Trustmark Corporation (TRMK) Q3 2021 Earnings Report, Transcript and Summary

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 at Trustmark. Please go ahead.

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 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, and thanks for joining us. With me this morning are Tom Owens, our CFO; Barry Harvey, our Chief Credit and Operations Officer; and Tom Chambers, our Chief Accounting Officer. Turning to Slide 3, let's review the third quarter highlights. For the third quarter 2021, Trustmark reported net income of $21.2 million or $0.34 per diluted share. These results include costs of the voluntary early retirement program, which we reduced net income by $4.3 million or approximately $0.07 per diluted share. Also included this quarter was a settlement to resolve allegations by regulatory authorities regarding fair lending matters, which reduced net income by $5 million or approximately $0.08 per share. Together, these items reduced net income by $9.3 million or approximately $0.15 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 to invest in 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 is a positive impact on all. Now getting back to our review of the third quarter, loans held for investment increased $22 million or 0.2% from the prior quarter and $327.2 million or 3.3% year-over-year. Deposits increased $290.8 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 2.9% from the prior quarter. At September 30, noninterest income totaled $54.1 million and represented 35.5% of total revenue. Adjusted noninterest expense totaled $116.6 million in the third quarter, a 0.3% increase 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 1 capital ratio of 11.68% and a total risk-based capital ratio of 14.01%. During the third quarter, Trustmark repurchased $9.7 million or approximately 319,000 shares of common stock. As of September 30, Trustmark had $65.4 million in remaining authority under its existing repurchase program that will expire December 31 of this year. The Board of Directors declared a quarterly cash dividend of $0.23 per share payable December 15 to shareholders of record on December 1. Now Barry Harvey will provide some color on loan growth and credit quality.

Thank you, Duane. Looking onto Slide 4, our loans held for investments totaled $10.2 billion as of 9/30, which reflects an increase, as Duane mentioned, of $22 million from the prior quarter and $327 million year-over-year. We experienced growth in both nonfarm, nonresidential and 1 to 4 family mortgage portfolios. While the overall CRE portfolio was down approximately $75 million due to significant scheduled and nonscheduled payoffs, we continue to see very strong production in this area. Moving onto Slide 5, Trustmark's CRE portfolio is approximately 2/3 existing and 1/3 construction land development. Our construction loan development book is 78% construction 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 6, the bank's commercial portfolio is well diversified across numerous industrial segments with no single category exceeding 12%. Typically, these loans are well secured, governed by formulaic borrowing bases, coveted to protect both the income statement and the balance sheet. Turning to Slide 7, 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 to $13.6 million in one credit. The bank has also underwritten both hotel and retail CRE in a very conservative manner historically. We've been extremely pleased to see how well our credits in COVID-19-impacted industries have performed over time. Moving to Slide 8. We conducted during the quarter an analysis of borrowers with outstanding balances of $1 million or more in COVID-impacted industries as well as borrowers in other selected categories such as churches, senior living, healthcare facilities that potentially have been impacted to an extent by COVID. Within the COVID-19 impacted industries, we reviewed 98% of the 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 of outstandings were upgraded from the criticized category to the pass category. Looking at Slide 9, our allowance for credit losses remained relatively unchanged from the prior quarter. Our reserve 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 analyzed credits. At September 30, 2021, the allowance for credit losses on loans held for investments totaled $104 million or 1.02%. Turning to Slide 10, you can see we continue to post solid asset quality metrics. As of September 30, our allowance for credit losses represented 151% of nonaccruals, excluding those loans that were individually evaluated. And recoveries exceeded charge-offs, as Duane mentioned, by $2.5 million during the quarter. Other real estate totaled $6.2 million. That's 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, 2021, our PPP loans totaled $46.5 million, net of deferred loan fees and costs of $800,000. Duane?

