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Trustmark (NASDAQ:TRMK)
Q1 2020 Earnings Call
Apr 29, 2020, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's first-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.

Mr. Rein, the floor is yours, sir.

Joey Rein -- Director of Investor Relations

Thank you, and good morning. I would like to remind everyone that a copy of our first-quarter earnings release, as well as a slide presentation that will be discussed on our call this morning, is available in 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, chairman and CEO of Trustmark Corporation.

Jerry Host -- Chairman and Chief Executive Officer

Thank you, Joey, and good morning, and thanks for joining us. With me this morning to discuss their areas of responsibility and to answer questions are Duane Dewey, president and chief operating officer; Louis Greer, CFO; Barry Harvey, chief credit officer; and Tom Owens, bank treasurer. Before we review our first-quarter results, I want to acknowledge the challenges that many people in our communities are facing as a result of COVID-19. Our thoughts and prayers are with all those dealing with both the economic and health consequences of this disease, and we are grateful to the healthcare workers and first responders for the work they're doing on the frontlines of this pandemic.

I'm especially proud of our associates and their dedication to serving customers during these unprecedented times. Trustmark entered this crisis from a position of strength and stability, and we've been proactive in our response. As detailed on Page 3, we've taken comprehensive actions to support our customers, associates and communities. We continue to serve customers through a variety of channels, including drive-through branch access, our ATM and ITM networks, and digital and mobile banking applications.

We're working with customers to provide flexibility by providing waivers of certain fees and charges, granting extensions, deferrals and forbearance as appropriate and pausing all foreclosures and repossessions. Importantly, we are supporting small business owners by participating in the small business administration's Paycheck Protection Program. As of April 23, we had completed and approved approximately 6,000 applications with proceeds in excess of $800 million. As our associates remain focused on serving our customers, we are committed to doing all we can to ensure their health and safety.

We have implemented social distancing practices and taken additional measures to comply with CDC guidelines. Approximately 45% of our associates are working remotely with other departments working on rotating schedules. For all our frontline associates, we provided temporary compensation adjustments, and we provided all associates with additional paid sick leaves. We also continue to invest in our communities, and we've taken a number of actions to offer support during these uncertain circumstances.

Among other initiatives, we've made special contributions to area food banks, provided meals to healthcare heroes and school lunch programs and hosted blood drives. We are committed to doing everything in our power to ensure the safety of our customers and associates and support our communities through these challenging times. Moving to Page 4. Let's review some highlights from the quarter.

Our results reflect the number of onetime or unusual items. Our provision and expense for credit loss totaled $27.4 million, primarily reflecting the impact of the COVID-19 pandemic on expected credit losses. This increased provision and expense for credit loss reduced after-tax net income by $0.32 per diluted share. First-quarter results also include a pre-tax charge of $4.4 million related to a voluntary early retirement program, which reduced earnings by $0.05 per diluted share.

And positive hedge ineffectiveness of $9.9 million increased earnings in the first quarter by $0.12 per share. Loans held for investment, excluding reclassification of acquired loans, increased $160 million or 1.7% from the prior quarter and $500 million or 5.6% year over year. Our pre-tax pre-provision income totaled $56.6 million, up 31% linked quarter and 40% year over year. Core noninterest expense totaled $110.2 million in the first quarter, a 2.5% increase from the prior quarter.

The voluntary early retirement program is expected to produce pre-tax savings of approximately $3 million for the remainder of 2020 and $4 million in 2021. Effective January 1, Trustmark adopted the current expected credit losses methodology for estimating the allowance for credit losses. Our credit quality remained solid as nonperforming assets declined 5.6% from the prior quarter and 12.1% year over year. We maintained strong capital levels with common equity tier 1 capital ratio of 11.35% and a total risk-based capital ratio of 12.78%.

In order to ensure ample capital support to support customers during the COVID-19 pandemic, we suspended our share repurchase program on March 9. At this time, I'd like to ask Barry to provide some color on loan growth, credit quality and the adoption of CECL.

Barry Harvey -- Chief Credit Officer

Glad to, Jerry. Turning to Page 5. Our loans held for investment totaled $9.6 billion as of the end of the first quarter. During the first quarter, we did reclassify $73 million worth of acquired loans into our loans held for investment.

Excluding this reclassification, loans held for investments increased $160 million from the prior quarter. Growth came primarily from other construction and as well as other loans. We do continue to anticipate mid-single-digit loan growth for 2020, driven primarily by fundings on CRE projects that are currently on the books. The loan portfolio remains well diversified both by product perspective, as well as a geographic perspective.

