Q2 2019 Earnings Call
It was as much happy to Jerry so turning to slide six.
Deposits totaled 11.6 billion at June Thirtyth, an increase of $31.8 million or three tenths of a percent from the prior quarter.
And an increase of $494.2 million or 4.5% from the prior year.
Linked quarter average balance growth of $196 million or 1.7%.
Was driven primarily by commercial and personal accounts and we had good balance between the two.
Year over year average balance growth of $559 million or 5.1%.
It was also driven primarily by personal and commercial accounts and there again, we had good balance.
Our cost of interest bearing deposits rose six basis points from the prior quarter, representing a beta of 37% cycle to date relative to the feds rate hike.
And noninterest bearing deposits represented 25% of average balances in the second quarter.
Looking at revenue on slide seven net interest income SPE totaling $111 million in the second quarter, which resulted in the net interest margin of 364 of one basis point increase from the prior quarter.
Excluding acquired loans. The net interest margin was 316 unchanged from the prior quarter and up 14 basis points from the prior year and now Dwayne will provide an update on non interest income.
Thank you Tom total revenue in the second quarter was 157.4 million Thats, a 7.6% increase from the prior quarter and a 3.2% increase from this time last year.
Non interest income totaled $49.6 million for the second quarter, an increase of $8.1 million from the previous quarter and $2.2 million from the prior year.
Mortgage banking revenues totaled $10.3 million for the second quarter, a $6.9 million increase for prior quarter and $1.2 million over last year.
Insurance revenue continued to remain solid in the second quarter totaling 11.1 million, a 2% increase from the prior quarter and a 3.3% increase year over year.
Louis will now cover expenses on slide eight in capital management on slide nine.
Thank you Duane.
As Gerry mentioned earlier in his comments core non interest expenses totaled about $105 million for the second quarter.
Increased slightly under 2% from the prior quarter and.
Free from this time last year, which was in line with our previous guidance salary and benefits did increase approximately $1 million linked quarter due to higher insurance mortgage commissions as a result of continued growth in both of those lines of businesses services fee expenses.
Increase from the previous quarter, primarily due to professional fees and continued investments in new software.
I do expect the core expenses to remain stable in the third quarter. However, they could increase.
Depending on commissions related to revenue growth and continued investments in technology now turning to slide nine.
Trustmark continues to maintain a solid capital position during the second quarter Trustmark repurchases approximately $13 million. Our 398000 shares of this common stock, bringing our total repurchase year to date to $50 million or 1.5 million shares at June Thirtyth, Trustmark had $87 million of remaining authority under its existing stock repurchase program that expires.
March 30, Onest 2020, so Gerry.
Yes. Thank you Louis we believe the strategic priorities in place align our activities.
With our focus enabling us to continue adding value to the customers communities and shareholders we serve.
At this time, we glad to address any questions that you might have.
Thanks.
We will now be for question and answer session to ask a question you May Press Star then one on your touched down soon.
If you are using a speakerphone. Please pick up your handset for pressing the keys if that anytime. Your question has been addressed and Youd like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question comes from.
Brad.
Milsaps with Sandler O'neill. Please go ahead.
Hey, good morning, guys.
Marta Brad.
So you guys had a nice quarter I, just maybe want to start with the with the net interest margin.
Tom could you kind of maybe walk through some of the components. This quarter, maybe any impacts from from loan fees and you guys have been able to hold the core NIM stable for a couple of quarters you know despite.
You know I know you've been worried about it.
About contraction, how do you feel about it now with the prospects of the fed.
Potentially cutting rates next week and beyond.
Sure.
So.
Quite a bit tough intact, there I'll try and keep it brief.
Second quarter.
Really nothing unusual.
In the way of loan fees or anything else we have.
You know you've got an extra day in the second quarter creates a headwind.
We had a normal seasonal uptick in the second quarter versus first quarter.
In terms of loan fees, and so it's pretty clean quarter pretty comparable to the year ago quarter.
With respect to our for our projection for margin in our outlook on interest rates. Our current forecast as you know we use market implied forwards.
Marketing five forwards basically have the fed cutting 25 next week.
Another 25 in September and call it a 50% chance of a third cut in December .
