Q3 2022 Trustmark Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the Trustmark corporations third quarter earnings Conference call. At this time, all participants are in a listen only mode.
During the presentation. This morning, there will be a question and answer session to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two 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 Dot 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.
I'd 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 Joe and good morning, everyone and 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 <unk> 69 per diluted share.
Let's look at our financial highlights in a little more detail by turning to slide three.
At September 30.
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 23% linked quarter noninterest income totaled $52 6 million and represented 27, 9% of total revenue in the third quarter.
Noninterest 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 one ratio of 10.63% and a total risk based capital ratio of 12.85%.
The board declared a quarterly cash dividend of <unk> 23 per share payable December 15 to shareholders of record December 1st.
During the third quarter, Trustmark repurchased $8 million or approximately 247000 shares of common stock as of September 30th Trustmark had $75 4 million remaining under its authority and is its existing repurchase program.
It expires December 31st F 'twenty two.
At this time I'd like to ask Barry Harvey to provide color on loan growth and credit quality.
Glad to do why then thank you.
Turning to slide four loans held for investment excluding PPP loans totaled $11.6 billion as of September 30th and increase as do I mentioned.
$641 million linked quarter, or five, 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.
<unk>, reaching Q3 levels, we do expect another solid quarter.
Our loan portfolio continues to be well diversified based upon both product types as well as geography.
Looking at slide five Trustmark 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 bank's phone or occupied portfolio as you can see that's a nice mix between real estate types as well as.
As well as industries.
Turning to slide six.
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 seven.
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 analysed reserves increasing.
And a less positive outlook within the macroeconomic forecast, primarily offset by adjustments to our pandemic reserve.
At September 32020 to the allowance for credit losses on loans held for investment totaled $115.1 billion.
Looking at slide eight we continue to post solid credit economic metrics.
The allowance for credit losses represents 0.99% of loans held for investment.
466%.
Non accrual loans, excluding those that are individually analyzed.
In the third quarter net charge offs totaled $1 million or point out 3% of average loans, both non accruals and.
Net nonperforming assets remained near historically low levels.
Duane.
Okay. Thank you Barry now turning to the liability side of the balance sheet number one small discuss our deposit base and net interest margin.
Thanks, Dwayne and good morning, everyone looking at deposits on slide nine deposits totaled $14 4 billion at September 30th of $345 million decrease linked quarter and $498 million decrease year over year.
The linked quarter increase was driven by 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 $201 million.
The granularity of our deposit base remains strong.
Our cost of interest bearing deposits increased by nine basis points from the prior quarter to 20 basis points we.
We continued 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 Lyft linked quarter with higher average loan balances contributing about $6 6 million the.
The securities portfolio contributed about $1 $7 million since last linked quarter with about $1 4 million due to higher yields and about 300000 due to higher average balances.
The lift was offset by a linked quarter increase in interest bearing deposit cost is about $2 6 million and borrowing cost of about $1 5 million.
Drivers of our continued expansion in net interest margin include lagging realized deposit betas, continuing fed fed rate increases and a 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 four one 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 rate.
As of September 30, the portfolio notional was $675 million with a weighted average maturity of three five years and a weighted average receive 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 200 basis point shock and about 8% for a 300 basis point shock with the benefit in years, two and beyond increasing.
<unk> is our balance sheet continues to reprice.
Yeah.
Turning to slide 12, noninterest income for the third quarter totaled $52 $6 million 647000 dollar linked quarter decrease and at $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 of $209000 increase linked quarter and a 1.8 million dollar increase year over year.
For the quarter noninterest income represented 28% of total revenue continuing to demonstrate our well diversified revenue stream.
Yeah.
Looking at Slide 13, our mortgage banking revenue totaled $6 9 million in the third quarter of $1 3 million dollar 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 remains strong.
Representing 82% of volume or about $414 million.
Yeah.
Yeah.
[noise] 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 consist 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 eight 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 noninterest expense and capital management.
Thank you Tom turning to slide 14, you'll see a detail of our noninterest expenses broken out between adjusted other than total adjusted noninterest expense was $125 $5 million in the third quarter, the linked quarter increase of $3 1 million or two 5% salaries employee benefits.
<unk> expense in the third quarter totaled $72 7 million, a $1 million increase from the prior quarter, mainly due to investments in the Atlanta L. P O and the establishment of the equipment Finance line of business services and fees increased $1 $3 million linked quarter due to due to increased.
Professional fees associated with technology, and our 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 247000 shares of its common stock our share repurchase program may take place through open market or private transactions, depending on market condition.
<unk>.
At management's discretion.
Capital ratios remained solid with a common tier one ratio of 10, 63% and a total risk based capital ratio of 12, 85% at September 30.
<unk> mentioned earlier the board declared a quarterly cash dividend of <unk> 23 per share payable December 15th to shareholders of record on December 1st.
Wayne.
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.
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 we 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.
Asset 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 forecasts 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 Paul.
Folio.
Yeah.
From a non interest income perspective, we expect service charges and bank card fees to move slightly higher.