Flipping on over to Page 6. Trustmark's CRE portfolio was approximately two-thirds existing and one-third construction land development. Within the construction land development book, we focus on the vertical construction as opposed to lot land and development. Lot land development only comprises 22% of the book.

The bank's owner-occupied portfolio has a nice mix between real estate pipes, as well as by industry. Looking on to Page 7. The bank's commercial loan portfolio is well diversified across numerous industries, as you can see. Typically, these loans are well secured, governed by formularic borrowing basis.

Numerous covenants typically are incorporated in each of these credits that are intended to protect both the income statement, as well as the balance sheet. Turning on to Page 8. You can see we have a minimum exposure to both restaurants and energy. Line utilization in our energy book continues to decrease over time.

Trustmark has never been in the highly levered or the high-risk C&I business. We have one customer today with an outstanding balance of $3 million in that book. The bank has always been careful in underwritten hotels and retail, real estate in a conservative or prudent manner. We displayed on page -- on this trickle slide, Page 8, we displayed some of the metrics for both hotels, as well as retail, hotels with LTVs in the 50% range, debt service coverage, about 1.8, on average.

In our retail portfolio, the loan-to-values are in the 60s and debt service coverage of about 1.5. Of course, all of that is pre-COVID-19. As we move along in the new environment we're in, we'll have to see exactly how those types of products are able to perform and recover. Looking on to Page 9.

Trustmark continues to offer prepayment deferrals for all of its products. We've been extremely successful in offering both full deferment of P&I for 90 days, as well as converting some of those P&I deferments to actually interest-only. And that's been a nice surprise for us to be able to achieve that in order to keep the customer paying as opposed to the full 90-day deferment of P&I. We're actually -- we're actively participating in the Paycheck Protection Program, as Jerry alluded to earlier, and we continue to be excited about how we've been able to serve our existing customers and provide them some relief during this time.

Looking on to Page 10. We continue to post solid asset quality metrics. Nonperforming loans decreased during the quarter by about 0.4% year over year, about 6% decrease. ORE declined 15% from the prior quarter, 23% from this time last year.

As of March, our allowance coverage for nonperforming loans was 469%, excluding those that are specifically reviewed. This increase resulted in us adopting our CECL solution effective 1/1/2020. The day 1 results were an adjustment of $27 million, which was applied to our off-sheet reserve for unfunded commitments. Day 2, which is represented in our Q1 results, we had reserves for both funded and unfunded, primarily the amount that we reserve for each of those was driven by deterioration in the macroeconomic factors, that's looking at both the southern and the national unemployment and the national GDP.

Jerry?

Jerry Host -- Chairman and Chief Executive Officer

Thank you, Barry. Turning now to the liability side of the balance sheet. Tom, I'd like to ask if you would discuss the deposit base and the net interest margin.

Tom Owens -- Bank Treasurer

Thanks, Jerry. So turning to Page 12. Deposits totaled $11.6 billion at March 31, up $330 million from the prior quarter and up $41 million from the prior year. As you know, though, we've continued to optimize our deposit base, and we have driven some public fund balance attrition.

So excluding public fund balances, deposits at March 31 were up $168 million or 1.8% from the prior year, and average balances for the first quarter, excluding public funds, were up $205 million or 2.2% from the prior year. Our cost of interest-bearing deposits declined 14 basis points from the prior quarter as we continue to grasp -- as we repriced our deposits in response to the Fed's ongoing rate cuts. So we remain pleased with our continued deposit growth while, at the same time, reducing deposit costs. And noninterest-bearing deposits represented 26% of average deposits in the first quarter, with 58% of deposits in checking accounts.

Our liquidity remains strong with loan-to-deposit ratio of 85% at March 31 and reliance on wholesale funding of less than 5%. Turning to revenue on Page 13. Net interest income FTE totaled $107.1 million in the first quarter, which was a decline of $1.7 million from the prior quarter as a reduction of $4.3 million in interest income more than offset a decline of $2.6 million in interest expense. Net interest margin in the first quarter of 3.52%, reflecting transfer of acquired loans to loans held for investment.

So core net interest margin was unchanged from the prior quarter, while total net interest margin declined by four basis points. And now Duane will provide an update on noninterest income.

