Trustmark Corp
NASDAQ:TRMK
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Trustmark Corp
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Good morning, ladies and gentlemen, and welcome to the Trustmark Corporation's Third Quarter Earnings Conference Call. At this time, all participants are in a 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 my pleasure to introduce Mr. Joey Rein, Director of Corporate Strategy at Trustmark.
Good morning. I'd like to remind everyone that a copy of our third quarter earnings release as well as the slide presentation that we will be discussing on the call this morning is available on the Investor Relations section of our website at trustmark.com.
During the course of our call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We would like to caution you that these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties, which are outlined in our earnings release and our other filings with the Securities and Exchange Commission.
At this time, I'd like to introduce Duane Dewey, President and CEO of Trustmark.
Thank you, Joey. Good morning, everyone. Thank you for joining us. With me this morning are Tom Owens, our Chief Financial Officer; Barry Harvey, our Chief Credit and Operations Officer; and Tom Chambers, our Chief Accounting Officer.
Trustmark had a strong third quarter as reflected by significant loan growth, expansion of the net interest margin, solid performance in our insurance and wealth management businesses and strong credit quality. For the third quarter, Trustmark reported net income of $42.5 million or $0.69 per diluted share.
Let's look at our financial highlights in a little more detail by turning to Slide 3. At September 30, loans held for investments totaled $11.6 billion, an increase of $641.2 million from the prior quarter and $1.4 billion from the previous year. Deposits totaled $14.4 billion, a decrease of $325 million linked quarter and a $497.7 million decrease from this time last year.
Revenue in the third quarter totaled $188.7 million, an increase of $22.8 million or a 13.7% increase from the previous year. Net interest income totaled $139.1 million in the third quarter, an increase of $23.5 million or 20.3% linked quarter. Non-interest income totaled $52.6 million and represented 27.9% of total revenue in the third quarter. Non-interest expense in the third quarter totaled $126.7 million, a 2.4% increase from the prior quarter.
Credit quality remained solid this quarter as net charge-offs represented three basis points of average loans. The allowance for credit losses for loans held for investment represented 466% of non-accrual loans excluding individually evaluated loans. We continue to maintain strong capital levels with a Tier 1 ratio of 10.63% and a total risk-based capital ratio of 12.85%.
The Board declared a quarterly cash dividend of $0.23 per share payable December 15 to shareholders of record December 1. During the third quarter, Trustmark repurchased $8 million or approximately 247,000 shares of common stock. As of September 30, Trustmark had $75.4 million remaining under its authority in its existing repurchase program that expires December 31 of 2022.
At this time, I'd like to ask Barry Harvey to provide color on loan growth and credit quality.
Be glad to Duane. And thank you. Turning to Slide 4. Loans held for investment excluding PPP loans totaled $11.6 billion as of September 30, an increase as Duane mentioned of $641 million linked quarter or 5.9% and $1.4 billion or 13.9% from the prior year. We're extremely excited about the third quarter's loan growth that occurred in almost every category. While we don't see Q4 loan growth reaching Q3 levels, we do expect another solid quarter. Our loan portfolio continues to be well diversified based upon both product type as well as geography.
Looking to Slide 5. Trustmark's CRE portfolio is 92% vertical, with 60% in the existing category and 40% in the construction land development. Our construction land development portfolio is 78% construction. The banks on our occupied portfolio as you can see, has a nice mix between real estate types as well as industries. Turning to Slide 6. The bank's commercial portfolio is well diversified as you can see across numerous industry segments with no single category exceeding 14%.
Moving now to Slide 7. Our provision for credit losses for loans held for investment was $12.9 million in the third quarter. The provision was partially due to reserves related to loan growth, individually analyzed reserves increasing and a less positive outlook within the macroeconomic forecast, primarily offset by adjustments to our pandemic reserve. At September 30, 2022, the allowance for credit losses on loans held for investment totaled $115.1 million.
Looking at Slide 8. We continue to post solid credit economic metrics. The allowance for credit losses represents 0.99% of loans held for investment and 466% of non-accrual loans excluding those that are individually analyzed. In the third quarter, net charge-offs totaled $1 million or 0.03% of average loans. Both non-accruals and net non-performing assets remain near historically low levels. Duane?
