Trustmark Corporation (NASDAQ:TRMK) Q3 2023 Earnings Call Transcript
Trustmark Corporation (NASDAQ:TRMK) Q3 2023 Earnings Call Transcript October 25, 2023
Operator: Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's Third 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 Corporate Strategy of Trustmark. Please go ahead.
Joey Rein: Good morning. I'd like to remind everyone that a copy of our third quarter earnings release as well as the slide presentation that will be discussed on our call this morning is available on the Investor Relations section of our website at trustmark.com. During the course of our call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We would like to caution you that these forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties, which are outlined in our earnings release as well as our other filings with the Securities and Exchange Commission. At this time, I'd like to introduce Duane Dewey, President and CEO of Trustmark.
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Duane Dewey: Thank you, Joey, and good morning everyone. Thank you for joining us today. 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 solid third quarter with continued loan and deposit growth, a stable net interest income, strong performance in our insurance business, and solid credit quality. As previously disclosed, Trustmark recognized a litigation settlement expense of $6.5 million in the third quarter. With this charge, Trustmark reported a third quarter net income of $34 million, representing diluted earnings per share of $0.56. Including this litigation -- excluding this litigation settlement expense, Trustmark's third quarter net income totaled $38.9 million or $0.64 per diluted share.
During the first nine months of 2023, Trustmark's net income totaled $129.4 million, which represented diluted earnings of $2.11 per share, an increase of 22.7% from the same period in 2022. We continue to focus on cost-saving initiatives to improve efficiency as well as technology to enhance our ability to grow and serve customers. We believe Trustmark is well-positioned to respond to changing economic conditions and create long-term value for our shareholders. Let's take a look at our financial highlights in a little more detail by turning to Slide 3. Loans held-for-investment increased $196.3 million, or 1.6% linked-quarter, and $1.2 billion or 10.6% year-over-year. Deposits during the quarter grew $188 million or 1.3% linked-quarter, and $676.7 million or 4.7% year-over-year.
Net interest income totaled $141.9 million, resulting in a net interest margin of 3.29%, down 4 basis points, linked-quarter. Noninterest income decreased 2.5%, linked-quarter, to $52.2 million, representing 27.4% of total revenue in the third quarter. Noninterest expense in the third quarter totaled $140.9 million. Excluding the litigation settlement expense of $6.5 million, noninterest expense was $134.4 million, up $2.2 million or 1.7%, linked-quarter. Net charge-offs during the quarter totaled $3.6 million and represented 11 basis points of average loans. The provision for credit losses for loans held-for-investment was $8.3 million in the third quarter. Credit quality remained solid during the quarter as the allowance for credit losses represented 1.05% of total loans held-for-investment and 273.6% of non-accrual loans excluding individually evaluated loans at September 30.
We continue to maintain strong capital levels with common equity tier 1 of 9.89% and a total risk-based capital ratio of 12.11%. The Board declared a quarterly cash dividend of $0.23 per share payable on December 15 to shareholders of record as of December 1. At this time, I'd like to ask Barry Harvey to provide some color on loan growth and credit quality.
Barry Harvey: I'll be glad to, Duane, and thank you. Turning to Slide 4, loans held for investments totaled $12.8 billion as of September 30. That's an increase, as Duane mentioned, of $194 million for the quarter. Loan growth during Q3 came from CRE, equipment finance and our mortgage line of business. We do expect continued solid loan growth throughout the remainder of 2023, resulting in mid-single-digit loan growth for the year. Our loan portfolio, as you can see, is well-diversified both by product type, as well as by geography. Looking at Slide 5, Trustmark CRE portfolio is 94% vertical, with 68% in the existing category and 32% in construction land development. Our construction land development portfolio was 80% construction.
Trustmark's office portfolio, as you can see, is very modest at $288 million outstanding, which represents only 2% of our overall loan book. The portfolio is comprised of credits with high-quality tenants, low lease turnover, strong occupancy levels and low leverage. The credit metrics on this portfolio remain extremely strong. Looking at Slide 6, the bank's commercial loan portfolio is well-diversified, as you can see, across numerous industries with no single category exceeding 13%. Looking at Slide 7, our provision for credit losses for loans held-for-investment was $8.3 million during the quarter, which was attributable to: reserving for one individually evaluated credit; a weakening macroeconomic forecast; funding provision for the loan growth that we achieved during the quarter; and net adjustments to our qualitative factors.
