Q4 2021 Trustmark Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's fourth 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 fourth quarter earnings release as well as the slide presentation that will be discussed on the call. This morning is available on the Investor Relations section of our website at Trustmark Dot com.
During the course of our call. This morning management may make forward looking statements within the meaning of the private Securities Litigation Reform Act.
Got it.
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 Cooper.
Right.
Thank you Joey and good morning, everyone and thank you for joining us.
With me. This morning are Tom I wanted as our Chief Financial Officer, Barry Harvey, Our Chief credit and operations Officer, and Tom Chambers, Chief Accounting Officer.
Trustmark had a solid fourth quarter and strong performance overall in 2021, reflecting balance sheet growth excellent credit quality and record results in our insurance and wealth management businesses.
Our mortgage banking business continued to perform well with total production of two 8 billion in mortgage loans during the year.
Although the gain on sale margins continued to be under pressure, we will continue to navigate the challenging interest rate environment. We remain committed to positioning the company for continued long term success with that said our balance sheet is well positioned for rising interest rates.
Turning to slide three let's review our financial highlights Trustmark reported net income of $26 2 million.
Or 42 cents per diluted share for the fourth quarter for the year Trustmark net income totaled $147 4 million.
Representing diluted earnings per share of two point $2.34.
At December 31st loans held for investment totaled $10 2 billion, an increase of $72 9 million linked quarter, and $423 3 million or four 3% from the prior year.
<unk> totaled $15 1 billion, an increase of $164 3 million from the prior quarter and $1 billion or seven 4% year over year.
Investment Securities totaled $3 6 billion, a linked quarter increase of $128 9 million in a year over year increase of $1 1 billion or 41, 6%.
Net interest income excluding interest and fees on P. P. P loans totaled $108 million in the fourth quarter, an increase of $1 2 million or one 2% linked quarter non interest income totaled 58 million and represented 34, 1% of total rent.
But it was in the fourth quarter.
Insurance revenue in 2021 totaled $48 5 million, reflecting a seven 4% increase from the prior year, while wealth management revenues totaled $35 2 million up 11, 5% year over year mortgage loan production totaled 500 and.
$97 million in the fourth quarter down seasonally 16.7% linked quarter.
Adjusted noninterest expense in 2021 totaled 471 3 million is a three 5% increase from the prior year.
In the fourth quarter adjusted noninterest expense totaled $118 2 million, a 1.3% increase linked quarter credit quality continued to remain solid for 2021 as nonperforming assets declined 10, 1% from the prior year and recoveries.
Exceeded charge offs by $3 7 million.
We also maintained strong capital levels with tier one capital of 11.29% and a total risk based capital of $13 five 5%.
The board declared a quarterly cash dividend of 23 per share payable March 15th to shareholders of record on March 1st in.
In the fourth quarter, Trustmark repurchased $27 1 million or approximately 816000 shares of common stock.
For the full year, we repurchased 61 8 million or approximately one 9 million shares of common stock.
At this time, Barry Harvey well provide color on loan growth and credit quality.
Thank you Duane turning to slide four loans held for investment excluding PPP loans totaled as Duane indicated $10.2 billion as of December 31st.
That's a $73 million increase from the prior quarter, and an increase of $423 million or four 3% year over year.
We're extremely excited about the growth in Q4 occurring in almost all loan categories other than CRE and as you know for US CRE has continued to experience some significant scheduled and unscheduled payoffs.
Loan production for all portfolios, especially CRE has been extremely strong and bodes well for future loan growth.
We anticipate mid single digit loan growth during 2022.
Our loan portfolio continues to remain well diversified basically by both product type and geography.
Moving to slide Bob Trustmark, CRE portfolio is 65% existing 35% construction land development with 92% being vertical.
Our construction land development book is 77% construction the bank's owner occupied portfolio has a nice mix between real estate types as well as industries.
Turning to slide six the bank's commercial portfolio is well diversified across numerous industry segments with no single category exceeding 14%.
