Q3 2019 Earnings Call
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As a reminder, this call is being recorded and it's now my pleasure to introduce Mr. Joey Rein director of Investor Relations that Trust Mark.
Only investor Relations section on our website at <unk> Dot com during the course of our call management may make forward looking statements within the meaning up a private Securities Litigation Reform Act 1995.
We would like to caution you that these forward looking statements.
During only from actual results.
For a number of risks and uncertainties, which are outlined in our earnings release <unk> other filings with the Securities Exchange Commission. This time I'd like to introduce jury coast, President and CEO of.
Thank you Joey and good morning, everyone and thanks for joining up.
With me. This morning are Louis Greer, CFO , Barry Harvey Chief Credit Officer, Wind Daly, Chief operating Officer, and Tom Owens Bank Treasure.
I'm pleased to report solid financial results for the third quarter. It's Trustmark again proved its ability to successfully navigate a challenging interest rate in competitive environment.
We remain focused on our strategic initiatives.
As evidenced by the continued loan growth and minimal increase.
Non interest expenses.
Let's review some of the highlights from the quarter, which are shown on slide three.
4% from the previous year.
Net interest margin excluding acquired loans was 3.61 in the third quarter up one basis point linked quarter, and 11 basis points year over year.
Non interest income totaled 48.3 million in the third quarter, 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 <unk>, 0.6% linked quarter and up 3% year over year.
Other expense management core non interest expense, excluding oriented intangible amortization totaled 105 point Threemillion, an increase the 0.3% from the prior year and 2.5% year over year.
At this time I'd like to ask Barry Harvey to provide some color to both loan growth and credit quality Barry.
Glad to Jerry looking on the side or.
You can see we grew $107 million long broke during the quarter.
The growth was primarily going to be and the other construction category.
We can I'm sure talk later during the Q1 day about kind of where the migration occurred and some of the changes that show up in the GAAP accounting I'd be glad to do that we're still on track for mid single digit loan growth as we've got in the street previously.
Our energy book is modest at $132 million, then it's trending downward.
Look over time slot file you can say that our credit quality metrics remain at historically low levels, whether you're talking about past dues criticized classified et cetera, I'm not accruals due to increased about $6 million during the quarter inch one credit mark right into two other nonaccrual status and we really have.
A little or no other activities speak up.
The loan loss reserve remains adequate at 90 basis points.
Jerry.
Oh, Thanks, Barry and turning to the liability side of the balance sheet I'd like to ask Tom Owens to discuss.
Pause the base and the net interest margin Tom Bakke scary looking at slide six deposits totaled 11.3 billion at September Thirtyth decrease of 312 million from the prior quarter.
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 449 million dollar increase in personal and commercial accounts, which more than offset from 180 million decline in public fund balances.
Our cost of interest bearing deposits declined three basis points from the prior quarter as we proactively reprice certain deposits in response to the spreads to rate cuts [laughter] noninterest bearing deposits represented 26% of average deposits in the third quarter.
Turning to slide seven net interest income F. T E totaled 111.7 million in the second quarter, which resulted in a net interest margin of 366, two basis point increase from the prior quarter.
Excluding acquired loans. The net interest margin was 361 up one basis point from the prior quarter end up 11 basis points from the prior year No Dwayne will provide an update on noninterest income.
Thank you Tom turning to slide eight non interest income totaled 48.3 million from 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 prior quarter and 42.4% year over year.
Gain on sale of loans totaled 8.5 million in the third quarter.
2.9 million from the prior quarter [noise].
This increase was more than offset by negative net hedge ineffectiveness up 3.7 million.
[noise] insurance revenue totaled 11.1 million in a third quarter and wealth management revenue totaled 7.7 million both unchanged from the prior quarter up now is and the third quarter non interest income represents 31.3 of total revenue.
Lewis will now cover expenses on slide 19 capital management on Slide 10.
Thank you to wind as Jerry mentioned earlier court, Onyx expenses, which exclude oriented and tangible amortization totaled about 105 million for the third quarter relatively flat linked quarter and up about two and a half are set this time last year salary and benefits increased around $550000 links.
Were primarily due to higher commissions as a result increased production.
Servicing fees increased 829000 from the previous quarter due to technology investments as well as certain professional fees. Other expenses declined the million dollar linked quarter primarily.
[noise] linked quarter to 10.8 Megan.