Duane Dewey -- President and Chief Operating Officer

Thank you, Tom. As shown on Page 14, overall, it was a solid quarter for noninterest income, which totaled $65.3 million, up 37.2% linked quarter and 57.3% year over year. For the quarter, noninterest income represented $38.6 million of Trustmark's revenue, demonstrating a solid diversified revenue stream. Our mortgage banking group led the way for the quarter with strong production totaling $457.2 million, which is down seasonally on a linked-quarter basis but up 61.3% when compared to the first quarter of last year.

Of this production, 59% was purchased monies and 41% was refi. Gain on sales of loans for the quarter totaled $14.3 million, which is an increase of $6.4 million on a linked-quarter basis. Overall, mortgage banking revenue in the first quarter totaled $27.5 million, and that includes hedge and effectiveness of a positive $9.9 million, a very nice quarter in mortgage. Other noninterest income areas of note for the quarter included our insurance group, which continues to show steady production and growth.

We're reporting quarterly revenue of $11.6 million, which is a seasonal increase of 23.3% linked quarter and 6% year over year. Similarly, our wealth management group reported a 10% on a linked-quarter basis increase and 14% year over year, reflecting some of the investment we've made in that business over the last two years. Finally, given the economic environment offsetting some of the improvement noted, service charges on depository accounts and bankcard and other fees are down on a linked-quarter and year-over-year basis. Louis will now cover noninterest expense and capital management.

Louis Greer -- Chief Financial Officer

Thank you, Duane. As you can see on Page 15, you see a detail of our noninterest expenses broken out between core and noncore, as Jerry mentioned. Our core noninterest expense totaled about $110 million in the first quarter, an increase of about 2.5%, which is in line with our previous guidance. The increase is primarily related to seasonal increases in payroll taxes and higher insurance commissions.

Noncore expenses totaled about $13.6 million, an increase of $11.2 million from the fourth quarter of 2019 due to the credit loss expense for off-balance sheet credit exposure, which totaled $6.8 million and a onetime $4.4 million charge for our voluntary early retirement plan completed in the first quarter. In the second quarter, we expect expenses to remain relatively flat with the first quarter as benefits of our voluntary early retirement program will be offset by expenses related to COVID-19 that occurred starting in the second quarter. Trustmark remains well-positioned from a capital position, as noted on Page 16. On March 9, as Jerry indicated, as the breakout of COVID-19 began, Trustmark suspended its share repurchase program.

Prior to March 9, Trustmark repurchased 887,000 shares of common stock for about $27.5 million. I would also note that Trustmark has elected a five-year phase-in transition period related to the CECL methodology for its regulatory capital. Jerry?

Jerry Host -- Chairman and Chief Executive Officer

Great. Thanks, Louis. I trust this discussion of first-quarter financial results has been helpful. In closing, Trustmark remains focused on providing support, advice and solutions to meet our customers' unique needs during the unprecedented circumstances brought about by COVID-19.

Over our 131-year history, we've weathered many storms, and we remain well-positioned to continue serving customers and creating long-term value for our shareholders. At this time, we'd be glad to address any questions.

Questions & Answers:


Operator

Thank you, sir. [Operator instructions] At this time, there appear to be no questions. We'll go and conclude the question-and-answer session. I would now like to turn the conference call back over to Mr.

Jerry Host for any closing remarks. Sir?

Jerry Host -- Chairman and Chief Executive Officer

Thank you, operator. Appreciate it. We have a question coming in. Looks like we may have a question coming in.

Operator

Yes. Yes, sir. I do apologize. It looks like one has come in.

We'll go ahead and take that. It will come from Graham Dick of Piper Sandler.

Jerry Host -- Chairman and Chief Executive Officer

Thank you.

Graham Dick -- Piper Sandler -- Analyst

Hey, guys. This is Graham on for Brad today. How is it going?

Jerry Host -- Chairman and Chief Executive Officer

Well, thank you. And thank you for joining us.

Graham Dick -- Piper Sandler -- Analyst

Just have a couple of quick questions here. So within fee income, you guys, you mentioned your providing some waivers on certain fees and charges to customers. Kind of just wondering how you think that's going to affect fee income here in the near term and then also what kind of activity you're seeing in mortgage so far to start off the second quarter.

Jerry Host -- Chairman and Chief Executive Officer

OK. I'll take the question relative to some of the fee waivers. At this point, we have not seen a significant impact, although we have seen a slight downtrend in some of the deposit-related service charge revenue. We also, and I think this has to do with the shelter in place, have seen transaction volumes on our ATMs and ITMs down a little bit while, at the same time, seeing a tremendous increase in the activity on our online banking systems, both business and consumer.

