Q3 2021 Trustmark Corp Earnings Call

Good morning, ladies and gentlemen, and welcome to Trustmark corporations 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.

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As a reminder, this call is being recorded it is now my pleasure to introduce Mr. Joey Rein director of corporate strategy at Trustmark. Please go ahead.

Good morning.

To remind everyone that a copy of our third quarter earnings release as well as the slide presentation that will be discussed on the call. This morning is available on the Investor Relations section of our website at Trustmark Dot com. During the course of our call management may make forward looking statements with the meaning of the private Securities litigation.

<unk> 1995, we would like to caution 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.

I would like to introduce Duane Julie <unk>, President and CEO of Trustmark.

Thank you Joe and good morning, Thanks for joining us.

With me. This morning are Tom <unk>, our CFO, Barry Harvey, our Chief credit and operations Officer, and Tom Chambers, Our Chief Accounting Officer.

Turning to slide three let's review the third quarter highlights.

For the third quarter 2021, Trustmark reported net income of 21.2 million or <unk> 34.

Diluted share.

These results include costs of the voluntary early retirement program, which will reduce net income by $4 3 million or approximately seven cents per diluted share.

Also blended this quarter wasn't a settlement to resolve allegations by regulatory authorities regarding fair lending matters, which reduced net income by 5 million or approximately eight cents per share.

Together these items reduced net income by $9 3 million or approximately 15 cents per diluted share.

I'd like to take a moment to discuss our recent regulatory settlement.

We believe Trustmark has a strong reputation in the communities, we serve by making products and services available to all consumers and businesses.

We have and continue its been bass our communities through improved products.

Better accessibility as well as providing financial literacy training volunteer hours contributed capital and much more.

The recent settlement, we entered allows us to avoid any distractions and focus on meeting the common goals of breaking down barriers that could prevent anyone from reaching that dream of homeownership.

We look forward to continued progress in the Memphis market as well as all communities we serve.

From a financial perspective, we do not anticipate any material negative impact to earnings from the settlement. While we are hopeful that our efforts to build strong communities has a positive impact on all.

Now getting back to a review of the third quarter.

Loans held for investment increased 22 million, 4.2% from the prior quarter and $327 2 million or three 3% year over year.

Deposits increased 298 million linked quarter and $1 7 billion from the prior year.

Investment Securities increased $470 8 million from the prior quarter as excess liquidity was deployed.

Net interest income excluding interest and fees on PPP loans increased $2 9 million or two 9% from the prior quarter.

September 30, non interest income totaled 50, $154 1 million and represented 35, 5% of total revenue.

Adjusted non interest expense totaled $116 6 million in the third quarter 8.3 increased from the prior quarter.

Our credit quality continues to remain solid as recoveries exceeded charge offs by $2 5 million in the third quarter.

Provisions for credit losses, net totaled a negative $3 5 million for the quarter and reflects improved credit loss expectations.

We maintained strong capital levels with a common equity tier one capital ratio of 11.68% and a total risk based capital ratio of 14.0 or 1%.

During the third quarter, Trustmark repurchased $9 7 million or approximately 319000 shares of common stock.

As of September 30th Trustmark had $65 4 million in remaining authority under our existing repurchase program that walks fire at December 31st of this year.

The board of directors declared a quarterly cash dividend of 23 cents per share payable December 15 to shareholders of record on December 1st.

Now Barry Harvey will provide some color on loan growth and credit quality.

Thank you Duane I'm looking on to slide four our loans held for investments totaled 10.2 billion.

And so a 930, which reflects an increase as Dwayne mentioned of 22 million from the prior quarter and $327 million year over year.

We experienced growth in both non farm non residential.

And one to four family mortgage portfolios.

While the overall CRE portfolio was down approximately 75 million.

Due to significant scheduled and non scheduled pay offs, we continue to see very strong production in this area.

Moving on to slide five.

Trustmark CRE portfolio is approximately.

Two thirds existing and one third construction land development.

Construction loan development book is 78%.

Struction or vertical.

The bank's owner occupied portfolio as you can see has a nice mix between real estate types as well as industries.

Looking at slide six.

<unk> commercial portfolio is well diversified across numerous industrial segments with no single category exceeding 12%.

Typically these loans are well secured and governed by a formulaic borrowing bases coveted to protect both the income statement and the balance sheet.