Looking at slide seven now we have a minimum exposure as you can see to restaurants and energy Trustmark has never been in the high risk C&I lending business and currently we have one customer alone with $10 million outstanding the.
The bank has always underwritten both hotels and retail CRE in a conservative manner.
Moving to slide eight our allowance for credit losses decreased $4 6 million from the prior quarter.
The negative provisioning was primarily due to improvements in credit quality.
And the economic forecast.
At December 31, 2021, the allowance for credit losses on loans held for investments totaled $99.5 million.
Looking at slide nine we continue to post solid credit quality metrics the allowance for credit losses represents 0.97% of total loans held for investment.
And 501% of nonperforming loans, excluding individually evaluated loans net charge offs totaled 101000 for the fourth quarter for.
For 2021 recoveries exceeded charge offs about $3 $7 million.
Nonperforming assets declined 5.2 million linked quarter and $7 5 million from this time last year Duane.
Thank you Barry now turning to the liability side of the balance sheet I'd like to ask Tom Owens to discuss our deposit base and net interest margin.
Thanks, Dwayne and good morning, everyone I'm.
Looking at Slide 10 deposits totaled $15 1 billion at December 31st a $164 million increase linked quarter and $1 billion increase year over year.
We continue to have good growth during the quarter as well as for the full year, which was driven primarily by personal account activity.
With personal deposit balances up by over $700 million year over year.
Our cost of interest bearing deposits declined one basis point from the prior quarter to total 13 basis points and we continue to maintain a favorable deposit.
With 32% of balances and noninterest bearing deposits.
Yeah.
Turning to revenue on slide 11, net interest income FTE was unchanged linked quarter totaling $101.2 million, which resulted in a net interest margin of 253, representing a linked quarter decline of four basis points.
Interest and fees on P. P. P loans totaled $397000, which was a decrease of $1 $1 million linked quarter.
The decline in P. P. P interest and fees was a significant driver of the linked quarter decline in net interest margin.
Core net interest income FTE.
Was $109 million, which was an increase of $1 million linked quarter, driven primarily by the increase in average investment securities balance.
Net interest margin, excluding PPP loans and fed reserves was 282, a decline of eight basis points linked quarter, which was significantly influenced by the 431 million dollar linked quarter increase in average securities balances.
Turning to slide 12.
Balance sheet remains well positioned for higher interest rates, but substantial asset sensitivity driven by loan portfolio mix with 51% variable rate coupon.
Securities portfolio duration of three nine years, and cash and do balance of $2 $3 billion.
64% of the Securities portfolio in agency MBS is backed primarily by 15 year collateral.
Which generates substantial cash flow for reinvestment and limited extension risk in a rising interest rate environment.
You're one increase in NII to immediate interest rate shocks is about 10% for a 100 basis point shock about 20% for a 200 basis point shock and about 30% or 300 basis point shock with the benefit in years, two and beyond increasing as the balance sheet.
Continues to reprice.
Turning to slide 13, noninterest income for the fourth quarter totaled $58 million.
$3 $4 million linked quarter decrease in our $52 $7 million decrease year over year.
The linked quarter and year over year decreases are primarily attributable to lower mortgage banking revenue.
Insurance and wealth management, both had record years with insurance revenue up seven 4% and wealth management revenue up 11, 3%.
Service charges on deposit accounts increased by $455000 linked quarter continuing to rebound from the low of the first quarter as the economy continues to normalize from the pandemic.
And for the quarter noninterest income represented 34% of Trustmark revenue continuing to demonstrate a well diversified revenue stream.
Looking at Slide 14 mortgage banking revenue totaled $11 $6 million in the fourth quarter and $63 $8 million for the full year, which were declines of $2 4 million and $62 1 million respectively.
Mortgage loan production remained strong at $590 million in the fourth quarter and $2 $8 billion for the full year, which was down six 1% from the record level of 2020.
Retail production remained strong in the fourth quarter, representing 79% of volume or $468 million.
