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. 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.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 three. At September 30, loans held for investment 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 $345 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 3 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 1st. During the third quarter, Trustmark repurchased $8 million or approximately 247,000 shares of common stock. As of September 30th, Trustmark had $75.4 million remaining under its authority in its existing repurchase program that expires December 31st, 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 four. Loans held for investment, excluding PPP loans, totaled $11.6 billion as of September 30th, 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 at slide five, 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 bank's owner-occupied portfolio, as you can see, has a nice mix between real estate types 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. 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
Positive outlook within the macroeconomic forecast, primarily offset by adjustments to our pandemic reserve. At September 30th, 2022, the allowance for credit losses on loans held for investment totaled $115.1 billion. Looking at slide eight, we continue to post solid credit and 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 nine. Deposits totaled $14.4 billion at September 30th, a $345 million decrease linked-quarter and a $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. 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 cost 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 rate.
As of September 30th, 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 a 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 reprice. 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 remains 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 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 8.8% linked quarter from 197 basis points in the second quarter to 181 basis points in the third quarter. 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 benefits 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 remain 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 1st. 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%-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 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 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 commissions on our fee businesses.
Earlier this year, we announced Fit to Grow, a comprehensive program of focus, 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 Fit to Grow. 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, ITM 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 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 continue the 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. To ask a question, you may press star, then one on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time 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. Our first question comes from Graham Dick with Piper Sandler. Please go ahead.
Hey, good morning, gentlemen.
Morning, Graham.
Morning. I just wanted to start on loan growth. Obviously, you know, 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 land in that range in 2022. I guess that's for 4Q. Trends seem to be really strong. I'm just wondering what the slowdown is in 4Q. Is it just paydowns? As you look ahead into 2023, with the Atlanta office starting to contribute, you know, is there any reason for us to think it should slow down from, you know, 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 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.
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 the opportunity for profit on those projects will slow over time if rates do in fact continue to rise. For that reason, we do expect to have significant headwinds from standpoint of payoffs in our CRE book, and therefore, we would expect Q4 to look, you know, 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, you know, 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. Therefore, we do have a little bit of hesitancy about new production in the construction book. We do expect that to slow somewhat. Then on the flip side, we have a lot of projects on the books today that we'll fund during 2023. 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. Those 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. Obviously, that pace will increase as we get into 2023. 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.
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't control being what the economy does.
Let me add to that one additional note, Graham. As it relates to Atlanta and specifically the equipment finance business, as noted, that's a de novo startup 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. 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. We think it'll be a positive contributor in 2023.
Little early to know exactly how much that might be.
Okay, appreciate it. Very helpful. So the loan to deposit ratio is still pretty manageable at 80%, but, you know, it's moved, you know, meaningfully higher from the high 60% level, you all saw the end of last year. How do you plan on funding what sounds like in 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?
Graham, this is Tom Owens. You know, if you go back a few years pre-pandemic, a more normal loan to deposit ratio for us was about 85%.
What we said back then was we could, you know, we could see that going a bit higher, say 90%. We're quite a way 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. You know, 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 betas going forward here will increase. It's, you know, it's really a function of promotional deposit campaign activity to accelerate deposit growth.
Okay, great. I guess just that you mentioned it on the deposit beta quickly. The last quarter, I think we talked about a 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? How does that impact both of those items that we mentioned last quarter?
Yeah, 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. You know, 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. We're planning for a fourth quarter increase in linked-quarter deposit cost 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.
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 cost by the time you get into second quarter next year.
Okay, great. That's very helpful. Thank you.
Yep.
Our next question comes from Jennifer Demba with Truist Securities. Please go ahead.
Thank you. Good morning. Just wondering.
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, you know, two or three years?
Jennifer, this is Barry. I think what we're seeing today in terms of activity in the industry is very encouraging. I think from what we can crystal ball the next nine-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. We do believe within the next 30 days we'll be in a position to act on those opportunities. 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'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, adjust their concentration limits and things of that nature.