Okay. Thank you, Barry. Now turning to the liability side of the balance sheet. Tom Owens, will discuss our deposit base and net interest margins.
Thanks, Duane and good morning, everyone. Looking at deposits on Slide 9. Deposits totaled $14.4 billion at September 30, a $345 million decrease linked quarter and $498 million decrease year-over-year. The linked quarter increase was driven by a normal seasonal decline of $149 million in public fund balances, as well as declines in personal and non-personal balances. The year-over-year decrease was driven primarily by public fund balances, which decreased by $534 million, while personal balances increased by $297 million and non-personal balances decreased by $261 million. So the granularity of our deposit base remains strong.
Our cost of interest-bearing deposits increased by 9 basis points from the prior quarter to 20 basis points. We continue to maintain a favorable deposit mix with 30% of our balances in non-interest-bearing deposits and 64% of deposits in checking accounts.
Turning to Slide 10. Net interest income FTE increased $23.5 million linked quarter. Totaling $139.1 million, which resulted in a net interest margin of 350 basis points, representing a linked-quarter increase of 60 basis points. Higher loan yields contributed about $19.4 million of lift linked quarter with higher average loan balances contributing about $6.6 million. The securities portfolio contributed about $1.7 million of lift linked quarter with about $1.4 million due to higher yields and about $300,000 due to higher average balances.
The lift was offset by a linked quarter increase in interest-bearing deposit costs of about $2.6 million and borrowing cost of about $1.5 million. Drivers of our continued expansion in net interest margin include lag in realized deposit betas, continuing Fed rate increases and shift in earning asset mix.
Turning to Slide 11. The balance sheet remains well positioned for higher interest rates with substantial asset sensitivity driven by loan portfolio mix with 48% variable rate coupon and securities portfolio duration of 4.1 years. During the third quarter, we initiated a cash flow hedging program to manage our asset sensitivity by entering into interest rate swaps, which synthetically convert floating rate loans to fixed rates. As of September 30, the portfolio notional was $675 million, with a weighted average maturity of 3.5 years, and a weighted average received fixed rate of 2.98%. The year one increase in net interest income to immediate interest rate shocks remains asset sensitive at about 3% for 100 basis point shock about 5% for a 200 basis point shock and about 8% for a 300 basis point shock, with the benefit in years two and beyond increasing as the balance sheet continues to re-price.
Turning to slide 12. Non-interest income for the third quarter totaled $52.6 million $647,000 linked-quarter decrease and a $1.5 million decrease year-over-year. The linked quarter and year-over-year changes are principally due to lower mortgage banking revenue, which was offset substantially by increases in other line items.
Service charges on deposit accounts increased $1.1 million linked quarter and $2.4 million year-over-year. Insurance revenue totaled $13.9 million in the third quarter, a $209,000 increase linked-quarter and a $1.8 million increase year-over-year. For the quarter non-interest income represented 28% of total revenue, continuing to demonstrate our well-diversified revenue stream.
Looking at slide 13. Mortgage banking revenue totaled $6.9 million in the third quarter, a $1.3 million decrease linked quarter, and a $7.1 million decrease year-over-year. Mortgage loan production totaled $508 million in the third quarter, a decrease of 25% linked quarter and 28% year-over-year.
Retail production remained strong, representing 82% of volume or about $414 million. Loans sold in the secondary market represented 47% of production, while loans held on balance sheet represented 53%. The majority of loans going into the portfolio consists of 15-year and hybrid ARMs, while we've continued to sell rather than retain our conforming 30-year loan originations. Gain on sale margin declined by about 8% linked quarter from 197 basis points in the second quarter to 181 basis points in the third quarter.
And now, I'll ask Tom Chambers to cover non-interest expense and capital management.
Thank you, Tom. Turning to slide 14, you'll see a detail of our non-interest expenses broken out between adjusted other and total. Adjusted non-interest expense was $125.5 million in the third quarter, a linked quarter increase of $3.1 million, or 2.5%. Salaries and employee benefit expense in the third quarter totaled $72.7 million, a $1 million increase from the prior quarter, mainly due to investments in the Atlanta LPO, and the establishment of the equipment finance line of business.