Loan sold in the secondary market represented 68% of production while loans held on balance sheet represented 32%.
Gain on sale margin declined by about 6% linked quarter from 262 basis points in the third quarter to 246 basis points in the fourth quarter.
And now I'll ask Tom Chambers to cover noninterest expense and capital management. Thank.
Thank you Tom turning to Slide 15, you will see our detail of our noninterest expenses broken out between adjusted other in total but.
Adjusted noninterest expense was $118 $2 million in the fourth quarter, an increase of $1 $6 million linked quarter for 2021, adjusted non interest expense totaled $471 $3 million, an increase of three 5% from the prior year.
Salary and employee benefits expense in the fourth quarter totaled $68 $3 million excluding.
Excluding $5 $6 million in charges associated with the voluntary early retirement program in the prior quarter salary and employee benefits expense declined $754000 or one 1% linked quarter.
For 2021, the voluntary early retirement program salary and benefit savings totaled approximately $1 $3 million, which was in line with our prior guidance.
As noted on line 16, Trustmark remains well positioned from a capital perspective.
During the fourth quarter, we repurchased $27 $1 million or approximately 816000 shares of Trustmark stock.
During 2021, we repurchased we repurchased $61 $8 million or approximately one 9 million shares.
As previously announced our board authorized a stock repurchase program effective January one 2022 under which $100 million of Trustmark shares may be acquired through December 31, 2022.
Our share repurchase program may take place through open market or private transactions, depending on market conditions and at management's discretion.
Capital ratios remained solid with a common equity tier one ratio of 11, two 9% and a total risk based capital ratio of 13, 55% at December 31st.
As Dwayne mentioned the board declared a quarterly cash dividend of 23 cents per share payable March 15th to shareholders of record on March 1st.
Duane.
Thank you Tom now, let's look at slide 17, and that's our outlook commentary.
From a balance sheet perspective, we are expecting loans held for investment to grow mid single digits for the full year 2022 .
Our security balances are targeted at 20% to 25% of earning assets subject to changes in market conditions deposit balances are expected to grow low single digits for the full year.
We're expecting net interest income, excluding PPP loan interest and fees to grow mid single digits, driven by mid single digit earning asset growth.
Our outlook reflects three fed rate hikes of 25 basis points each occurring in March June and September and conservative through the cycle deposit betas.
Based on current economic outlook, our total provision for credit losses, including unfunded commitments is expected to be modest.
Net charge offs, requiring additional reserving are expected to be nominal based on our current outlook.
From a non interest income perspective, we expect service charges and bank card fees to continue rebounding from depressed levels as the economy continues to emerge from the pandemic.
Mortgage banking revenue is expected to continue trending lower driven by reduced volume and a lower gain on sale margin.
Wealth management and insurance revenue are both expected to grow mid single digits for the full year 'twenty two.
Adjusted non interest expense is expected to remain flat for the full year subject to the impact of commissions in our mortgage insurance and wealth management businesses.
We will continue to work on initiatives, including market optimization technology enhancements and vendor management initiatives to identify further process improvement and expense reduction opportunities.
While considering expenses. It is important to note we will continue to invest in technology to meet the growing needs of our customer base as well as remain competitive and associate compensation.
We'll also continue a disciplined approach to capital deployment with a preference for organic loan growth potential M&A and then opportunistic share repurchases.
So with that I'm hopeful our discussion of our fourth quarter financial results and outlook commentary has been helpful and insightful and at this time, operator, we'd be glad to answer any questions that may be out there.
Thank you we will now begin the question and answer session.
You ask a question you May press Star then one on your Touchtone phone. If you were using a speakerphone. 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.
And the first question will come from Graham <expletive> from Piper Sandler. Please go ahead.
Hey, everyone. Good morning.
Good morning Graham.
So just wanted to start with the loan growth guide.
Can you all just talk a little bit about the puts and takes in that mid single digit outlook.
And then I was also curious to know if this guidance included <unk>.
Retaining mortgage production on balance sheet and.