I think being new in the industry, but with some very experienced savvy associates that we've been able to 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. As the growth comes, we'll continue to monitor that. I think in the long run, a 10% percentage of our total loan book is a very reasonable place to be.
Okay, great. Thank you so much.
Our next question comes from Catherine Mealor with KBW. Please go ahead with your question.
Thanks. Just to follow up on the margin question, just, Tom, if you could update us on your thoughts on loan betas as well. I feel like that came in high this quarter, and you've talked about a 50% beta in the past. Is that still the level that you're expecting? And you know, where are you kind of seeing cycle? Where are you expecting cycle to date loan yields to go with your Fed assumptions?
Yeah. Catherine, this is Tom. Yeah, I think 50% is still a good assumption by the time you get to the top of the rate cycle. Again, as market implied forwards have it, by, say, second quarter of next year. You know, 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. The way I would think about it is, you know, the market's got another 150 basis points of Fed tightening priced in here over the next quarter or two.
You'll get the 50% realized beta on the loan side on those increases. The beta on the deposits will be below that, but accelerating. 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. Again, when you look at the strong loan growth that we've driven, the net result is gonna be continued strong growth in net interest income.
Great. Okay. Yeah, that's very helpful. Then, as I'm kind of playing with the guidance you've given, I'm getting a margin kind of in the 3.70 range for this next quarter, which is up another 20 basis points. Does that feel right? Or you kind of see it keep around there and then come down a little bit or have
Getting awful precise on us there. As I said, I fully expect that 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. Thought I'd at least give it a shot. And then on the securities balances, you know, you've kind of guided to the lower end of that 20%-25% range. Does that mean security balances from here actually probably decline, or is that more just growth, you know, faster growth in the loan book, but the security balances just are kind of flat? How are you thinking about that mix shift?
Yeah. It's both, and I think we probably will see securities balances decline somewhat. You know, if you look at the first half of this year, we still had abundant excess liquidity that we're putting to work. Clearly, you know, the second quarter and third quarter growth has been really strong. From a liquidity perspective, I think it's reasonable to assume that we may let the securities portfolio 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. You know, 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. Thank you for the color.
Thank you. Yep.
Our next question comes from, Joe Yanchunis with Raymond James. Please go ahead with your question.
Good morning.
Morning, Joe.
You highlight in your prepared remarks, you know, some of the internal investments that you've made and to different technologies. I was wondering what's remaining on the wish list that, you know, 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?
Joe, this is Barry. I'll start with what's on the wish list going forward. We've got a couple of applications that we'll be migrating from one vendor over to our new ALS system, and that'll be happening in 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. We'll take that opportunity in the near term to begin working on that. 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. 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. Having said that is the next big project that we have in front of us. Once we have that done, then I think we'll be in 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.
Yeah. 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. That's already in process and ready to go in the fourth quarter.
Yeah. 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.
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. 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 wring out of that new solution as we go through 2023.
Got it. I appreciate it. With this new loan origination system, your branch consolidation plan, how should we think about expenses kind of trending into 2023?
Well, that's, you know, 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, you know, at the same time, trying to initiate growth initiatives like Atlanta Equipment Finance, these 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 given some additional guidance in what we see in 2023 and the efficiencies and things that Barry noted with some of these system changes, as well as, you know, a handle and maybe less new additional associate compensation and so on in the process. As I look into 2023, we'll give additional guidance at the end of the fourth quarter.
Perfect. I appreciate it. You know, 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 the Atlanta LPO today, we have commercial real estate, residential real estate, corporate banking, and equipment finance. Total about 12-14 associates currently. We will definitely be adding equipment finance teammates here over time. I wanna 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 trajectory in those businesses, and we'll add staff accordingly. I don't see significant adds at this point in time.
Great. I appreciate you taking my 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 y'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 is now concluded. Thank you for attending today's presentation. You may now disconnect.