Turning to slide seven.

We have minimum exposure as you can see to restaurants and energy Trustmark has never been in the high risk lending business.

And with limited our exposure today being limited the $13 $6 million and one credit.

The bankers has also underwritten both hotel and retail CRE and a very very conservative manner manner historically.

We've been extremely pleased to see how well our credits and COVID-19 impacted interest rates have performed over time.

Moving to slide eight.

We conducted during the quarter and analysis of borrowers with outstanding balances of $1 billion or more and Covid impacted industries as well as borrowers and other selected categories such as churches senior living health care facilities that potentially have been impacted to an extent.

Bob Covid within the COVID-19 impacted industries, we reviewed 98% of our hotel book, 71% of the retail portfolio and 54% of the restaurant credits as a result of this review no credits were downgraded to the criticized category.

And approximately $20 million.

Outstanding were upgraded from the criticized category to the pass category.

Looking at slide nine are.

Our allowance for credit losses remained relatively unchanged from the prior quarter.

Zarb calculation included.

Decreases resulting from credit quality improvements in both the Covid impacted industries.

As well as quantitative changes due to the improving economic forecast.

The calculation increased as specific reserves were added for individually analysed credits at September 30th.

2021, the allowance for credit losses on loans held for investments totaled $104 million or one point or 2%.

Turning to slide 10.

You can see we continue to post solid asset quality metrics at timber.

As of September 30, our allowance for credit losses represented 151% of non accruals, excluding those loans that were individually evaluated.

And recoveries exceeded charge offs, that's due I mentioned about $2 $5 million during the quarter.

The other real estate totaled $6 2 million Thats, a $3 $2 million decrease for the quarter.

And a $10 million decline from the prior year.

Nonperforming assets increased 11, 6 million linked quarter, and $2 3 million year over year.

Looking at Slide 11, our Paycheck protection program portfolio continues to decline on September 30 of 2021, our PPP loans totaled $46 5 million net of deferred loan fees and cost of $800000.

Right.

Thank you Barry I'd now like to ask Tom Owens to discuss our deposit base net interest margin and noninterest income as we look to the liability side of the balance sheet.

Thanks, Dwayne and good morning, everyone.

Looking at Slide 12 deposits totaled $14 9 billion at September 30th two.

$291 million increase linked quarter, and a $1 7 billion dollar increase year over year.

Having said that we had some unusually large balance increases among some of our larger depositors during the quarter that will likely prove to be transitory and create a headwind to deposit growth during the fourth quarter.

So none of that activity, we continue to see a normalization and deposit growth rates.

<unk> continues to recover.

Our cost of interest bearing deposits declined five basis points from the prior quarter to total 2014 basis points and we continue to maintain a favorable deposit mix with 33% of balances and noninterest bearing deposits.

Turning to revenue on slide 13, net interest income FTE totaled $101 2 million in the third quarter, resulting in a net interest margin of $2 57, and representing a linked quarter decrease of $21 2 million.

Interest and fees on PPP loans totaled $1 5 million, which was a decrease of $24 million linked quarter, reflecting the accelerated recognition of $18 6 million in origination fees in the second quarter, driven by the sale of $354 million of loans.

The decline in PPD interest and fees was the primary driver of the linked quarter decline in NIM from $3 16 in the second quarter to $2 57 in the third quarter.

Core net interest income FTE was $99 7 million.

Which was an increase of $2 9 million linked quarter, driven primarily by the increase in security balances and the extra day of interest accruals during the quarter.

Core NIM was $2 90, a decline of four basis points quarter, which was driven primarily by the increase in security balances as the five basis points decline in interest bearing deposit cost largely offset the five basis point decline in our core loan yield.

Turning to slide 14, noninterest income for the third quarter totaled $54 1 million or $2 $3 million linked quarter decrease of $19 6 million decrease year over year.

Linked quarter and year over year decreases are primarily attributable to lower mortgage banking revenue.

Service charges on deposit accounts continued to rebound during the third quarter from the low of the first quarter as depositors continue to draw down excess balances.

For the quarter noninterest income represented 35, 5% of Trustmark revenue continuing to demonstrate a well diversified revenue stream.

Yeah.