Services and fees increased $1.3 million linked quarter due to increased professional fees associated with technology and the risk management initiatives. As noted on slide 15, Trustmark remains well capitalized from a capital perspective.
During the third quarter Trustmark repurchased $8 million or approximately 247,000 shares of its common stock. Our share repurchase program may take place through open market or private transactions depending on market conditions and at management's discretion.
Our capital ratios remained solid with a common Tier 1 ratio of 10.63%, and a total risk-based capital ratio of 12.85% at September 30. As Duane mentioned earlier, the Board declared a quarterly cash dividend of $0.23 per share payable December 15 to shareholders of record on December 1. Duane?
Thank you, Tom. Turning to slide 16, let's review our outlook. From a balance sheet perspective, we're expecting loans held for investment to grow in the mid-teens for the year. Note, our Atlanta office is now staffed with a very solid production team, including our equipment finance organization, which is yet to significantly impact loan growth at this point, and will start contributing in coming quarters.
Security balances are still targeted at 20% to 25% of earning assets, likely moving to the lower end of that range. Deposit balances are expected to decline mid-single digits full year driven primarily by lower public fund balances. We're expecting net interest income to grow in the high-teens for the year based on current market and implied forward interest rates.
The total provision for credit losses including unfunded commitments is dependent upon future loan growth and current economic forecast. At this point, we expect the fourth quarter provision to be below the third quarter level. Net charge-offs that require additional reserving are expected to be nominal based on the current outlook and portfolio.
From a non-interest income perspective, we expect service charges and bank card fees to move slightly higher. Mortgage banking revenue is expected to continue trending lower driven by reduced volumes and a lower gain on sale margin. Insurance revenue is expected to increase high single digits full year with wealth management expected to increase low single digits.
Adjusted non-interest expense as previously defined is expected to increase mid-single digits for the year. This reflects general inflationary pressures as well as pressure on wages, additions of new production associates and the impact of conditions on our fee businesses.
Earlier this year we announced FIT2GROW, a comprehensive program of focused innovation and transformation designed to enhance Trustmark's ability to grow and serve customers. As part of this program, we are focusing our community bank efforts on commercial small business and consumer lines of business to provide additional expertise for our customers to enhance profitable revenue growth.
As mentioned we've also expanded geographically with the opening of the Atlanta office, which is focused on commercial real estate, residential real estate, corporate banking and equipment finance. Innovation is also a key component of FIT2GROW. In recent years investments in state-of-the-art technology were made in Trustmark's insurance, wealth management and mortgage banking areas, as well as human resources and accounting systems.
We also made significant upgrades to our mobile banking platform, IT and network and digital marketing programs. Collectively these investments have positioned Trustmark for growth and efficiency. During the third quarter, we successfully converted to a new core loan system and we'll be implementing a state-of-the-art loan origination platform during the fourth quarter. Collectively these investments are designed to provide best-in-class service to customers as well as enhance our productivity and efficiency.
We have accelerated efforts to optimize our branch network reflecting changing customer preferences and the continued migration to mobile and digital channels as announced in the first quarter. To date eight offices have been closed in 2022 and four additional offices are scheduled to close in the fourth quarter.
Finally, we also continued a disciplined approach to capital deployment with a preference for organic loan growth, potential M&A and opportunistic share repurchases. We will continue to maintain a strong capital base to implement corporate priorities and initiatives.
I trust this discussion of our third quarter financial results and outlook commentary has been helpful and insightful and we now open the floor to questions.
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Graham Dick with Piper Sandler. Please go ahead.
Hey good morning, gentlemen.
Good morning, Graham.
I just wanted to start on loan growth. So, obviously, great again this quarter. I think your guidance for mid-teens growth would imply that loan balance could grow by anywhere from the mid-single digits to the low double and still win in that range in 2022. I guess that's for 4Q. The trends seem to be really strong. I'm just wondering what the slowdown is in 4Q? Is it just pay downs? And then as you look ahead into 2023 with the Atlanta office starting to contribute, is there any reason for us to think it should slowdown from the mid-teens level you're expecting for the full year 2022?
