Q1 2022 Trustmark Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's first 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.
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. Please go ahead.
Good morning, I would like to remind everyone that a copy of our first quarter earnings release as well as the slide presentation that will be discussed on our call. This morning is available only investor Relations section of our website at Trustmark Dot com during the course of our call management may make forward looking statements within the meaning of the private.
The 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 Exchange Commission at this time I would like to introduce Duane.
<unk>, President and CEO of Trustmark.
Good morning, and thank you for joining US with me. This morning are Tom Owens, Our Chief Financial Officer, Barry Harvey, Our Chief credit and operations Officer, and Tom Chambers, Our Chief Accounting Officer.
Trustmark had a solid first quarter in 2002 with.
Continued growth in loans and deposits expanded total revenue and continued strong credit quality.
The first quarter Trustmark reported net income of $29 2 million or <unk> 47 per diluted share.
So let's look at our financial highlights in a little more detail turning to slide three.
At March 31, 22 loans held for investments totaled $10 4 billion, an increase of $149 3 million from the prior quarter and $413 4 million from the.
And are the same period last year, a four 1% increase.
Deposits totaled $15 1 billion, an increase of $26 1 million linked quarter.
$730 million or five 1% from this time last year.
Revenue in the first quarter totaled $153 5 million, a $4 4 million or two 9% increase linked quarter.
Net interest income totaled $102 3 million in the first quarter, an increase of $1 1 million or one 1% from the prior quarter.
Noninterest income totaled $54 1 million and represented 35, 3% of total revenue in the first quarter.
Insurance revenue totaled $14 1 million, an increase of $2 4 million or 23% linked quarter, and a $1 6 million or 13, 2% increase from the prior year.
Non interest expense in the first quarter totaled $121 5 million, a one 7% increase from the prior quarter and flat year over year.
Credit quality remained solid this quarter as nonperforming assets declined eight 9% from the prior year and recoveries exceeded charge offs by 137000.
We also maintained strong capital levels with the tier one ratio of 11 point.
Two 3% and a total risk based capital of $13 five 3%.
Board declared a quarterly cash dividend of 23 per share payable June 15 to shareholders of record June 1st.
During the first quarter, Trustmark repurchased $9 1 million or approximately 279000 shares of common stock as of March 31st Trustmark had $99 million remaining authority under its existing repurchase program, which expires 12 31 'twenty two.
At this time I would like to ask Barry to provide color on loan growth and credit quality.
Glad to delay looking to slide forward loan.
Loans held for investment excluding PPP loans totaled $10 4 billion at March 31, an increase of $149 3 million linked quarter, and $413 4 million or four 1% from the prior year.
Very excited about the Q1 loan growth occurring in almost all categories other than CRE, which continues to experience significant scheduled and unscheduled payoffs loan production in all portfolios, especially CRE is extremely strong and bodes well for the future loan growth.
We anticipate mid single digit loan growth in 2022.
Our loan portfolio continues to remain well diversified based on product type and geography.
Moving to slide five.
Trustmark CRE portfolio is 65% existing and 35% construction land development, which is 92% is vertical.
Our construction land development portfolio is 77% construction.
Thanks <unk>.
Owner occupied portfolio has a nice mix between real estate types as well as industries.
Turning to slide six.
<unk> commercial portfolio was well diversified across numerous industry segments with no single category exceeding 12%.
Moving to slide seven our allowance for credit losses decreased $2 million from the prior quarter. The negative provisioning was primarily due to improvements in credit quality and the economic forecast.
At March 31, 2020 to the allowance for credit losses on loans held for investments totaled $98 7 million.
Yeah.
Looking at slide eight we continue to post solid asset quality metrics the allowance for credit losses represented nine 5% of loans held for investment and 484% of nonperforming loans, excluding those that are individually analyzed.
In the first quarter recoveries exceeded charge offs by 137000 nonperforming assets remained relatively unchanged from the prior quarter and decrease and decreased $6 6 million or eight 9% from the prior year.
Right.
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.
So looking at deposits on slide nine deposits totaled $15 1 billion at March 31.
$26 million increase linked quarter and $730 million increase year over year.
Linked quarter increase was driven by growth in personal deposit balances of about $95 million and non personal balances of about $29 million those were offset by about a $98 million decline in public fund balances.
Likewise, the year over year growth has been driven primarily by personal account activity, which accounts for about $519 million of the year over year increase of about $730 million. So the granularity of our deposit growth remains strong.
Our cost of interest bearing deposits declined two basis points from the prior quarter to total 11 basis points and we continued to maintain a favorable deposit mix with 31% of balances and noninterest bearing deposits and 63% of deposits in checking accounts.
Turning our attention to revenue on slide 10, net interest income FTE increased $1 $1 million linked quarter totaling $102 $3 million, which resulted in a net interest margin of 258, representing a linked quarter increase of five basis points higher.
Higher average loan balances contributed about $600000 of lift linked quarter. Although there were two fewer days in the quarter, which reduced interest income by about $1 5 million.
The securities portfolio contributed about $1 $6 million of lift linked quarter with about $1 $2 million due to higher yields at about 400000 due to higher average balances.