The provision for credit losses for off-balance sheet credit exposure was $104,000 for the third quarter. On September 30, the allowance for loan losses for loans held-for-investment were $134 million. Looking at Slide 8, we continue to post solid credit quality metrics. The allowance for credit losses represents 1.05% of loans held-for-investment and 274% of non-accruals excluding those loans that are individually analyzed. In the third quarter, net charge-offs totaled $3.6 million or 0.11% of average loans. Both non-accruals and non-performing assets remain at reasonable levels. Duane?
Duane Dewey: Okay, thank you, Barry. I'd like to ask Tom Owens now to focus on deposits and income statement.
Tom Owens: Thanks, Duane, and good morning everyone. Turning to deposits on Slide 9. We had another good quarter with our deposit base continuing to show its strength amid an environment that remains exceptionally competitive. As Duane said, deposits totaled $15.1 billion at September 30, which was a linked-quarter increase of $188 million or 1.3% and a year-over-year increase of $677 million or 4.7%. The linked-quarter increase was driven by strong fundamentals, with growth in personal balances of $288 million, non-personal balances of $148 million and brokered balances of $125 million. That growth was offset somewhat by a decline in public fund balances of $373 million due to seasonal and other factors. Regarding mix, time deposits continued to increase linked-quarter, with promotional CDs up $344 million and brokered CDs up $113 million.
As of September 30, our promotional time deposit book totaled $1.23 billion, with a weighted average rate paid of 4.65% and a weighted average remaining term of about six months. Our brokered deposit book totaled $728 million, with an all-in weighted average rate paid of about 5.42% and weighted average remaining term of about five months as of September 30. Also regarding mix, the rate of decline in noninterest-bearing DDAs slowed meaningfully during the third quarter, down linked-quarter by $141 million or 4.1%. Noninterest-bearing DDA represented 22% of the deposit base as of September 30. Our cost of interest-bearing deposits increased by 43 basis points from the prior quarter to 2.39%. Turning to Slide 10, Trustmark continues to maintain a stable, granular and low-exposure deposit base.
During the quarter, we had an average of about 464,000 personal and non-personal deposit accounts excluding collateralized public fund accounts with an average balance per account of about $26,000. Average accounts for the quarter increased by about 3,000 or at an annualized rate of about 3%. As of September 30, 65% of our deposits were insured and 12% were collateralized, meaning that our mix of deposits that are uninsured and uncollateralized was essentially unchanged linked-quarter at 22%. We maintain substantial secured borrowing capacity, which stood at $5.7 billion at September 30, representing 170% coverage of uninsured and uncollateralized deposits. Our third quarter total deposit cost of 1.84% represented a linked-quarter increase of 36 basis points and a cumulative beta cycle-to-date of 33%.
Forecast for the fourth quarter is for an increase in deposit cost to 2.12%, which would represent a cycle-to-date beta of 39%. Forecast reflects market implied forward interest rates with the Fed remaining on hold for the remainder of the year, with the top of the target range for the Fed funds rate at 5.5%. Turning our attention to revenue on Slide 11. As Duane said, net interest income, FTE, decreased by $1.4 million linked-quarter, totaling $141.9 million, which resulted in a net interest margin of 3.29%. Net interest margin decreased by 4 basis points linked-quarter, as changes in asset rate and volume substantially offset changes in liability, rate and volume. Turning to Slide 12. Our interest rate risk profile remained essentially unchanged as of September 30, with substantial asset sensitivity driven by loan portfolio mix with 49% variable coupon.
During the third quarter, the weighted average maturity of the cash flow hedged portfolio shortened slightly to 2.9 years, and the weighted average received fixed-rate increased to 3.16%. We entered into $25 million notional or forward-starting swaps, which brought the portfolio notional at quarter-end to $975 million. The cash flow hedging program substantially reduces our adverse asset sensitivity through potential downward shock in interest rates. Turning to Slide 13. Noninterest income for the third quarter totaled $52.2 million, a $1.3 million linked-quarter decrease and a $382,000 decrease year-over-year. The linked-quarter decrease was driven primarily by a decrease in bank card and other fees of $700,000 and by a decrease of -- in other net of $1.3 million, which was essentially normalization from an elevated level in the second quarter, that was driven by non-recurring income recognition.
