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Trustmark Corp  (NASDAQ:TRMK)
Q3 2018 Earnings Conference Call
Oct. 24, 2018, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 pleasure to introduce Mr. Joey Rein, Director of Investor Relations at Trustmark. Please go ahead.

Joey Rein -- Director-Investor Relations

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 website at trustmark.com.

During the course of our call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We would like to caution you that these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties, which are outlined in our earnings release and our other filings with the Securities and Exchange Commission.

At this time, I'll turn the call over to Gerry Host, President and CEO of Trustmark.

Gerard Host -- President and Chief Executive Officer

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, 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 three of our presentation. We continued 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 continued to run off maturing investment securities in an effort to better optimize our earning 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 improved 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?

Barry Harvey -- Chief Credit Officer

I'd be glad to, Gerry. Thank you. Just looking over on to page four. 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 on to page five, 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 move in the right direction at 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 non-performing 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 outstandings 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 six, 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 juiced by recoveries, about 4.4% of that is recoveries. On a go-forward basis, we expect the yield to be between 6.5% and 7.5%.

Gerry?

Gerard Host -- President and Chief Executive Officer

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?

Tom Owens -- Treasurer

Happy to, Gerry. So turning to page seven. 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 hikes.

Turning our attention to revenue on page eight. 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 non-interest income.

Louis Greer -- Chief Financial Officer

Yes. Thanks, Tom. Looking at the non-interest income table, you can see that total non-interest 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 the lines, including service charges, bank card income and wealth management, you can see they 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, non-interest income remains strong and represents about 31.5% of revenues excluding interest and fees on acquired loans.

Turning to page nine, looking at non-interest expenses, they remained well controlled with core non-interest 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're 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 would expect our fourth quarter core expenses to remain in line with the third quarter.

Next, I'll mention our effective tax rate for the third quarter, which was less than normal due to our annual true-up. And when we file our 2018 tax return, little under 11%, and 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 employment, including our share repurchase program.

Gerry?

Gerard Host -- President and Chief Executive Officer

Thank you, Louis. And I hope you 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 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 30th, Trustmark had 1,786 loans with a balance of $240 million and exposure of $282 million. And this upwards(ph)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.

Questions and Answers:

Operator

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.

Brad Milsaps -- Sandler O'Neill -- Analyst

Hey, good morning.

Gerard Host -- President and Chief Executive Officer

Good morning, Brad.

Brad Milsaps -- Sandler O'Neill -- Analyst

Maybe my first question is for Tom, as it relates to the NIM. Interest-bearing deposit costs were up about 13 basis points linked quarter, so roughly 50% beta there. What does your outlook say? Are you starting to feel more pressure there from competitors? 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 earning assets. Just wanted to see if there's any alteration to that?

Tom Owens -- Treasurer

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 had 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 a one more Fed hike here in 2018 in December and then two hikes in 2019, one in the December, one in June, that would take the Fed funds rate to about 3% by year-end 2019, 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. That, I think, we, if you looked at on average in the third quarter, we were at about 23%, continue to trend lower. We talked about a target of 21% whether that were 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.

Brad Milsaps -- Sandler O'Neill -- Analyst

Perfect. That's very helpful. And then just to follow up with Barry, you alluded to a few times in your remarks, but just curious if we could get a little more color on the couple of problem loans you alluded to in the release, also just kind of the moving parts. It looked like most your provisioning this quarter came out of the Tennessee region, most of your charge-offs came down at 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?

Barry Harvey -- Chief Credit Officer

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 led 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 of states, but it came through our Tennessee market, and thus for it was originated through. And we had a specific reserve established for that impaired loans, and that was also one of our new non-accruals 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, the same 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 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 paid down, 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 million. 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.

Brad Milsaps -- Sandler O'Neill -- Analyst

Okay. Yes, 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, is that -- did I understand that correctly?