Looking at 515 mortgage banking revenue in the third quarter totaled $14 million or $3 3 million dollar decrease linked quarter, and a $22 $4 million decrease year over year.

Loan production remained strong at $709 million in the third quarter, but declined three 8% linked quarter and 20% year over year from historically high level.

Retail production production remained strong in the third quarter, representing 79% of volume were $557 million.

And sold in the secondary market represented 73% of production.

It's held on balance sheet represented 27%.

Gain on sale margin declined about 17% linked quarter from 315 basis points in the second quarter to 262 basis points in the third quarter.

And now I'll ask Tom Chambers to cover noninterest expense and capital management.

Thank you Tom I'll be glad to turning to slide 16, you see the detail of our noninterest expenses broken out between adjusted other and total adjusted.

Adjusted noninterest expense totaled $116 $6 million in the third quarter.

3% increase from the prior quarter.

Salaries and employee benefits increased $4 $5 million of linked quarter, excluding the $5 $6 million in charges related to a voluntary early retirement program salary and benefit expenses declined $1 1 million from the prior quarter.

As noted on slide 17, Trustmark remains well positioned from a capital perspective, with our common equity tier one capital ratio of 11, 668%.

Total risk based capital ratio of 14, 1% as of September 32021.

During the third quarter, we repurchased nine $7 million for approximately 319000 shares of common stock.

At September 30th we had $65 $4 million remaining under our existing stock repurchase plan, which expires December 31 2021.

Well he will now cover our outlook commentary on slide 18.

Thank you Tom Let's review our outlook from a balance sheet perspective, we're expecting loans held for investment to grow low to mid single digits for the full year 2021.

With continued headwind in the remainder of the year from accelerated repayment activity in the commercial real estate book.

Our security balances are targeted at one 8% to 25% of earning assets subject to changes in market conditions.

Deposit growth.

It is expected to continue to flatten out during the remainder of the year.

We're expecting the net interest margin to remain under pressure from the low interest rate environment and excess balance sheet liquidity.

Our core net interest income is expected to stabilize during the remainder of the year as core earning asset growth offsets continued modest linked quarter compression in core net interest margin.

Based on our current outlook, the total provision for credit losses, including including unfunded commitments is expected to remain and mine with the third quarter results for the remainder of the year net charge offs are expected to be immaterial for the remainder of 'twenty one based upon the current economic outlook.

From a non interest income perspective, we expect service charges and bank card fees rebound modestly from depressed levels.

The economy emerges from the Covid crisis.

Mortgage banking is expected to continue trending lower on moderating mortgage production and a lower gain on sale margin Wow.

Wealth management and insurance are both expected to grow by mid single digits for the full year 2021.

Adjusted noninterest expense is expected to increase by low single digits for the full year subject to the impact of commissions in mortgage insurance and wealth management.

We'll continue to work on initiatives like the voluntary retirement program and market optimization to identify further process improvement opportunities.

So with that that concludes our prepared comments and we'll open the floor for questions at this time.

[laughter].

We will now begin the question and answer session.

Ask a question you May press Star then one on a touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at.

At this time, we will pause momentarily to assemble our roster.

And the first question comes from Graham <expletive> with Piper Sandler. Please go ahead.

Hey, good morning, guys.

Alrighty.

So I think last quarter, you mentioned that you're expecting some some larger repayments to get pushed into 2022.

And I'm just wondering if you're still expecting that to occur and then also if it does what kind of.

Level of loan growth you might be anticipating.

I guess with mid single digit be reasonable given what you said earlier on the strong production Youre seeing.

And Greg This is Barry.

I'd say that its correct. We have we're in the process of fully analyzing all of what occurred during Q3.

And really for the first three quarters of the year forecasting out the remainder of the forecasting out Q4 cohorts forecasting out 2022 and.

We have seen quite a bit of the expected payoffs to occur within our CRE book and they and but what we've also seen a while we've seen quite a bit of it occur. We've also seen a meaningful amount slot into into the later part of this year and then of course and in the case a COO.

Three in Q4 Q3, we know some slid into 2022, we expect the same in maybe a little bit extra in 2024.

<unk> Q4 to slot into 2022, so with that in mind I think we still have the similar headwinds for CRA purposes going into 2022, as we did going into 2021, we do have other areas within the organization outside of CRE, where we are very focused on grow.