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, we expect to increase low single digits.
Adjusted noninterest 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.
Early in the earlier this year, we announced fit to grow our comprehensive program of focus innovation and transformation designed to enhance trustmark <unk> 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 <unk>.
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 fit for growth in recent years investments in state of the art technology were made at Trustmark 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.
M 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 will 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 and 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.
Yeah.
Okay.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys is that anytime you're your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from Graham <expletive> with Piper Sandler. Please go ahead.
Hey, good morning, gentlemen.
Good morning.
I just wanted I just wanted to start on loan growth. Obviously, you know great again this quarter I think your guidance for mid teens growth.
Implied it will bounce P grow by anywhere from the mid single digits to low double and still land in that range.
In 2020 to you I guess that's for <unk>.
Yeah.
Trends seem to be really strong I'm just wondering.
But what that what the slowdown is in <unk>. They just pay downs and then as you look ahead into 2023.
With the Atlanta office, starting to contribute now is there any reason for us to think it should slow down from here.
Mid teens level youre expecting for the full year 2022.
Yeah.
And Graham this is Barry I'll I'll 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 pay offs.
As well as anticipated pay offs within our CRE book, and we don't expect that trend to change I do think that the price, but a lot of our a lot of our customers on the CRE side or merchant builders and therefore, they're looking to sell their projects as we're able to obviously the the profit margin in those.
Projects is beginning to come down as interest rates have gone up and there 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 brisker pace as they anticipate maybe they see opportunity for profit 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 standpoint of payoffs in our CRE book and therefore the weed.
We 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 when we see a lot of things that make us.
Be able to have a little bit of concern about too much optimism, we do see projects on the CRE side. Some of the projects that had been discussed for twenty-three or are still on the drawing board, but but the certainty around them as is changing a little bit. So therefore, we do have a little bit of hasn't see about.
New production on the construct and the construction book, we do expect that to slow somewhat and then on the flip side, we have a lot of.
<unk> on the books today that will fund during 2023. So we're optimistic there. We're also optimistic because you mentioned about the the Atlanta L. P O where we've got some very talented resources that we've been able to to procure and.
<unk> will begin to pay dividends as we get into 2023, they're already bringing forth 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 its going to be a function of the economy and how much certain categories.
Lending might slow, including probably a little bit on the commercial side, where 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 is 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.
Yeah no.
Let me add to that just one one additional note Graeme as it relates to Atlanta, and specifically the equipment finance business as noted that's that de Novo startup operation for US we're stepping into it with.
I say caution, but we really want.
Want to understand what we're putting on the books and we will we do expect very significant growth over time, but will.
Measured in 'twenty, three 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'll be a positive contributor in 'twenty three.
Oh early to know exactly how much that might be.
Yeah.
Okay I appreciate that very helpful.
The loan to deposit ratio still pretty manageable at 80%, but it's new.
Meaningfully higher from the high 60% level.
You all saw the end of last year.
How do you plan on funding, which sounds like you know pretty promising growth from here and then I guess longer term do you have it.
A range, where you would like the loan to deposit ratio to rest in a normal operating environment.
So Graham this is Tom Owens.
You know if you go back a few years pre pandemic.
The more normal loan to deposit ratio for us was about 85%.
And what we said back then was we could we could see that going a bit higher say, 90%.
So were work 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 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 beta realized betas going forward here.
Will increase.
So it's really a function of promotional deposit.
<unk> activity.
To accelerate deposit growth.
Okay, Great and then I guess, just you mentioned it on the deposit beta it 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 that this quarter went according to plan or I guess I got to perform better and then how does that impact both of those items that we mentioned last quarter. Yeah, I think we can.
Clearly did outperform in the third quarter.
We are continuing to target for internal modeling purposes, as well as for planning purposes.
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.
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.
And linked quarter deposit cost it would get us to something like a <unk>.
80 basis points or so would put you at like 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 475% at 40%.
Realized beta cycle to date would put you had something like 190 basis points in terms of interest bearing deposit costs by the time you get into the second quarter next year.
Okay, Great. That's very helpful. Thank you.
Yes.
Our next question comes from Jennifer Denver with the Truest Securities. Please go ahead.
Thank you good morning, good morning, Jennifer.
Just wondering on the Atlanta L. P O in the equipment finance business line what.
Do you think the potential is.
Yeah.
For gross that office into that business line over the next you know two or three years.
And Jennifer this is Barry.
I think that what we're seeing today in terms of activity and the industry is very encouraging and I think our from what we can crystal ball.
Next nine to 12 months look very 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 to book those deals at this point in time, but we do believe within the next 30 days will be in a pause.
<unk> to act on those opportunities and the volume is 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's 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 as they.
Adjust their concentration limits and things of that nature, So I think being new in the new in the industry, but with some very experienced savvy.
<unk> associates that we've been able to bring on the board who are well bring on 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 I asked the growth comps will continue to monitor that but I think in the long run 10% percentage of our.
Total loan book is a very reasonable place to be.