Barry Harvey -- Chief Credit Officer

The provision was $9.8 million and our provision for the bank as a whole was at $8.7 million (ph), and so dealing with non-acquired. So you can sense that all of 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.

Brad Milsaps -- Sandler O'Neill -- Analyst

Okay. Great. Thanks. I'll hop back in the queue.

Operator

Our next question comes from Daniel Mannix with Raymond James. Go ahead, Daniel.

Daniel Mannix -- Raymond James -- Analyst

Hey, guys. Good morning.

Gerard Host -- President and Chief Executive Officer

Good morning, Daniel.

Daniel Mannix -- Raymond James -- Analyst

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.

Barry Harvey -- Chief Credit Officer

And Daniel, this is Barry. I would glad to. I guess, starting off with just talk about loan growth in general and kind of cover the waterfront there. As you can see, a $68 million; we continue to see strong growth. And when you look at it from a GAAP perspective, you are 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 on the construction side, and we have strong homebuilder growth on the 1-4 family size. We were up $112 million between those two categories from a growth perspective.

Now, obviously we have projects that they see over, they 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. Again, this is coming out of our mortgage company. We saw $57 million worth of growth in our our 1-4 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 are other real estates predominantly multifamily, you're going to see decreases there, but those are not unanticipated, those are stabilizing projects or projects that have stabilized that are move into the primary market or being sold. And so we would 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 1-4 family, and then you 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 and that combination of about $26 million. All of that decrease came from two sizable substandard energy credits which moved out during the quarter. So -- and actually over 26%, those two loans made up over $26 million. So without those, we would have -- some growth in our C&I category is still extremely competitive, is 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, too aggressive, the pricing is very aggressive.

Daniel Mannix -- Raymond James -- Analyst

Got it. Really helpful. And just to clarify there, you're saying that the other real estate secured segment is multi-family loans?

Barry Harvey -- Chief Credit Officer

Yes, your multifamily and your REITs are going to be in that bucket.

Daniel Mannix -- Raymond James -- Analyst

Got it.

Barry Harvey -- Chief Credit Officer

And we don't have much in the way of REIT, so it's going to be -- you're going to see your multifamily projects, whether it'd be standard housing or apartments, that have either -- they've got a certificate of occupancy, and at that point, all that began paying P&I, and at that point we're moving them down into the existing category from the construction category.

Daniel Mannix -- Raymond James -- Analyst

Okay, great. And then just really quickly on the earning asset growth expectation with the securities book continuing to run-off here, are we looking at low-to-mid single digit growth for the year? I mean, it looks like that might even be a little difficult.

Barry Harvey -- Chief Credit Officer

Yeah, I think, what we've guided to for the loan portfolio for 2018 was, once we got past the first quarter, we've been guiding the 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 2018. And in 2019, I do think our expectation is one, we're going see more growth in 2019 obviously than we've seen in 2018. 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 2019 than we did in 2018, and that was obviously when -- as those things roll off, we've got to cover that just to remain flat. So we have less to cover in 2019 than we did in 2018. 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 we're -- with our projections, I think we're better -- more comfortable that we not only know what's 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 us -- the amount of growth we have in 2019 pickup from what we experienced in 2018.

Daniel Mannix -- Raymond James -- Analyst

All right. Very helpful. I'll hop back in the queue. Thanks, guys.

Barry Harvey -- Chief Credit Officer

Thank you.

Operator

Our next question comes from Jennifer Demba with SunTrust. Go ahead, Jennifer.

Jennifer Demba -- SunTrust -- Analyst

Thank you. Good morning.

Gerard Host -- President and Chief Executive Officer

Good morning.

Jennifer Demba -- SunTrust -- Analyst

Two questions. Just curious about your exposure to loans, 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?

Gerard Host -- President and Chief Executive Officer

Barry, why don't you take the loan question? I'll take the share repurchase.

