue next year? Are you still thinking mid-single digits is the right number here? Or do you see any change to potentially your ability on the C&I side?
Daniel, we've not guided in terms of loan growth for next year at this point. We do expect for our CRE business to continue to be brisk next year. We don't really see anything changing in the industry or anything about our appetite for those type of loans changing at this point. The C&I, we expect that to continue to be, as you refer to it, as tough sledding. And we've got a lot of guys out there -- guys and girls hustling business. But nonetheless, there's a few opportunities that are presenting themselves, but we are actively out there pursuing everything that's available. And it's thinly priced and it's pretty aggressive in terms of structure, but we are actively pursuing every opportunity that we can within our footprint.
Our next question comes from Catherine Mealor with KBW.
I wanted to see if we could talk about the margin for a little bit. I remember last quarter, you had guided for about 4 to 5 bps compression with the July cut. The margin held in much better than expected this quarter, but I'm assuming some of that is from the balance sheet remix. So maybe just updated thoughts on how you're thinking about balance sheet remix moving forward and then how you think your margin should hold in with further rate cuts.
Catherine, Tom was anticipating your question...
I am sure he was.
Or the detail.
Catherine, this is Tom. Not only did I anticipate the question, but I anticipated who was going to ask it. So yes, in the third quarter, we did better than guidance in terms of core net interest margin. We had given guidance of linked-quarter compression of 4 to 5 basis points. We actually came in with a 1 basis point increase.
Some of it is fundamental. You see the decline in other earning assets, which in turn -- that was basically excess reserves with the Fed, that in turn is driven by our continued optimization of the public fund deposit base. You heard me comment earlier about linked quarter and year-over-year growth in deposit balances, which has been actually reasonably solid in personal and nonpersonal. We've been optimizing and thereby running off public fund deposit balances that were somewhat higher cost, somewhat higher pay down. So that part of it is fundamental. That's probably 3 basis points or so.
And then LHFI yield, we got about a 4 basis point lift contribution to the margin in -- just from a very strong quarter in terms of loan fees. So if you add the 4 basis points from loan fees, which is not necessarily fundamental, we've talked in the past about volatility of loan fees quarter-to-quarter, add the 4 basis points of loan fees and the 3 basis points lift from some favorable balance sheet mix, that's about 7 basis points. If you take 7 basis points off of the 1 basis point reported linked-quarter increase, that would be about 6 basis points. That's pretty comparable to the 4 to 5 basis points guidance that we gave.
That makes sense. Okay, that's really helpful. And sort of moving forward, what we have -- that was September and perhaps October cuts coming, how are you thinking about the margin outlook from here?
Right. So as you know, we do our forecast on the market-implied forwards, which at third quarter and which is what we're using, basically had a 50% chance of a Fed rate cut next week and then a 100% chance that a Fed cut would occur by the December meeting. So that is what's in our forecast. So when you think about linked quarter core NIM for the fourth quarter, you had two cuts in the third quarter that you didn't feel the full effect of in the third quarter. You will feel the full effect in the fourth quarter. And then it obviously matters a lot when you're talking about linked-quarter NIM, the timing of -- if there's going to be a next Fed cut, it matters a lot whether it happens next week or they wait until the December meeting.
I would say in terms of guidance for core NIM on a linked-quarter basis here in the fourth quarter, I would be thinking high single-digit basis points compression quarter-over-quarter, which would take us into the low 350s.
All right. Okay. That's super helpful. And then on the deposit side, can you give any color -- I know a lot of that declined, and to your point, it came from public fund. But is there a way to think about what deposit cost did maybe month-over-month to help us think about how much of downside we have or, I guess, downside deposit cost, but upside to the margin we have from deposit cost coming down over the next couple of quarters?
Sure. So I can answer that two ways. One, as we discussed on last quarter's call, we have in the neighborhood of $2.5 billion or so of high-beta, interest-bearing nonmaturity deposits that we did proactively reprice lower during the quarter in response to the Fed cuts. Another way to look at it is when we think about beta, so as I said, we've got one cut priced in or forecast reflecting market-implied forwards by December and then one in June of next year and one in December of next year. And what I would tell you is if you look at our interest-bearing deposit cost beta relative to those Fed cuts, we're assuming about 45%. So those 3 more cuts would take us down to about a Fed funds target of about 1.25.
So if you look at the peak Fed funds rate of 2.5 down to 1.25 by the end of next year, we're assuming a beta on interest-bearing nonmaturity deposits of about 45%. That's a, I think, reasonably conservative assumption relative to what we experienced in the way of beta on the way up. So if you look at the interest-bearing deposit beta we experienced on the way up from 1.25 target Fed funds rate up to 2.5, that was closer to 55%. So I think we have an appropriately conservative assumption there, and I think that should help you in terms of modeling our deposit cost.
Yes, that's great. And to be clear, the 45% beta is just on that $2.5 billion high-beta, nonmaturity deposits?
No. So the 45%, Catherine, would be all in. It would be all in...
Oh, all in.
All in applied to our interest-bearing deposit cost. The $2.5 billion of high beta would be obviously much higher beta assumption. We still have plenty of room to reprice those down. Now again, it's anybody's guess as to whether -- where the Fed goes from here, the market-implied forwards are priced to where they are priced, that's what we reflect.
Our next question comes from Brad Milsaps with Sandler O'Neill.