Hey, Graham this is Barry. I'll try to address some of those questions. I guess as it relates to Q4, historically, we've seen a large number of unanticipated payoffs, as well as, anticipated payoffs within our CRE book and we don't expect that trend to change. I do think that the price -- a lot of our customers on the CRE side are merchant builders, and therefore they're looking to sell their projects as they're able to.
Obviously, the profit margin in those projects is beginning to come down, as interest rates have gone up and the value of those cash flows have changed slightly. So we do expect for our customers, who have opportunities to move forward and desires to sell their projects, to move forward as they have historically and maybe even with a little bit of risk or pace, as they anticipate maybe the opportunity for profit on those projects will slow over time, if rates do in fact continue to rise.
So for that reason, we do expect to have significant headwinds from a standpoint of payoffs in our CRE book. And therefore, the -- we would expect Q4 to look more like what we saw in Q1 and Q2 on average. And so as opposed to what we saw in Q3. As it relates to 2023, I think we see a lot of opportunity and we see a lot of things that make us, to have a little bit of concern about too much optimism.
We do see projects on the CRE side, some of the projects that have been discussed for 2023 are still on the drawing board, but the certainty around them is changing a little bit. So therefore, we do have a little bit of hesitancy about new production in the construction book. We do expect that to slow somewhat.
And then on the flip side, we have a lot of projects on the books today that we'll fund during 2023. So we're optimistic there. We're also optimistic as you mentioned about the Atlanta LPO, where we've got some very talented resources that we've been able to procure. And those will begin to pay dividends, as we get into 2023. They're already bringing both deals today and we're getting opportunities to put some of those on the books. And obviously that pace will increase, as we get into 2023. So, there's a lot of positives there.
A lot of it's going to be a function of the economy and how much certain categories of lending might slow, including probably a little bit on the commercial side. We're seeing a little less activity today, than we did earlier in the year. We don't know if that trend will continue into 2023, as well. But we're very encouraged about 2023, in terms of loan growth. It's going to be a little bit of a function of, what we can control and then what we can control being what the economy does.
Yes, Graham [ph]. Just let me add to that. Just one additional note Graham, as it relates to Atlanta and specifically the Equipment Finance, business as noted that's a de novo start-up operation for us. We're stepping into it, with I say caution, but we really want to understand what we're putting on the books and we will we do expect very significant growth over time, but we'll be measured in 2023, as we get comfortable and familiar with the type of credit, we're underwriting and the type of business we're putting on the books. So we think it will be a positive contributor in 2023. A little early, to know exactly how much that might be.
Okay. Appreciate it. That’s helpful. The loan-to-deposit ratio is still pretty manageable at 80% but it's moved meaningfully higher from the high 60% level. You saw at the end of last year. How do you plan on funding, which sounds like a pretty promising growth from here? And then I guess, longer term do you have a range where you would like the loan-to-deposit ratio to rest in a normal operating environment?
So, Graham, this is Tom Owens. If you go back a few years pre-pandemic, a more normal loan-to-deposit ratio for us was about 85%. And what we said back then was, we could see that going a bit higher say 90%, so we're quite away from that at this point. As part of our planning for 2023 and beyond, we certainly are taking into consideration the growth from the other businesses in particular equipment finance. And you'll note, that we've had a pretty low realized deposit beta in the third quarter. We do anticipate both due to competitive pressures as well as the need to accelerate deposit growth to fund that future loan growth that our realized betas going forward here will increase. So it's really a function of promotional deposit campaign activity to accelerate deposit growth.
Okay. Great. And then I guess just -- you mentioned it on the deposit beta quickly. Last quarter I think we talked about 45% interest-bearing deposit beta with a bit of a lag and then interest-bearing deposit costs getting to 60 basis points. Would you say this quarter went according to plan, or I guess performed better? And then how does that impact both of those items that were mentioned last quarter.
Yes. I think we clearly did outperform in the third quarter. We are continuing to target for internal modeling purposes as well as for planning purposes. And when you think about promotional deposit campaign activity right how that's going to drive your realized beta. We continue to plan for something like a 40% realized beta for the full cycle market implied forwards have continued to increase. As you know the market has the Fed now at 4.75 or so in the second quarter next year.