Barry Harvey -- Chief Credit Officer

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. There's really -- we've got two credits that make up the majority of that and that number also includes the credit in question that we have reserve 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.

Gerard Host -- President and Chief Executive Officer

(multiple speakers) Yeah, I'll 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; the use of capital with organic growth, anticipated M&A needs, our ongoing dividend plan and then repurchasing. As you probably recall, we have $100 million authorization. It'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 some movement in the overall stock market. When you 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.

Barry Harvey -- Chief Credit Officer

Gerry, just to circle back around, Jennifer, our total exposure in that limited service categories is $44 million, not $34 million. And that does include the credit in question, which probably gives us down more to $34 million remaining after that credit is fully resolved, which we expect it to be during Q4. So I'd say it's really a few -- a handful of number of credits that make that up. We've looked at all those and we're very comfortable with. I'm not so sure the problem credit is specific to the industry as much as it is to the company itself.

Jennifer Demba -- SunTrust -- Analyst

Thank you.

Operator

(Operator Instructions) Our next question comes from Matt Olney with Stephens. Go ahead, Matt.

Brandon Steverson -- Stephens -- Analyst

Hey. Thanks. Good morning, guys. This is Brandon Steverson on for Matt.

Gerard Host -- President and Chief Executive Officer

Hey, Brandon.

Brandon Steverson -- Stephens -- Analyst

Hey. 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 quick math, I think, that puts us at about a 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 -- they could make that number a little lower?

Gerard Host -- President and Chief Executive Officer

Well, first of all, as far as IT spending, we have spent a significant amount over the last six, seven, eight years, upgrading 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.

Barry Harvey -- Chief Credit Officer

Well Gerry, I'll just comment, certainly I don't think we're ready to give any guidance to 2019. We're still on our strategic planning process and budgeting process. But as you can see on page nine, we maintain that expense -- core expense number for about five quarters at $100 million and you can see in the second quarter it came up to back at $103 million; third quarter was about $103 million. So we do expect to maintain that through the fourth quarter. And again, I don't want to offer anything for 2019 as we're in our planning process today.

Brandon Steverson -- Stephens -- Analyst

Understood. And then last one from me. Can you just remind us how much of your loan book is exposure to shared national credits?

Gerard Host -- President and Chief Executive Officer

(inaudible)

Barry Harvey -- Chief Credit Officer

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.

Brandon Steverson -- Stephens -- Analyst

Great. And that's all from me. Thanks, guys.

Barry Harvey -- Chief Credit Officer

Thank you.

Operator

Our next question comes from Catherine Mealor with KBW. Go ahead, Catherine.

Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst

Thanks. Good morning.

Gerard Host -- President and Chief Executive Officer

Good morning.

Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst

And I apologize, I've been jumping in and off of call, so this has already been asked, then I can just go back to the transcript, but wanted to ask about your loan to deposit ratio being so low versus your peers, at low 80s. Any thoughts as to how that should be trending over time as you balance -- in your balance sheet remix effort? Thanks.

Tom Owens -- Treasurer

Yeah. Catherine, this is Tom. I would expect 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.

Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst

Yes, that's great. And I think all my other questions were actually answered. Thank you very much.

Tom Owens -- Treasurer

Okay.

Operator

(Operator Instructions) At this time, there are no further questions in the question queue.

Gerard Host -- President and Chief Executive Officer

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.

Operator

The conference has now concluded. Thank you for attending today's presentation. And you may now disconnect.

Duration: 34 minutes

Call participants:

Joey Rein -- Director-Investor Relations

Gerard Host -- President and Chief Executive Officer

Barry Harvey -- Chief Credit Officer

Tom Owens -- Treasurer

Louis Greer -- Chief Financial Officer

Brad Milsaps -- Sandler O'Neill -- Analyst

Daniel Mannix -- Raymond James -- Analyst

Jennifer Demba -- SunTrust -- Analyst

Brandon Steverson -- Stephens -- Analyst

Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst

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