To what extent if it dies.
Yes that would be helpful. Thank you.
And Graham this is Barry I'll be glad to address address your questions I guess, starting with the last one first we do intend to continue to portfolio mortgages are some of the economic environment remains similar to what we've experienced in 2021, we continue to like the mix of the 10 year less paper.
Or.
And then along with some of the 10 year hybrid arms I think we like the duration and we and today, we like the the WAC, we're putting on the books for those for those products as far as the growth of the portfolio as a whole we are very excited about the the mix that you saw in Q4.
We did have growth as I mentioned previously and all categories with the exception of CRE, a little bit on the knot and the owner occupied category.
That's very encouraging that's the results of a lot of hard work and and some additional resources. We brought on board who are finding some of the other C&I opportunities. We continue to focus on the CRE side production. There is very strong. We just have continued to face those scheduled and unscheduled headwind so payoff.
But if that begins to diminish and to any degree then youll see a lot more volume coming on there that's not baked into what our mid single digit forecast would guide too. So I think in all the other categories outside of CRE, we expect to see the momentum that we had in Q4 throughout 2022, and we're very excited about.
The diversification that's bringing about.
Okay great.
Hey, Graham this is Tom, though and I would just add.
As Barry mentioned, we do like the retention of the 15 year mortgages in the hybrid arms, we do like the tradeoff there between the duration.
And the economics, we gained by maintaining.
The loans as compared to selling them and really consider that as a proxy for growth in the securities portfolio.
And so again it is short shorter duration stuff and it doesn't result in a really a meaningful increase in concentration in residential mortgage and in the loan portfolio and just this is Barry just to add to Tom's comment I think from a standpoint of deepening our relationship a lot of times.
With customers that mortgage is the first product to have with Trustmark and we saw that in acquisitions. We've had in the past where we had a pretty good sized book for example in Alabama that we were servicing bombed before we entered the state through an acquisition. So it is a good good first product in the wallet with the customers that we can build upon.
Right. So just to be clear that the mortgage retention I guess would be additive to that.
Mid single digit growth or is it the mortgage retention the mortgage retention as we experienced in 'twenty. One we will continue to experience that in 2022, maybe even a little more and that will be and that is baked into our mid single digit loan growth at this time.
Okay. Thank you guys.
And then also I guess just on asset sensitivity you guys. Obviously screen is pretty asset sensitive in large part due to just the amount of liquidity youll have on the balance sheet and your deposit base.
I was just trying to get some more color on what you guys are expecting in terms of loan and deposit betas. I know you said conservative just now on the call, but if you can like I guess, maybe compare to the last cycle or just maybe give a little color on what your outlook might be.
Yeah, So great question Graeme.
As Dwayne indicated in his prepared comments, we do use what we deem to be appropriately conservative through the cycle deposit betas.
So through the cycle, meaning something on the order of magnitude of 50%.
You know.
So there's there's always there's a lot of differing opinions in the industry in terms of.
You know what the effective beta might be for the industry for the first.
50 basis points 100 basis points of fed tightening for the versus the next hundred versus the next hundred.
You asked about.
Our experience historically.
The 50% through the cycle beta is based on analysis over the last several interest rate cycles.
And so if you think about the last.
Rising fed tightening cycle, we've topped out with the fed funds rate at about two 5%. So arguably that was sort of a.
Many cycle.
And in terms of our.
Effective interest bearing deposit betas in that many of the cycle.
Topped out at about 35%.
And if you've looked at the first 100 basis points of that tightening cycle, we were at about 20%.
So hopefully that helps dimension for you sort of what the range could be and as it relates to the loan beta in the last cycle for the first 100 basis points was also in that same.
The neighborhood of 20% to 25%.
So depending on your view.
<unk>.
What industry betas will be.
The fed with the market's pricing right now is essentially fed tightening each quarter each of their quarterly meetings March June September December and so depending on what you think of.
How does.