As far as the mortgage company and the volume there, I'll let Duane comment on that.

Duane Dewey -- President and Chief Operating Officer

Yes. Activity in the second quarter is very strong, both quarter to quarter and year over year. So we're seeing very good, very solid volumes across the board and are optimistic about the quarter in that regard.

Graham Dick -- Piper Sandler -- Analyst

OK, great. And then one more thing kind of on your all's exposures to at-risk industries. So as a country and your all's footprint more specifically starts to come back online, do you guys kind of look at maybe hotels or retail CRE is taking a little longer to ramp up versus restaurants? Or how do you guys sort of weigh the time lines on the given industries and how that might look in terms of future provisioning on those specific industries?

Barry Harvey -- Chief Credit Officer

Sure. This is Barry. I'll be glad to answer that. As it relates to hotels, we do expect for that to be a slower process to get fully ramped back up.

We would look more to an 18- to 24-month period before you would see those functioning at levels that they did prior to COVID-19. And so we continue to monitor those credits closely, offer concessions where we need to in order to serve our customer. But we do expect that to be a slower process for people to return to some type of normalcy as it relates to both leisure travel, as well as business travel. On the retail front, we expect it to return to normalcy a little bit quicker than we do with hotels.

Nonetheless, there'll still be a slowness to it. Those are going to be the two categories that we have exposure to in a meaningful way that we would expect to return much more slowly once the economy begins to open back up, but we do expect retail to return. We do expect the rent abatements that we're seeing that the tenants are requesting and demanding of the landlords to begin to reduce over time, and we don't expect to see the lease arrangements being renegotiated at this point in time.

Graham Dick -- Piper Sandler -- Analyst

OK, great. Then sorry, but one more follow-up, I guess. When you guys put your provision on this quarter, were you using the economic assumptions as of the 31st of March, or did you guys take it into the second quarter at all? Kind of just wondering on, I don't know, if there could be any incremental provision in the second quarter based on change from quarter-end.

Barry Harvey -- Chief Credit Officer

Sure. This is Barry, again. We do use -- in most all of our portfolios have one of several macroeconomic factors being used at a national level, we're using unemployment, prime and GDP. And at southern level, we're also using unemployment vacancy rates.

And the driving factor or loss-driver factor in most all of our portfolio is going to be southern unemployment. But we do use both national factors and southern. The national factors are as of 3/27 from -- this is coming from Moody's Analytics. And then the southern factors are as of 4/1/2020.

And then we use a one-year forecast and then a one-year reversion.

Graham Dick -- Piper Sandler -- Analyst

OK, great. That's super helpful. That's all for me guys. Thanks so much and congrats on second quarter.

Jerry Host -- Chairman and Chief Executive Officer

Thank you.

Operator

[Operator instructions] I do not believe we have any further questions at this time. I will go ahead and hand the conference back over to Mr. Host. Sir?

Jerry Host -- Chairman and Chief Executive Officer

Thank you, operator. We appreciate it. We appreciate all of you joining us today. Obviously, we have long ways to go before we see some trends of normalcy through the COVID-19 pandemic.

The management team here remains very focused on the challenges we have at hand. We look -- each area is looking -- each executive officer is looking at their areas independently, and then we're meeting daily to discuss the overall situation and to look forward to whatever unknowns are out there and be as prepared as we possibly can for those. We are starting to see some glimmer of hope here in the state of Mississippi. The governor has moved us from a shelter-in-place to a safer-at-home process, opening up certain businesses but also maintaining the safety necessary to protect the citizens of the state.

Alabama will open up at the end of April. We're already seeing in both markets an opening of the beaches, which is very important this time a year to the tourism business. So although, as I mentioned, a long way to go, there's positive signs that things are beginning to open back up, and we think that is going to be helpful to the citizens of both states. So again, we appreciate you joining us this morning.

We would anticipate that there is going to be at least another noisy quarter in terms of some of the numbers just because there's so much taking place, but we will be ready to report to you in July on our second-quarter results. Thank you all for joining us, and please stay safe.

Operator

[Operator signoff]

Duration: 29 minutes

Call participants:

Joey Rein -- Director of Investor Relations

Jerry Host -- Chairman and Chief Executive Officer

Barry Harvey -- Chief Credit Officer

Tom Owens -- Bank Treasurer

Duane Dewey -- President and Chief Operating Officer

Louis Greer -- Chief Financial Officer

Graham Dick -- Piper Sandler -- Analyst

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