This line item includes a recovery 1.6 billion and litigation related expenses included in prior periods. Other expenses also reflecting contributions totaling one point made 1.1 million related to trustmark participation in the state of Mississippi's children problem effect, which provides a dollar for dollar.
Mississippi State tax credit to individuals and business donations to eligible charitable organizations.
I would expect core expenses in the fourth quarter being in line with a third quarter now turning to slide 10, Trustmark continues to maintain solid capital position during the third quarter Trustmark repurchased approximately four and a half million dollars worth a common stock are about 139000 shares outstanding common stock.
At September Thirtyth, Trustmark at about 82 or half million remaining authorization honor to existing repurchase program and that expires on March 31st <unk>.
Jerry Thank you list.
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, who creating long term value for our shareholders.
At this time I'd be glad to address any questions and as the group would any credit a question that you might have thank you.
[laughter], we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset for pricing.
If at any time. Your question has been address and you would like to withdraw your question. Please press Star then too.
Our first question comes from Daniel Manitex with Raymond James.
Yeah, Hey, guys good morning.
Good morning, good morning.
Ah, Yes, I just want to start with the loan growth. He is a little bit there on the under construction bucket I'm trying to figure out. So <unk> was was the growth there are driven by less pay off was it more or was it more production.
[noise] then of the spirit it was driven by more production and what's a little bit puts a little bit hard to say from the a GAAP reporting a for the true growth occurred we did grow about $217 million and commercial construction.
About $211 million migrated down into non owner occupied.
And we grew about 16 million end dot one four family builder funding, though the one thing it did it does make it a little bit hard to understand is on the owner occupied increasing art are staying where it did and that's the that's the result of a reclassification that was acquired by the call reporting instructions that came out recently.
We were able to reclassified some senior living facilities that were providing.
Both health care add to our maintenance services to customers from non owner occupied the owner occupied so that's just a month, that's just a reclassification that hurt but our growth came from commercial construction as well that's wonderful family builder lending and it was all based on increased production that <unk> commercial construction growth came in.
In the industrial apartments senior.
As far geographically it was in Houston, Atlanta, Dallas and Spring go South Carolina.
Okay, great color.
If I back out energy C. N islands are down a little bit how much of that was line pay down versus maybe lower production.
Sure. It was pay downs us as opposed to lower productions, we decreased $42 million and see.
That was all in our it was all originated out of our Tennessee market. It was a result of really several things there were some refinancing of some credits where some of the some of the larger banks, but larger position on some of the smaller banks works not asked to participate in the new facility. We also had one refinance that was upsized that we are.
It's not despite and just go something at a fast growing about what's occurring and then we had a we got a few payoffs or paydowns as a result to some business combination. So it all was out of our Tennessee market, but nonetheless, it was all things that Weve you know when the refinancings occurred and we were not part of the new facility that was five.
And then we opted out and then we had some business combinations that resulted in the.
The lack of a need for additional financing, where we were paid off for pay down almost.
Got it okay. So it seems like.
No you're you're still looking at pretty good growth on real estate side and sand I, a little more tough sledding.
Do you expect that to continue next year or you are you still thinking mid single digits is the right number here or do you see any any change to the potentially or a your ability on the C N eyesight.
Daniel we got guided in terms of ball growth for next year at this point, we do expect bars CRM business to continue to be brisk next year, we don't really see anything changing in the industry or anything about our appetite, but I was five of loans changing at this point, let's see we expect that to continue to be as you refer to it it's tough.
Flooding and we've got a lot of guys out there has got some guys and girls and girls, how some business, but nonetheless, there you opportunities a better presenting themselves, but we are actually out fair pursuing everything that's available and its thinly priced and it's pretty aggressive in terms of structure, but we are we are.
The big sort of every opportunity that we can't within our footprint.
Yep completely understand great color I'll hop back in the queue. Thanks, guys.
Thank you Dan.
Our next question comes Catherine Mealor with KBW.
Thanks, Good morning.
Good morning Kathryn.
Well, we can't talk about the margin for a little bit and then my last question God, It's not about what a thought that's compression with it you like high margin how did much better than expected this quarter, but they are getting some of that for the balance sheet remake. So maybe just updated thoughts on and how you're thinking about BACE Rediclinics live work and then how you think your margins.
Oh, Dan how much further right. Thanks.
Turning to Tom was anticipating your question.
I am sure he was further detail.