The industry betas will come to pass there is potentially some upside there relative to through the cycle betas I'd also add the others you know in my mind, there's potentially risk there right I mean, it's.
It's been quite sometime since the fed found itself in a position of 7% consumer price index.
<unk>, which continues to accelerate so.
I think I think the the actual path of monetary policy. This year is.
Highly uncertain.
That's great. Thank you Tom.
And just I guess, a quick one here but.
Obviously theres been a lot of press recently on NSF and some of the larger regional banks in the southeast had eliminated them altogether recently.
Do you guys have anything similar plan here or are you expecting that be might you might be a little while until you feel any meaningful pressure to take action.
I'll take that one and as you know Doug Graham we're closely monitoring everything related to overdrafts and the issues that are presented with that.
We as a company we have been very proactive over time, starting EBIT back in <unk> and the <unk>.
2011 kind of time period, but over time proactively putting in place numerous programs adjustments alerts.
All sorts of things to keep our customers.
Aware of overdrafts issues and opportunities to limit and and adjusts and so we've been and are being very proactive on that front.
As we move forward, obviously, we're going to continue to monitor.
The both the regulatory guidance as well as competitive issues and competitive.
Our position is moving forward and we will adjust accordingly, I would note our overdraft.
Revenue dating back a number of years has has declined very dramatically as a result of some of these proactive efforts in.
So we do maybe expect a little bit of an uptick as economic activity comes back, but nowhere near the historic levels, we've seen in the past.
Okay Awesome, that's it for me guys. Thank you.
And the next question will be from Catherine Mealor from K B W. Please go ahead.
Thanks, Good morning.
Good morning Catherine.
One follow up to the margin discussion you mentioned that you've got 51% variable rate loans.
And Pat from floors on that can you just remind us how much of that actually repriced immediately once we start to see fed hikes.
Hi, Good morning, Catherine This is Tom.
Yeah, it's about $800 million in round numbers that are.
Where the floor is activated by about 60 basis points in round numbers.
So that puts you in the neighborhood of about $5 million in terms of.
Run rate benefit that is currently accruing to our interest income that would be.
We would not get the benefit for that first 60 basis points of shock or so or a fed tightening or so and that is reflected in our interest rate risk numbers that we publish.
Oh great.
And we have an average was.
New loan yields.
And their growth this quarter.
I'm, sorry could you repeat that Kathryn.
Excuse me my voice May have for me.
So your linear today are three lucky fix what where on average or is new production coming on relative to that that level. So.
Barry agrees with me here, but.
I believe the right answer here is about 15 basis points or so differential if you look at the.
<unk>.
The weighted average coupon of loans paying down.
Versus the weighted average coupon of loans funding if that's your question here.
Recent run rate has been about a 15 basis point differential about 15 basis points of compression does that sound about right that's correct Tom.
On a blended basis.
Okay.
And then just one.
Big picture question.
And then you're you're highly asset sensitive.
And you've got some nice efficiency initiatives is adding for a flat expense base. This year. So it feels like we've got some significant positive operating leverage ahead of us for the next couple of years that have you thought about just.
Just big picture profitability target.
And were.
You think it's appropriate that that may be a better rate environment and there was an expense savings where you think your aro <unk> Aro.
ROE and ROA.
Essentially be getting towards.
Well I'll start.
On that Kathryn.
Obviously in this environment of.
Low interest rates, which hopefully for the industry's perspective is about to change here.
In March our return on tangible equity is dropped into the high single digits and so certainly we.
We would expect through.
Through the combination of higher interest rates and efficiency initiatives as well as growth initiatives, we've been investing for growth.
And so.
Our return on tangible common equity would return to the double digits.
Catherine I Wouldnt add a whole lot to that we haven't given any particular or are really presented any particular guidance out there in terms of target a return on tangible equity or any of that at this point, but as you noted and as Tom just expressed I mean, we're focused on.
Both sides of the equation in terms of really really trying to manage in and at least flatten if not reduce expenses across the across the cycle, but at the same time.
You need to invest in technology, and and some growth initiatives.