Tom, thanks for all the color. That was really helpful. Just a point of clarity, the 4 basis points of loan fees this quarter, is that 4 basis points of total loan fees or 4 basis points above and beyond what you kind of typically get in any given quarter?
So Brad, that's incremental. Again, loan fees kind of run in a channel normal range of volatility, and the loan fees that we booked in the third quarter actually kind of breached the high end. I mean it was really just somewhat. So it was really an unusually strong third quarter in the way of loan fees. The 4 basis points is above and beyond what we would normally be booking.
Great. That's helpful. Really appreciate that. And then just curious for Louis or Barry, any thoughts on CECL and how that impact you guys?
Brad, this is Barry. I think where we are is we feel like we're in a good place in terms of being ready for the implementation. I think we feel like, from a funded loan standpoint, we're not expecting to see a material change. And reserving requirements, I think from an unfunded standpoint, there will be some additional reserving that we'll need to do. But I think when looking at what our peers have disclosed today, which is a real mixed bag, we're going to be inside that range. We're not going to be an outlier on either side. So -- but I think our biggest change for us is going to be the unfunded reserving. We've been paralleling all year, and we feel like we're in real good shape in terms of come 1/1 to implement our new CECL solution.
Okay. Barry, it sounds like you guys aren't ready to provide numbers yet. But it doesn't seem to me that, based on your comment, you expect to be sort of an outlier either way kind of based on what other people have said.
That is correct.
Okay. And then just final question, maybe bigger picture. Louis, you guys have done a great job controlling overhead for a number of years. Just kind of curious, how long you think that can continue? I know you talk to Jerry a lot about investments in technology and so on I know that you guys are making. But just want to get a sense of if you feel like there's sort of built-up expense growth that you need to take care of? Or is this something that you can kind of continue to maintain while still making those investments?
Well, Brad, I would tell you, we don't give guidance into 2020. But I'll tell you that for the fourth quarter, as I mentioned earlier, we expect this core expense to stay relatively flat for next year. Certainly have not given any guidance related to that, but we'll continue to reinvest in technology to change processes and improve efficiencies hopefully, that we can start taking this efficiency ratio southward. So Jerry, any color there?
Well, just, Brad, I think you made a point that we are making investments in technology so that we remain relevant to our customers and we can be competitive. But at the same time, there's as much effort by another group of people in the company to find ways that we can improve our processes and reduce other operating-type costs.
So is there any pent-up expenditures? Not that we foresee and the challenge in the -- that we face is how do we improve that efficiency ratio. And it's -- we're not looking at either a total reduction of expenses to improve that efficiency ratio. We're driving revenues for the balance of investing in people and technology that can increase revenues in all business areas and the same time figuring out how we can operate more efficiently.
We're like so many other banks in the middle of this transformation of moving from brick-and-mortar to digital. You can't do it all at once because the customer doesn't want it all at once. So it's a balancing act. And as Louis mentioned, we're going to work very hard in the fourth quarter to keep expenses in line with what we've reported here in the third quarter and just continue our processes of investing in the company, our customers, at the same time, we find ways to become more efficient.
[Operator Instructions]. Our next question comes from Jennifer Demba with SunTrust.
A question on M&A interest and discussion activity. Right now you guys still have a premium currency. What's your interest level right now? And with the more fundamentally challenging environment right now, are you seeing more discussion activity?
Jennifer, this is Jerry. Our interest level still remains high in doing transactions, but it's disciplined and balanced as it relates to how we use capital overall. And as far as discussions, yes, the discussions continue as they have for some time. The challenges really have to do with pricing. And when we use that disciplined approach is how we use capital. And when we look at some of the deals that have been done at certain levels and the reaction of the market to those deals, we feel like we really have to be selective in finding an organization that fits either within the existing footprint or is an adjacent to one we have that we can really take and improve the operating performance of that.
So as far as any additional discussions that we're seeing taking place, I think it's been -- there's been strong discussions all year long. They continue. I haven't noticed any new uptick though, all for the same reasons, a combination of banks facing tougher challenges relative to this interest rate environment, trying to find new efficiencies needed and some organizations that are looking for a liquidity event. So the reasons to do deals haven't really changed that we've seen, and we continue to be diligent in looking at opportunities.
Our next question is a follow-up from Daniel Mannix with Raymond James.
Just one from me, if I could go back to the NIM. In that guidance, the low 350s for the fourth quarter, what are you assuming there with the securities book? And going forward, is it still a conservative approach or assumption that you run down that book? Or have you changed your thoughts around that?
Daniel, this is Tom. That's a great question. So yes, I think on our last quarter's call, we talked about modeling internally an assumption that we continue to run off the securities portfolio through the year-end, and then going into '20, basically holding it flat from that point forward. I would tell you that given our liquidity situation, interest rate risk profile and our outlook for market interest rates and where rates are currently, there's a pretty good chance, if conditions continue this way, that we will be reinvesting securities cash flows here in the fourth quarter. We've hit about 20% of earning assets with our securities mix, which is kind of the range that we wanted to get to.
So I think a good assumption of the guidance I'd give you, it's probably a better assumption at this point to assume that we maintain securities balances in a range where we ended the third quarter of, say, $2.3 billion to $2.4 billion is a better assumption than continuing to run off for an extended period of time.
This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Jerry Host for any closing remarks.
Thank you, operator, and I'd like to thank all of you for your interest in Trustmark and for joining us today. We look forward to reporting on our fourth quarter results in late January of 2020. This ends our third quarter 2019 call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.