Okay, great. Thank you.
Our next question comes from it.
Catherine Mueller with K B W. Please go ahead with your question.
Thanks, just a follow up on the margin question.
If you could update us on your thoughts on loan betas as well, it's like that came in.
Hi, this quarter and you talked about about a 50% beta in the past is that still the level that youre expecting.
You know where you can see in cycle, where are you expecting cycled it Ain't linear.
With your with your a bad assumption.
Yeah. Catherine this is Tom and I think 50% is still a good assumption by the time you get to the top of the rate cycle and again as a market implied forwards habit.
Hum.
Priced by saying second quarter of next year.
So the dynamic there is.
You know 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 know you really haven't seen yet.
The full effects of.
Promotional deposit campaign activity.
So the way I would think about it is you know the market has 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 <unk>.
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 stock strong growth in net interest income.
Great. Okay, Yes, that's very helpful.
And then.
Is that kind of playing with.
The guidance, you've given them I'm getting our margin came in at $3 70 range.
For this next quarter, which is up another 20 basis points does that feel right or and then you kind of around there and then come down a little bit or had.
Yeah.
Also precise out or defer.
I fully expect that you will see you will see.
It says you know you're you've kind of got into 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 gross you know faster.
Faster growth in the loan book with a security balance is just kind of Platt or you can get all that make shift.
So if both and I think we probably will see securities balances declined somewhat.
If you look at the first half of this year, we still had a bug and to excess liquidity that we're we're putting to work clearly you know the the second quarter in third quarter growth has been really strong and so from a liquidity per perspective, I think it's reasonable to assume.
We may let the securities portfolio of cash flow between the end of this year and maybe throughout next year the portfolio throws off about $35 million per month in cash flow and so you know I would say between now and the end of twenty-three that might be a $400 million or.
So a decline in bulk balance.
Alright.
Alright, thank you for calling.
Thank you Yep.
Our next question comes from Joe <unk> with Raymond James. Please go ahead with your question.
Good morning.
Hey, Joe.
So you have your prepared remarks, you know so it would be in turtle investments that you've made and the different technologies.
Wondering what's remaining on the wish list that you know what you'd like to attack next and you expect savings from future initiatives upload the bottom line or will they be reallocated.
And Joe This is Barry I'll start with what's on the wish list going forward. We've got a a couple of of applications that will be migrating from one vendor over to our new system and that'll be happening and.
[noise] barge February of 2023, we've also got a an older.
Deposit and customer system that will be looking to replace just like we did on the long side actually same same system that that we have left on the deposit and the customer side. So we will take that opportunity in the near term to begin working on that.
Where we've been in the process of looking at what the what the solutions are out there that we might have interest and we've narrowed it down I think we'll move forward fairly quickly to select a vendor for both deposits and customer and then that's another kind of be the start of short process. It will be something that will occur.
Over an 18 or 24 month period following selection contraction 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 and then I think will be 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 next several years.
And just to add quickly we noted in the fourth quarter will be migrating to a comprehensive loan process system that is a pretty significant adjustment for the company and and we believe will be a transformational in terms of efficiency and other things came through that process.
So.
That's already in process and ready to go in the fourth quarter, Yeah, and Joe that's that is the loan origination system is something we've been working on is do I mentioned for well over a year now and we're in some of the the testing phases now two began 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 two two of next year and within that solution. There's a lot of.
Improvements for Trustmark in terms of the ability to to work with customer serve customers internal reporting a lot of a lot of efficiencies to be gained that we'll need to ring out of that new solution as we go through 2023.
Yeah, and I I appreciate it so with this new loan origination system your branch consolidation.
Plan.
How should we think about <unk> expenses kind of training into 2023.
Well, that's yes expense.
Management and efficiency, it's been a major major focus of our fit to grow program. We we found it.
Challenging time, I I guess in that arena, just simply the inflationary pressures wage pressures and you know at the same time trying to initiate growth initiatives like Atlanta equipment financed the system changes and so on we haven't 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 will be given some additional guidance and what we see in twenty-three and the efficiencies and things that are very noted with some of these system changes as well as you know a handle and it may be less new additional associate compensation and so.
Someone in the process so as hot as I look into twenty-three, we'll get we'll give additional guidance at the end of the fourth quarter.
Perfect I appreciate it and then you know.
You had mentioned the staffing in Atlanta and for your equipment Finance Division are you all stuffed up for those programs are you still looking to hire more people there.
So.
And the Atlanta L. P out today, we have a commercial real estate residential real estate corporate banking and equipment Finance total about 12 to 14 associates currently we will definitely be adding equipment financed teammates here over time.
Want to get the program up and going and we have a pretty sees and staff of six or so associates at this point will be adding more as we move forward. The other businesses of all kind of evaluate growth and to grasp trajectory and those businesses.
And we will add staff Accordant Accordingly, I don't see significant ads at this point in time.
Great I appreciate your 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.
Right. Thank you all for her 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's now concluded. Thank you for attending today's presentation you may now disconnect.