Thanks, Tom not not only did I anticipate the question, but I anticipated who was going to ask [laughter]. So yes in the third quarter, we did better than guidance in terms of core net interest margin, we've given guidance of linked quarter compression to 45 basis points, we actually came in with them one basis.
Increase.
Some of it is fundamental.
You see the decline in other earning assets, which in turn that was basically excess reserves at the fed that internet is driven by our continued optimization of the public fund deposit base.
You heard me comment earlier about.
Europe , when you're in year over year growth and deposit balances, which has been actually reasonably solid in personal nonpersonal.
We've been optimizing and thereby running off public fund deposit balances that were somewhat higher cost somewhat higher beta.
So that part of its fundamental that's probably.
Three basis points or so.
And then LHP Fi yield we got about a four basis point lift contribution to the margin.
And just from a very strong quarter in terms of a loan fees.
So if you add the four basis points from loan fee use which is not necessarily fundamental we've talked in the past about volatility a bone fees quarter to quarter at the four basis points of loan fees and the three basis points lift from.
Some favorable balance sheet mix, that's about seven basis point, if you take seven basis point points off with the one basis point reported linked quarter increase that would be about six basis points, that's pretty comparable to the four to five basis points.
And then schedule.
That makes sense, Okay. That's really helpful. It didn't look forward with what we have no is it the temporary rehab October cut.
I mean, how you're thinking about margin outlook right. So as.
As you know, we do our forecast on the market implied forward.
Which add a third quarter end, which is what we're using basically had a 50% chance.
The fed rate cuts or next week.
And then 100% chance that eight bed count would occur by the December meeting.
So that is what's in our forecast. So when you think about linked quarter Warner's NIM for the fourth quarter, you know yet to cod.
In the third quarter that you didnt feel the full effect.
In the third quarter, you will feel the full effect in the fourth quarter and that it obviously matters a lot when you're talking about linked quarter NIM. The timing if there's going to be next fed cod matters a lot whether it happens next week, where 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 it would take us into the low 350.
Okay, that's super helpful.
On the deposit side seems to be Hello.
A lot of that.
When it's going to come public fun, but is there way to think about what deposit cost said every month over month.
Yeah, but think about how much of a downside we have I guess downside deposit cost that upside to the margin we have from deposit costs coming down.
No.
Sure. So I can answer that two ways you know one as we discussed.
On last quarter's call you know we have in the neighborhood of two and a half billion or so Oh, hi, beta interest bearing non maturity deposits that we did proactively repriced lower during the quarter in response to the fed cuts.
Another way to look at it is when we think about.
Beta so they said, we've got one cut price, Dan or forecast, reflecting mark implied forwards by December and no. One in June of next year and want if 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 three more cuts would take us down to about a fed funds targets without one in a quarter. So if you look at the peak fed funds rate of two and a half down to one end of quarter by the end of next year, we're sending a beta on interest bearing non maturity deposits of about 45%.
Now, let's say 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 one in a quarter target fed funds rate up to two and a half that with closer to 55%.
I think we haven't appropriately conservative assumption, there and I think that should help you.
In terms of modeling our deposit costs.
Yeah, that's got that's great but to be clear the 45% data. It's just that she was <unk> billion high beta non maturity deposits.
No. So the 45% Catherine would be all then it would be Oh.
All in apply to our interest bearing deposit cost the the two and a half billion of high beta would be obviously much higher beta assumption, we still have a flat we stopped plenty of room.
To reprice. So it's down now again, it's anybody's guess as to whether you know where the fed goes from here the market it implied forwards or price the weather price that's what we reflect.
Got it okay. That's helpful. They get inside your had alright, thank you very much rather car.
Our next question comes from top Milsaps with Sandler O'neill.
Hey, good morning, guys.
Hi, Brad good morning.
Tom Thanks for all the all the color that was really helpful. Just a point of clarity the four basis points of loan fees. This quarter that four basis points of total loan fees or four basis points above and beyond what you've kind of typically get any given quarter.
So Brad that it that's incremental again.
[noise] loan fees kinda run in a channel a 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 you know just somewhat.
So it was really an unusually strong third quarter in a way of loan fees. The four basis points is above and beyond what we would normally.
Be book.
Great. That's helpful really appreciate that and then.
Just curious for Louis or better yet any any thoughts on.
On T., so on how that will impact you guys.
Brad This is Barry.
I think what where we are is where we feel like we're in a good place in terms of being ready for the implementation.