So that is what's in our forecast we would anticipate some margin compression as a result of that.
I would probably say four to five basis points linked quarter compression in core net interest margin.
Probably for the third quarter.
Assuming that Thats what comes to pass that the fed is consistent with market five forward.
Now that being said you look at the first half we put a good first half 360 for the first half and so even with the anticipated margin compression here in the second half if the fed is consistent with market implied forwards.
Four to five basis points of pressure linked quarter in the third quarter, and then maybe a little bit more in the fourth quarter. So maybe in the second half we get into the low 300 fiftys.
For the full year 19, we're going to be in the mid 300 Fiftys.
So that's consistent when you think about the guidance that we gave coming into the year.
In terms of.
Year over year increase in core net interest income, we said, 2% to 4% call. It a mid point of 3%.
When you look at the way the margin has held up even with the anticipated pressure.
Going forward and when you look at the growth in earning assets that we've achieved I think that that guidance is still reasonable although at a midpoint of 3% year over year over year lift in core net interest income.
That's really helpful. And then maybe just a follow up on on capital and maybe your appetite for M&A.
Jerry Lewis you did buy back some stock this quarter, maybe less than the previous quarter.
Just curious you know your appetite for buybacks and then in terms of M&A.
Kind of what size deal would you guys consider at this point if in fact, you are interested in continuing to look for acquisitions.
This is Jerry I will take the question.
Capital is viewed holistically in terms of.
The options that we see in front of us for.
I'll call it the buyback.
The organic growth pace and you see our loan growth slowed just a little bit in the second quarter and that's a function of our our discipline relative to credit quality and.
Loan structures were seeing.
A few banks that are that are looking at.
At easing some of those disciplines were holding to our disciplines from a credit standpoint has gotten very competitive from a pricing standpoint. So we look at capital use relative to.
The availability of finding new loans and growing the balance sheet there.
Also look at where we are from a buyback perspective.
We have a very disciplined approach that we look at on a weekly basis.
And we're holding to our disciplines. There in terms of the range of pricing, which we would we would buy back and there are lot of factors that go into account.
Dividend remained steady.
And we're right about 40% payout there, which.
We think is an appropriate level.
And that leaves the last part of capital utilization and that is acquisition and yes, we have and.
Very much an interest in continuing to grow expand our footprint both in contiguous markets in an existing markets, but what we're looking for our our franchises that that fit within.
Our disciplines.
Orkin shaped in that manner, but have good solid core customer base behind it.
We see an awful lot of opportunities out there.
For organizations that were put together within the last.
Five to seven years that are ready to sell.
And we feel like we can replicate those on our own.
So no real need to buy them, so not a serial acquirer as you know it has been a while last deal. We did was in Huntsville relatively small deal.
But it was in what we felt like was a really good market with good growth opportunities, so thats going to be our approach.
Deal size.
We feel like.
We can handle anything.
From 200 million to 5 billion in size.
We've got good structure good governance.
Some of the money that we've spent over the last several years Louis mentioned outside fees services.
A lot of that is going towards improving risk management practices.
That includes everything from as he said software enhancements.
To improving our compliance and other functions so.
We are very interested in finding the right franchises, we are well aware of how investors in the market looks at pricing on these deals and we're going to just like we do on on the credit side.
And on our discipline and buyback we're going to do the same thing.
From an acquisition standpoint.
Great. Thank you guys I'll hop back in queue.
Thanks.
The next question.
Comes from.
Jennifer Demba with Suntrust. Please go ahead.
Thank you so much.
Question is on credit quality and yours has remained excellent.
But we have seen other banks.
With credit cost bouncing off the bottom I, just wondering if you're seeing any areas that are.
Out there.
Or within your portfolio that are causing you pause right now.
We're waiting.
Together thanks.
And Jennifer this is Barry.
You know we're constantly looking at I guess, what are one of our main focus is going to be our own concentration how much we have in various categories. I think we do have a very diverse.
Overall book within the CRT category, we were focused very much on the different types of products, we have and prop de emphasizing some where appropriate emphasizing others, where we'd like to see some growth of balance ourselves out.
We're also.