Those linked-quarter decreases were offset somewhat by increases in service charges on deposit accounts of $379,000 and insurance commissions of $539,000. For the quarter, noninterest income represented 27.4% of total revenue, continuing to demonstrate a well-diversified revenue stream. Now looking at Slide 14, mortgage banking revenue totaled $6.5 million in the third quarter, a $142,000 decrease linked-quarter, driven by a $493,000 increase in amortization of the mortgage servicing assets, which was substantially offset by a $152,000 increase in servicing income and a $338,000 reduction in negative net hedge ineffectiveness. Year-over-year, mortgage banking declined by $418,000, driven primarily by reduced gain on sale. Mortgage loan production totaled $390 million in the third quarter, a decrease of 9.6% linked-quarter and a decrease of 23.3% year-over-year.
Retail production mix remained strong in the third quarter, representing 76% of volume or about $295 million. Loans sold in the secondary market represented 81% of production, while loans held on balance sheet represented 19%. Gain on sale margin decreased by 3 basis points linked-quarter to 1.21%. And now I'll ask Tom Chambers to cover noninterest expense and capital management.
Tom Chambers: Thank you, Tom. Turning to Slide 15, you'll see a detail of our total noninterest expense. Adjusted noninterest expense was $134 million during the third quarter, a linked-quarter increase of $2.4 million or 1.9%, mainly driven by an increase in salary and employee benefits of $726,000 as a result of higher salary expense. Other expense increased by $1.4 million, resulting from an increase of FDIC assessment expense of $1.2 million. In addition, services and fees decreased $382,000 due to lower professional and consulting fees during the quarter. As noted on Slide 16, Trustmark remains well-positioned from a capital perspective. As Duane previously mentioned, our capital ratios remained solid, with a common equity tier 1 ratio of 9.89%, and a total risk-based capital ratio of 12.11%.
Trustmark did not repurchase any of its common shares during the second quarter -- during the third quarter. Although we have a $50 million authority for the remainder of 2023 under our Board-authorized stock repurchase program, we are unlikely to engage in-stock repurchase in a meaningful way. Our priority for capital deployment continues to be organic. Back to you, Duane.
Duane Dewey: Well, thank you, Tom. Turning to Slide 17, let's look at our outlook. First, let's look at the balance sheet. We're expecting loans and deposits to continue to grow mid-single-digits for the year. Security balances are expected to decline in high-single-digits for the year as cash flow runoff of the portfolio is not reinvested, which of course is subject to the impact of changes in market interest rates. Moving on to the income statement, we're expecting net interest income to grow high-single-digits full year '23, which is driven by earning asset growth and reflects a full year net interest margin in the high 3.20%-s based on the current market implied forward interest rates. The total provision for credit losses, including unfunded commitments is dependent upon future loan growth, the current macroeconomic forecast and the credit quality trends.
Net charge-offs requiring additional reserving are expected to be nominal based on the current economic outlook. From a noninterest income perspective, insurance revenue is expected to increase high-single-digits full year with wealth management expected to increase low-single-digits. We're expecting service charges and bank card fees to increase low-single-digits, which is offset somewhat by lower customer derivative fees. Mortgage banking revenue is expected to decline low-single-digits for the year. Adjusted noninterest expense is expected to increase mid-single-digits for the year. This reflects general inflationary pressures, added talent throughout our system as well, but it is also subject to the impact of commissions in the various lines of business.
We remain intently focused on our FIT2GROW initiatives as discussed throughout 2022 and 2023. Our Atlanta-based Equipment Finance division continues to gain traction as its portfolio has grown to $191 million as of 9/30. We have implemented numerous technology advancements, which will continue into '24 and '25, all of which are designed to improve efficiencies. Moving into Q4, we're intently focused on cost-saving initiatives that will reduce the rate of expense growth in coming quarters. In addition, work continued on the design of our sales-through-service process, which will be implemented across the retail branch network in '24. We believe these actions will enhance Trustmark's performance and build long-term value for our shareholders.
Finally, we will continue a disciplined approach to capital deployment with a preference for organic loan growth and potential M&A. We will continue to maintain a strong capital base and implement corporate priorities and initiatives. With that, at this time, I'd like to open the floor up to questions.
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