I think we feel like for my funded loan standpoint.
We're not expecting to see a material change.
And preserving requirements I think from an unfunded standpoint that will be some additional reserving that will need to do but I think when looking at what our peers have disclosed today, which is a real mixed bag.
Going to be we're gonna be inside that range, we're not going to be an outlier I'm on either side, so, but I think our biggest change for us is gonna be the unfunded preserving we've been paralleling all year and were for like where im real good shape in terms of 'em come one one to implement our new.
Seasonal solution.
Okay Bury it sounds like you guys are ready to provide numbers yet, but it does it seem to me that based on your comments you expect to be sort of a an outlier either way kind of based on what other people have said that.
That's correct. Okay and then just final question, maybe bigger picture <unk>. Louis you guys have done a great job.
Controlling overhead for a number of years I'm just kind of curious how long you keep that can continue I know you know.
To Jerry a lot about investments in technology, and so on I know that you guys are making.
But just wanted to get a sense. If you feel like they're sort of built up you know a 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.
Brad I would take it all your guidance into 2020, but I'll tell you that for the fourth quarter as I've mentioned earlier, we expect this core expenses stayed relatively flat.
So for next year.
Certainly not given any guidance, we're delighted that but we'll continue to reinvestment technology.
To change processes improve efficiencies hopefully that weekend or start taking this efficiency ratio style or so.
Gary any color there well just.
Brad. Thank you made the point that we are making investments in technology. So that we remain relevant to our customers and we can be additive.
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 site cost so.
Is there any pent up expenditures.
Not not that we foresee in 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 to the expenses to improve that efficiency ratio are driving revenues, but a balanced.
Vesting in people and technology that can increase revenues, then all business areas and a same time figuring out how we can operate more efficiently. We're like so many other banks in the middle of this transformation is moving from brick and mortar to digital.
You can't do it all at once because there because the customer doesn't want it all at once so.
It's a balancing act and as Louis mentioned, we've worked very hard into fourth quarter.
To keep expenses in line with what we've reported here in the third quarter.
And.
And just continue our processes of investing in the company and our customers same time, we find ways to become more efficient.
Great. That's helpful. I appreciate it thank you.
Thank you Brett.
Again, if you have a question. Please press Star then one.
Our next question comes from Jennifer Demba.
Right.
Hi.
Good morning.
A question on M&A interest and discussion activity right. Now you guys still have a premium currency and 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 levels still remains high and doing transactions, but it's.
It's disciplined and balanced.
It relates to how we use capital overall.
And as far as discussions yes, the discussions continue as they have for some time.
The challenge is 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 it at certain levels and the reaction to the market to those deals we feel like we really have to be selective Vietnam and finding.
An organization that fits either within the existing footprint or is an adjacent to two one we have [noise].
That weekend.
We can really taken improved operating performance of that so.
As far as any.
Additional discussions that we're seeing taken place I think is then there's been strong discussions.
All year long they continue I noticed any new uptick.
All for the same raises.
No.
Combination of.
Thanks facing tougher challenges relative to this end.
Interest rate environment trying to find efficiencies.
Needed and.
And some organizations that are looking for liquidity events. So.
The reasons to do deals a are or haven't really changed that we've seen and and we continue to be diligent and in looking at opportunities.
Thanks, so much.
Thank you.
Our next question a follow up from Daniel Mannix with Raymond James.
Yeah, just one for me if I could go back to the NIM.
In that guidance or the low three fifties for the fourth quarter. What are you assuming there with the securities book.
And going forward is there's still a conservative approach or assumption that.
That you run down that book or have you changed your thoughts around that.
Daniel This is Tom that's a great question.
So yeah, I think on our last quarter's call we talked about.
Modeling internal internally in assumption that we continue to run off the securities portfolio through year end.
And then go 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.
You know if conditions continue this way that we will be reinvesting securities cash flow here in the fourth quarter, you know weve hit about 20% of.
Earning assets with our securities mix, which is.
Kind of the range that we wanted to get too so I think an.
I'm showing that the guidance I'd give you, it's probably better assumption at this point to assume that.
We maintained securities balances range, where we ended the third quarter of say to 2.3 to 2.4 billion is a better assumption and continuing to run off.
For an extended period of time.
Got it very helpful. Thanks, gentlemen.
This concludes our question answer session I would now like turn the conference back over to Mr. Jim.
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.