So we're planning for fourth quarter increase in linked quarter deposit costs that would get us to something like 80 basis points or so would put you at something like a 20% cycle to date realized beta. And then by the time you get into next year assuming the Fed does go to 4.75% at 40% realized beta cycle to-date would put you at something like 190 basis points in terms of interest-bearing deposit costs by the time you get into second quarter next year.
Okay. Great. That's very helpful. Thank you.
Yes.
Our next question comes from Jennifer Demba with Truist Securities. Please go ahead.
Thank you. Good morning.
Good morning, Jennifer.
Just wondering on the Atlanta LPO and the Equipment Finance business line, what do you think the potential is for growth in that office and for that business line over the next two or three years?
Hey, Jennifer, this is Barry. I think that what we're seeing today in terms of activity in the industry is very encouraging. And I think our from what we can crystal ball the next nine to 12 months look very positive in terms of activity and deal flow. We're even starting to look at some deal flow now even though we're not quite situated to be able to book those deals at this point in time. But we do believe within the next 30 days, we'll be in a position to act on those opportunities. And the volume is robust at this time.
I think from a long-term perspective, from the organization's perspective, we would like to see the equipment finance business one of our specialty lines grow into maybe 10% of the book. Overall, I think it's a very reasonable place for us to aspire to. And the market is going to dictate how quickly we get there. There'll be deal flow opportunities. I think in the Equipment Finance business, it's very common to see some of the larger money center banks sell off portfolios from time-to-time. There may be opportunities to pick and choose some loans, as they adjust their concentration limits and things of that nature.
So I think being new in the industry, but with some very experienced savvy associates that we've been able to bring on the board -- who are well bring on board with the company who are well connected. I think we're going to find a lot of opportunities early and we're just going to be very selective about those opportunities. And as the growth comes, we'll continue to monitor that. But I think in the long run a 10% percentage of our total loan book is a very reasonable place to be.
Okay. Great. Thanks.
Our next question comes from Catherine Mealor with KBW. Please go ahead with your question.
Thanks. Just a follow-up on the margin question, just Tom if you could update us on your thoughts on loan betas as well, so like that came in had this quarter. You've talked about a 50% beta in the past. Is that still the level that you're expecting? And where are you kind of seeing cycle -- where are you expecting cycle to-date loan yields particularly with your Fed assumption.
Yeah. Catherine, this is Tom. And yeah, I think 50% is still a good assumption, by the time you get to the top of the rate cycle. And again as market implied forwards have it priced by say second quarter of next year.
So the dynamic there is, as you think about the fourth quarter you may continue to get some spread widening in terms of net interest margin. But the way we've got it modeled, as I said earlier, you really haven't seen yet the full effects of promotional deposit campaign activity.
So the way I would think about it is, the market's got another 150 basis points of Fed tightening priced in here over the next quarter or two. And so you get the 50% realized beta on the loan side on those increases the beta, on the deposits will be below that but accelerating.
And so I would think here in the fourth quarter you might get some expansion of net interest margin. And then as you get into the first half of next year you might get some compression. But again, when you look at the strong loan growth that we've driven the net result is going to be continued strong growth in net interest income.
Great. Okay. Yeah. That's very helpful. And then, as I'm kind of playing with the guidance you've given I'm getting a margin kind of in the 370 range for this next quarter which is up another 20 basis points. Does that feel right, or -- and then you kind of keep around there and then come down a little bit or how [indiscernible]
Awful, precise audits there, as I said I fully you will see -- it stands to reason you'll see widening of our net interest margin in the fourth quarter before starting to encounter some headwinds in the first half next year, as deposit betas accelerate.
Okay. Fair enough. Fair enough, but at least [indiscernible]. And then on the securities balances you've kind of guided to the lower end of that 20% to 25% range. So, does that mean security balances from here actually probably decline, or is that more just growth -- faster growth in the loan book with the security balances just kind of flat? How are you thinking about that mix shift?