Very much focused on which markets are performing well, which ones are projected to perform well with which ones have or we think we'll be frothy in the future and trying to make sure of what we're doing in those in those markets that it's stabilized projects credit tenants.
Performing well and so are our main focus has been on concentrations and making sure that we're not whether it be on a product type within CRD or within the markets themselves, making sure that if we get less comfortable with either one that we began to do less of it.
There's not really anything we see at any of our trends at this point that have that concern us we're very active in surveying our lenders quarterly on every one of our CRM projects.
To make sure we understand where they are in the process, where the where the ball is in terms of completion status versus where we were it was pro forma where we approved it on how things are going what rents are being achieved things of that nature to make sure. The project going along as planned and whether or not we're following up to understand why and if they're going to be able to be corrected a timely fashion. So I think we're doing a lot of things to try to stay on top of what's going on but I think our main focus is in his stand word as it relates to concentrations by category or by market.
Thanks, so much.
The next question comes from Catherine Mealor with KBW. Please go ahead.
Thanks, Good morning.
Good morning Catherine.
I wanted to see if we could dig into the margin just a little bit more to as a follow up to Brads question and ill be starting first on the loan side with the your legacy loan yields were up this quarter I think about five basis points. So maybe versus a start you can you talk about where on average year, new and renewed loan yields were coming off from from your strong growth this quarter versus that cannot for 95 or 498 level that the portfolio is yielding today.
And then within that how much just remind us how much of your loan book.
Is variable rate tied to either LIBOR or prime and how we should think about that repricing upon us had cut thanks.
Sure Kathryn this is Tom so.
Yes, Sir.
Yes.
Good luck to consider here right the.
The the fed has won 80.
The market's reaction on the flattening of the yield curve, we have to think about as I said earlier weather weather bed system with those market implied forwards burden off so there is a lot to think about.
I would say with respect to you think just about the impact.
The flattening yield curve.
And so.
That spread whereas over the last couple of years, we're getting at a pretty consistent level of accretion or lift to the weighted average coupon on the loan portfolio from new business coming on that's really come down a lot.
Now.
The linked quarter increase in loan yield.
Five basis points versus the linked quarter increase in interest bearing deposit cost of six basis points.
As I've said in the past Trustmark has done a remarkable consistency over time over an extended period of time.
That spread has remained neighborhood were 100 basis points.
Now.
Of course, if the fed cuts next week, if they follow through in September .
When you think about the relationship between the asset side, driven by the loans and the deposit side of course, you're going to get pressure on your core net interest margin we have about.
4.7 billion.
Of floating rate loans, when indexed to LIBOR and prime.
When you look at the drivers of our increase in deposit cost at risk as it relates to interest bearing non maturity deposits.
Maybe that's more like 3.1 billion something like that that you would consider.
I'll call it really high beta.
Deposits and so you do the math on that and what you find is you've got three to four basis points there of compression in the short end.
And that's why I gave you the guidance earlier of four to five basis points linked quarter compression in core net interest in March and Thats. The primary driver now what happens then longer term is the time deposit book gradually reprices as well so I would anticipate as you look further out looking at less compression.
Going forward as a risk if the market implied forwards are right, which is basically for 100 basis points of cuts right.
Two and a half let's call it by year end this year than maybe.
100% chance they've done the third cut in March and then maybe another one by September so.
The longer that stretches out the more it mitigates the compression on core net interest margin and so I think it would be a mistake to take.
No one quarter's linked quarter guidance of four to five basis points and extrapolate that forward.
For the whole 100 basis points right because there's other dynamics to the balance sheet. So we should stabilize.
And I guess I'll, just stop there and see if that's helpful or if you have any follow up questions. No I think that was really helpful.
I think it.
It seems like you are saying is that the guidance for the third and fourth quarter is really just indicative of more the immediate repricing in terms of the flooding nature of your loan book and then the part of your deposit base that directly indexed or has a high data that over time that.
That compression will moderate as you're able to lower funding costs is that correct.
Okay Thats correct.
Great very very helpful. Thank you.
Thank you Catherine.
Again, if you have a question. Please press Star then one.
The next question comes from Daniel Mannix with Raymond James.
Please go ahead.