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, Duane, and good morning, everyone. Looking at Slide 12, deposits totaled $14.9 billion at September 30, a $291 million increase linked-quarter and a $1.7 million 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 net of that activity, we continue to see a normalization in deposit growth rates as the economy continues to recover. Our cost of interest-bearing deposits declined 5 basis points from the prior quarter to total 14 basis points and we continue to maintain a favorable deposit mix with 33% of balances in 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 PPP 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 accrual during the quarter. Core NIM was 2.90%, a decline of 4 basis points linked-quarter, which was driven primarily by the increase in securities balances as the 5 basis points decline in interest-bearing deposit costs largely offset the 5-basis point decline in core loan yield. Turning to Slide 14, noninterest income for the third quarter totaled $54.1 million, a $2.3 million linked-quarter decrease and a $19.6 million decrease year-over-year. The 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's revenue, continuing to demonstrate a well-diversified revenue stream. Looking at Slide 15, mortgage banking revenue in the third quarter totaled $14 million, a $3.3 million decrease linked-quarter and a $22.4 million decrease year-over-year. Mortgage loan production remained strong at $709 million in the third quarter, but declined 3.8% linked-quarter and 20% year-over-year from historically high levels. Retail production remained strong in the third quarter, representing 79% of volume or $557 million. Loans sold in the secondary market represented 73% of production, while loans 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 noninterest expense totaled $116.6 million in the third quarter, a 0.3% increase from the prior quarter. Salaries and employee benefits increased $4.5 million linked-quarter, excluding the $5.6 million in charges related to the 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 1 capital ratio of 11.68% and a total risk-based capital ratio of 14.01% as of September 30, 2021. During the third quarter, we repurchased $9.7 million or approximately 319,000 shares of common stock. For the first 9 months of 2021, we repurchased $34.6 million or approximately 1.1 million of our common shares. At September 30, we had $65.4 million remaining under our existing stock repurchase plan which expires at December 31, 2021. Duane 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 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 20% to 25% of earning assets, subject to changes in market conditions. Deposit growth 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 the core net interest margin. Based on the current outlook, the total provision for credit losses, including unfunded commitments, is expected to remain in line with the third quarter results for the remainder of the year. Net charge-offs are expected to be immaterial for the remainder of '21 based upon the current economic outlook. From a noninterest income perspective, we expect service charges and bank card fees to rebound modestly from depressed levels as 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. 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 will continue to work on initiatives like the voluntary retirement program and market optimization to identify further process improvement opportunities. We'll also continue a disciplined approach to capital deployment with a preference for organic loan growth, potential M&A opportunities and opportunistic share repurchases. So with that, that concludes our prepared comments, and we'll open the floor for questions at this time.

[Operator Instructions] And the first question comes from Graham Dick with Piper Sandler.

I think last quarter you mentioned that you were expecting some larger repayments to get pushed into 2022. 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 would mid-single-digit be reasonable given what you said earlier on the strong production you're seeing?

Graham, this is Barry. I would say that is correct. We have -- we're in the process of fully analyzing all of what occurred during Q3 and really for the first 3 quarters of the year, forecasting out the remainder of -- forecasting out Q4 and then of course forecasting out 2022. And we have seen quite a bit of the expected payoffs to occur within our CRE book. But what we've also seen, while we've seen quite a bit of it occur, we've also seen a meaningful amount slide into the later part of this year. And then of course, in the case of Q3 and Q4, Q3 we know some split into 2022. We expect the same and maybe a little bit extra in 2024. Excuse me, in Q4, slide into 2022. So with that in mind, I think we still have the similar headwinds for CRE 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 growing, and we have achieved growth, whether it be mortgage loans, as you saw growth this quarter. Public finance is another area where we've achieved growth during 2021. We expect to be the same for both of those in 2022. And then from a C&I perspective, we are entering into a new market, part 2, and we do have 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 grow that book, so we're excited about that possibility. And so while we do know we've got similar headwinds going into 2022 as we did 2021 for CRE, we do have other avenues that we expect to grow. In the end, I think that mid to low-single digits is where we'd expect to be for 2022 based on what we know today.

Okay, great. That's really helpful. And 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 tech? Or if you think actually the expense run rate might be able to tick lower in 2022?

I'll start and, Tom, you can add anything, but the answer -- what you said is exactly correct. I mean, we do expect some opportunity for improvement from the reduction in headcount. And so we're focused on minimizing hire backs and focused 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. And so with that, that could offset some of the benefit from the voluntary retirement program. But we do expect a modest impact, positive impact on expenses from that program.

Okay, great. And then I guess the last one for me here, I guess just assuming you take securities to the upper end of that 20% to 25% range and then loans growing at mid-single-digit rates, it 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?

Graham, this is Tom Owens, and I would say the answer is yes to the way you posed the question. So 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 and those balances to assess what we think the ultimate effective duration of them is 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 21.5% or so, with some backloaded deposit growth during the quarter. But yes, it's reasonable to assume I think that as those deposits continue to exhibit more normal looking effective durations that we'll continue to grow the portfolio. So the target range is 20% to 25%. I think for the near term, we'll 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 than 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 it.

[Operator Instructions] The next question comes from Jennifer Demba with SunTrust.

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

Jennifer, this is Duane, I'll start. It's a very active market. We're seeing a lot of different opportunities across the M&A landscape and lots of different sizes and shapes. And it 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 kind of opportunities you're really targeting right now?

It really hasn't changed since -- earlier in the year, we commented we are still very interested in the southeastern U.S., either expansion in our markets or new markets across the southeast. We have tended to kind of categorize it by $500 million to $5 billion would be the types of organizations we'd be interested in. I would also add that, again, things, 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, insurance and wealth management additive to what we currently offer, or new markets. And so all of the above are on our radar screen.

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. We hope our information was helpful to you, and we look forward to reconnecting at the end of the fourth quarter. Everybody, have a great rest of the day. Thank you.

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