We did actually in the fourth quarter opened in Atlanta L. P. O. We're in process of staffing that that location up at this point in time as well as several other.
Technology and digital related initiatives to impact gross so we're actually focused on on controlling and managing them and hopefully are really maybe some reduced expenses here moving forward. While also trying to focus on new growth initiatives across the organization.
I hope that's helpful. And then that in turn should return us back to a normalized return on tangible equity.
Great. Thank you for the commentary very helpful. Thanks.
Yeah.
And once again, if you have a question. Please press Star then one.
The next question will be from Michael Rose from Raymond James. Please go ahead.
Hi, Good morning. This is Carl Darwin on for Michael Rose.
It's Karl.
Good morning, just a question on the Securities portfolio, Obviously, you guys do it this.
This quarter again, and you recently raised the range.
From.
220% to 25%. So I guess my question would be so what caused that.
That balance is though to the upper end of the range given where rates are going.
Hi, Carl So good morning, Tom.
Thank you for the question so yeah, we have.
<unk> been operating within a target range of 20% to 25% of earning assets.
Last couple of quarters, we've been at about 22% of earning assets or earning assets or about $15 $4 billion and so if you think about if we were to go to the high end of the range of 25% that's incremental growth.
Just north of $500 million.
I think it is likely that we will continue to increase the size of the portfolio.
Both as earning assets grow and I do think we will creep higher.
In that range.
Yeah.
Okay.
Thank you and I guess, one other one for me.
The buyback obviously increased this quarter versus three keys.
We recently announced a new a Huntington program for this year, how aggressive do you plan to be.
Moving forward in buying back shares.
I'll start and others can add here Carl this is Duane.
I you know we were fairly aggressive in 2021 with the buyback program, we have a very disciplined approach to to that process in a very.
Internally very control process and felt opportunistic in 2021 will continue in 2022 to be opportunistic.
You know depending on of course, what the market does.
And.
And as things move forward with the economic changes with overall.
Reset in the equity markets et cetera, I would expect however, a.
2022 to be at least at this point, we're thinking we'll be a little less aggressive than we were in 'twenty one.
Probably considerably less aggressive, but we'll see how the how things turn out.
Tom anything to add to that.
Well I would just add Carl I mean, if you look at our history.
You know it.
We're not sort of set it and forget it in terms of an equal pace of deployment each quarter and so yeah. We were very proactive in the fourth quarter, but our history is you know you'll have quarters like that where as Dwayne said, we are opportunistic and when we see the opportunity we seize it.
There are quarters, where we deployed very little and.
So you shouldn't be surprised by that going forward.
Yeah.
Alright, thank you.
And the next question is a follow up question from Graham <expletive> from Piper Sandler. Please go ahead.
Hey, guys just a quick one here on the securities portfolio.
Just wondering about the yield on the taxable Securities book I think it was 122 basis points this past quarter.
I see this as maybe a trough and it can improve from here or just kind of wondering what the outlook might be there.
So.
Graham I'm not sure I fully understood. The question the question relating to our securities portfolio yield and do we see upside from here.
Yes, correct, Yeah, and I would say the answer is yes.
You know for a couple of reasons first of all obviously reinvestment.
Opportunities reinvestment yields currently are above.
Our fourth quarter yield and then the other thing is we are starting to see.
The early signs of slowdown in prepayment speeds in the underlying mortgage collateral and of course, you know that's been a big factor in the decline in our securities yield is the accelerated amortization of premium and so with higher rates. The theme you know all indications from the fed or that.
Rates are headed higher here.
We should have the wind at our back in terms of a higher securities yields.
As we go throughout the course of 2022.
Awesome. Thanks, Tom Thanks, Tom.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Duane Dewey for any closing remarks.
Yeah.
Well. Thank you all for joining us this morning.
And we look forward to connecting again at the end of the first quarter and April and so we hope that all of you have a great rest of the week and well talk to you then.
And thank you Sir Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Okay.
[music].