And we have achieved growth whether it be mortgage loans as you saw growth this quarter public finance is another area, where we've we've chief growth. During 2021, we expect complete the science for both of those in 2022, and then from a C&I perspective, we are entering into a new market bar too.

And we do have a very much a focus on growing C&I and we've acquired some additional resources recently from other institutions that we believe have the opportunity to to grow that book. So we're excited about that possibility and so we while we do know we've got similar headway.

And going into 2022, as we did 21 for CRD. We do have other avenues that we expect to grow and Andy and I think that mid to low single digits is where we'd expect to be for 2022 based on what we know today.

Yeah.

Okay, Great. That's really helpful. Thanks for that and then I guess moving towards expenses I. Just was wondering if the savings from the early retirement program are expected to be reinvested back into Trustmark, maybe through new lending hires or improved pack.

Or do you think actually the expense run rate might be able to take lower in 2022.

I'll I'll start and Tom you can add anything but the answer if you use what you said is exactly correct. I mean, we do expect some opportunity for improvement from a from the reduction in head count and so where we're focused on.

Minimizing higher backs and focus on gaining improvement that being said we are also focused on adding new talent and expanding as Barry noted.

We've got some opportunities on the C&I side to add talent to.

Focus on growth opportunities across all markets.

So with that that could offset some of the benefit from the voluntary retirement program, but we do expect a modest impact a positive impact.

On expenses from that program.

Okay, Great and then I guess, just the last one for me here.

<unk>.

I guess, just assuming you take securities to the upper end of that 2025% range and in loans growing at mid single digit rate I still seems like you guys are going to have a fair amount of excess liquidity next year.

I was just wondering if you guys had any color on how you might plan to deploy this longer term or if it's just kind of a matter of.

Being patient and waiting for higher rates or a better loan growth environment.

Grant this is Tom Owens and I would say the answer is yes.

So the way you pose the question.

So you know as we've discussed on prior calls.

We continue to diligently evaluate the persistence of the deposit surge we experienced during the pandemic and look at trends in those accounts those balances to assess what we think the ultimate effect of integration of them, it's going to be.

We did grow the securities portfolio substantially.

During the third quarter, we were targeting about 22% of earning assets and we came up a little short of that something like 21, and a half a percent or so with some back loaded deposit growth during the quarter.

But yeah, it's reasonable to assume I think that those deposits continued to.

Exactly.

More normal looking effective durations that we will continue to grow the portfolio. So the target range of 20% to 25%.

I think for the for the near term will continue to operate within that that's not to say that longer term, we couldn't go above that but obviously, we'd rather redeploy that liquidity in the form of loans.

And then the securities and so I think it's just going to be mostly a function of those dynamics and then to a lesser extent a function of what the market opportunity is to redeploy.

Okay, Great. That's it for me guys. Thanks for taking my questions. Thank.

Thank you.

Okay.

Yeah.

Yeah.

Again, if you would like to ask a question press Star then one to join the queue.

The next question comes from Jennifer Denver with Suntrust. Please go ahead.

Okay.

Good morning, I Wonder if you could talk about what you're seeing on the M&A opportunity landscape right now.

Good morning, Jennifer this Duane I'll start.

It's very active market, we're seeing a lot of different opportunities across the M&A landscape and lots of different sizes and shapes and edited includes some nonbank type things specialty lenders.

Insurance agencies, a wide range of different things so the M&A opportunity marketplace is very active.

Can you remind us what your kind of opportunities.

Were really targeting right now.

It really hasn't changed since you know earlier in the year. We commented we are still very interested and are the south Eastern U S. A you know either expansion in our markets or.

Our new markets.

The South east.

Tended to kind of categorize it by $500 million 5 billion.

Would be the types of organizations, we'd be interested in.

I would also add that again, you know things are some of the specialty lending space is something that we have some interest in and then we are looking at our fee businesses as well our insurance and wealth management.

Additive to what we currently offer or a new markets and so with all the above are on our radar screen.

Thank you.

Okay.

This concludes our question and answer session I would now like to turn the conference back over to Duane Dewey for any closing remarks.

Okay, well. Thank you for joining us this morning, and we hope our information was helpful to you and we look forward to reconnecting after at the end of the fourth quarter everybody have a great rest of the day. Thank you.

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

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