Yeah. So it's both. And I think we probably will see securities balances decline somewhat. If you look at the first half of this year, we still had a fund and excess liquidity that we're putting to work. Clearly the second quarter and third quarter growth has been really strong.
And so from a liquidity perspective, I think it's reasonable to assume that we may let the securities portfolio cash flow between the ends of this year and maybe throughout next year the portfolio throws off about $35 million per month in cash flow. And so I would say between now and the end of 2023 that might be a $400 million or so decline in book balance.
Great. All right. Thanks for the color Tom.
Thank you, Catherine.
Our next question comes from Joe Yanchunis with Raymond James. Please go ahead with your question.
Good morning.
Good morning, Joe.
Good morning.
So you highlighted in your prepared remarks some of the internal investments that you've made and the different technologies. And I was wondering what's remaining on the wish list that what you'd like to attack next? And do you expect savings from future initiatives that follow the bottom line, or will they be reallocated?
Hi Joe this is Barry. I'll start with what's on the wish list going forward. We've got a couple of applications that will be migrating from one vendor over to our new ALS system, and that will be happening and -- March February of 2023.
We've also got an older deposit and customer system that we'll be looking to replace just like we did on the loan side, actually same system that we have left on the deposit and the customer side. So we'll take that opportunity in the near term to begin working on that. Where we've been in the process of looking at what the solutions are out there that we might have interest in. We've narrowed that down. I think we'll move forward fairly quickly to select a vendor for both deposits and customer. And then that's not a kind of -- it's not a short process. It will be something that will occur over an 18 or 24-month period, following selection and contracting with them. But having said that, that is the next big project that we have in front of us, and once we have that done, then I think, we'll be in a much better position to ensure that we've got supported systems that are a long ways away from any type of sunsetting and that we can feel good about for the next several years.
And just to add quickly, we noted in the fourth quarter, we'll be migrating to a comprehensive loan process system that is a pretty significant adjustment for the company and we believe will be transformational in terms of efficiencies and other things gained through that process. So, that's already in process and ready to go in the fourth quarter.
Yes. And Joe, that is -- the loan origination system is something we've been working on as Duane mentioned for well over a year now and we're in some of the testing phases now to begin rolling out the commercial small business portion later this year and it will roll out into the first quarter of next year. We're also building out the consumer solution as well. It will roll out in the latter part of Q2 of next year. And within that solution, there's a lot of improvements for Trustmark in terms of the ability to work with customers, serve customers internal reporting, a lot of efficiencies to be gained that we'll need to ring out of that new solution as we go through 2023.
I appreciate it. So, with this new loan origination system your branch consolidation plan, how should we think about expenses kind of trending into 2023?
Well that's expense management and efficiency has been a major focus of our Fit to Grow program. We found it a challenging time I guess in that arena just simply the inflationary pressures, wage pressures. And at the same time, trying to initiate growth initiatives like Atlanta equipment, finance the system changes and so on. We haven't changed our guidance at this point on expenses to that mid-single-digit range of increase. As we report in the fourth quarter and look into 2023, we'll be giving some additional guidance in what we see in '23 and the efficiencies and things that Barry noted with some of these system changes, as well as a handle and maybe less new additional associate compensation and so on in the process. So, as I look into '23, we'll give additional guidance at the end of the fourth quarter.
Perfect. Appreciate it. And then, you had mentioned the staffing in Atlanta and for your Equipment Finance division. Are you all staffed up for those programs? Are you still looking to hire more people there?
In terms of -- so in the Atlanta LPO today, we have commercial real, estate residential real estate, corporate banking and equipment finance, total about 12 to 14 associates currently. We will definitely be adding equipment finance teammates here over time. I want to get the program up and going and we have a pretty seasoned staff of six or so associates at this point. We'll be adding more as we move forward. The other businesses, we'll kind of evaluate growth and the growth trajectory in those businesses and we'll add staff accordingly. I don't see significant adds at this point in time.
Great. I appreciate the questions.
Thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to Duane Dewey for any closing remarks.
Great. Thank you all for joining us this morning. We hope, you have a good weekend here upcoming and we look forward to being back with you at the end of the fourth quarter. Thanks.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.