Yeah. Thanks, good morning, guys.
Good morning.
Good morning quick question for you here first on the balance sheet optimization looks like you guys. Finally reached 21% target in the second quarter.
How are you looking at reinvesting cash flows going forward here maturing securities.
Given the current environment and what does that mean for your earning asset growth as we look into 2020.
Andrew This is Tom Great question, Thanks for asking it so.
As we had guided previously.
Second quarter, 19, and about 21% of of average earning assets was about the the inflection point, where we will discontinue the runoff of the securities portfolio.
So here we are right.
Second quarter 20 has come and gone we got to the 21%.
The in the meantime, as that it was just saying earlier the fed has grown to an enormous curve ball on us here.
I would describe the decision as tactical at this point.
Now I will say in our current internal forecast, we're assuming that we continue to run off the portfolio through year end.
But I think thats a conservative assumption.
Now.
Securities as a percentage of average earning assets when you look at the consistent run off of the Securities portfolio would you look at the reasonably consistent growth. We've had in loans that ratio tends to decline about 1% per quarter and so if we do continue to run off through year end that would put us at about 19% of average earning assets in the fourth quarter that is about where ourselves defined peer median was as of the first quarter just as a reference point. So I would describe it as we're in a zone now where it is tactical and it is quite possible that here in the second half we will begin to reinvest. It's also possible that we continue to run off through year end I don't really see it going beyond that but it's very much a function as you would imagine of.
Our outlook on interest rates.
I think all of us in the industry all of US in the market are looking for look into next Wednesday, what action does the fed take and what kind of messaging do they give us and that will.
And help form the markets view and helped to inform our view. So that's a lever that we're we've got our hands on.
And it's just going to be.
Tactical decision.
Got it Thats really helpful. Thank you.
My other question I wanted to turn to fee income really strong quarter on a on the mortgage line. So how sustainable is that number I understand the seasonality here, but.
Just want to get more color on how much of that was due to.
You know the higher margin business on the retail side.
Shifting your.
Your mortgage platform to be more retail versus wholesale.
And then just kind of generic understanding of volumes and how your gain on sale margins are looking.
So far here in Threeq you. Thank you.
Yes. This is Dwayne daily.
The mortgage business as you can tell has had a very solid second quarter.
Volumes production volumes were very strong across and and as you noted very retail oriented.
About 70, 70 ish percent retail, we expect that to continue into the third quarter volumes remain strong into the third quarter, probably is at or above where we were for the second quarter and.
In terms of gain on sale.
Volume helps that.
We had increased volume and then also we had.
Better margins and we see those continuing in the third quarter as well so.
All in all.
Have to have good feelings about the mortgage business moving into.
The second half of the year of course as you know there is some seasonality and third quarter is a really good quarter for us so.
All positive on that front and then join the only thing I'd add is the unknown is the volatility in the mortgage servicing rights.
We have been hedging.
That asset now for in excess of 20 years.
And it it has helped us to take some of the fluctuation and volatility out of the overall mortgage earnings stream.
Overall, it's been very positive for us, but like we experienced in the first quarter.
We had a significant loss in the hedge.
And here in the second quarter. It was just a neutral so.
That's that's the one big element that we can't control, but overall.
We've built out the mortgage platform and all five states.
And continue to.
To feel good about that business overall and feel like we have better control and opportunities because it is retail.
To do other business with with the customers as we make them their mortgage loan.
Okay. That's great. Thanks, a lot gentlemen.
Thank you.
This concludes our question and answer session I would like to turn the conference over to Mr., Jerry host for any closing remarks.
Thank you operator, and thank you all for joining US today I hope you can see.
And we have a well seasoned management team a balanced approach to running the company long term.
With Duane do we focused on generating.
New revenues from all of our lines of business a Louis controlling the expenses as he does as he's done all along.
Barry and his role in controlling.
In helping us to grow loans, and and manage credit overall, and and Tom and what he does in matching deposits against that growth and then managing the net interest margin.
We commit to stay focused and disciplined in our approach to how we run the company.
We appreciate your interest.
In Trustmark and we look forward to reporting to you again on our third quarter results in late October . Thank you all and have a great day.
The conference call is now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.