The decline in interest bearing deposit costs reduced interest expense linked quarter by about $600000 net.
Net interest margin, excluding PPP loans and fed reserves was $2 88, an increase of six basis points linked quarter.
Turning to slide 11, the balance sheet remains well positioned for higher interest rates with substantial asset sensitivity is driven by our loan portfolio mix with 47% variable rate coupon.
Securities portfolio duration of four one years, and our cash and do balance of $1 $9 billion.
63% of our Securities portfolio and agency MBS is backed primarily by a 15 year collateral, which generate substantial cash flow for reinvestment and limited extension risk in a rising interest rate environment.
Our year, one increase in net interest income to immediate interest rate shocks is about 8% or 100 basis point shock about 17% for 200 basis point shock and about 26% for a 300 basis point shock with the benefit in years, two and beyond increasing.
Our balance sheet continues to reprice.
Turning to slide 12, noninterest income for first quarter totaled $54 1 million, a $3 $3 million linked quarter increase and a $6 $5 million decrease year over year.
The linked quarter increases in insurance wealth management, and other were partially offset by decline in mortgage banking revenue.
Insurance revenue totaled $14 1 million in the first quarter of $2 4 million increase linked quarter, and a $1 $6 million increase year over year, primarily due to increased property and casualty commissions.
Insurance and wealth management, both continue to post solid year over year increases with insurance revenue up 13, 2% and wealth management revenue up seven 6%.
For the quarter noninterest income represented 35% of Trustmark revenue continuing to demonstrate a well diversified revenue stream.
Looking at Slide 13 mortgage banking revenue totaled $9 9 million in the first quarter.
South of $1 $7 million decrease linked quarter and $10 $9 million decrease year over year.
Mortgage loan production totaled $544 million in the first quarter, a decrease of seven 9% linked quarter and 29% year over year.
Retail production remained strong in the first quarter, representing about 80% of volume or about 434.
In dollars.
Loans sold in the secondary market represented 71% of production while loans held on balance sheet represented 29%.
Gain on sale margin declined by about 9% linked quarter from 246 basis points in the fourth quarter to 223 basis points in the first quarter.
And now I'll ask Tom Chambers to cover noninterest expense and capital management.
Thank you Tom turning to Slide 14, you will see the detail of our noninterest expenses broken out between adjusted.
<unk> in total.
Adjusted noninterest expense was up $126 million in the first quarter, a linked quarter increase of $2 4 million and flat year over year.
Salary and employee benefits expense in the first quarter totaled $69 $6 million.
One $3 million increase from the prior quarter due to the seasonal increases in payroll taxes.
Services and fees increased $1 $5 million linked quarter due to continued investments in technology and higher professional fees equipment expense and other expense collectively declined $1 1 million from the prior quarter.
As noted on slide 15, Trustmark remains well positioned from a capital perspective.
During the first quarter, trustmark repurchased $9 $1 million or approximately 279000 shares of Trustmark stock at.
At March 31, we had $99 million in remaining authority under its existing stock repurchase program, which expires 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.
Our capital ratios remained solid with a common tier one ratio of 11, 23% and a total risk based capital ratio of 13, 53% at March 31.
We will equity to tangible assets declined to 729% at March 31, driven by a decline in other comprehensive income due to valuation adjustments on securities available for sale, resulting from the increase in market interest rates during the first quarter.
As Dwayne mentioned earlier, the board declared a quarterly cash dividend of <unk> 23 per share payable June 15th to shareholders of record on June one.
Good morning.
Thank you Tom Let's review, our outlook, which is on slide 16.
From a balance sheet perspective, we're 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.
Asset balances are expected to grow low single digits for the full year.
We're expecting the net interest income, excluding PPP loan interest and fees to grow low double digits full year based on current market implied forward interest rates.
Based on the current economic outlook, the 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 upon the current outlook.
Yes.
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.
Insurance revenue is expected to increase high single digits full year with wealth management is expected to increase mid single digits full year.
Adjusted noninterest expense is expected to increase low single digits full year subject to the impact of commissions in mortgage insurance and wealth management businesses.
As you saw in our press release, we announced a comprehensive program of focus innovation and transformation or as we call. It fit to grow to enhanced trust marks growth and profitability, we've accelerated our efforts to optimize our branch network, reflecting changing customer preferences and continued migration to mobile.
<unk> and digital banking channels.
We have identified 11 branch offices across the franchise to be closed during 2022 with an estimated annualized expense savings of $2 million in 2023.
Many of these offices are near other existing trustmark locations.
We also anticipate additional opportunities to realign our organizational structure to service customers more effectively and look forward to providing more information in the coming months about these important initiatives.
As part of fit to grow we will continue initiatives focused on market optimization technology enhancements and vendor management 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 associated compensation. Therefore, we felt it necessary to adjust our guidance on expenses up slightly this quarter.
We'll also continue a disciplined approach to capital deployment with a preference for organic loan growth potential M&A and opportunistic share repurchases.
With that I Trust. This discussion of our first quarter financial results and outlook commentary has been helpful and insightful at this time, we'd like to open the floor for 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 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 from the queue. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question is from will Jones with K BW. Please go ahead.
Hey, great good morning, guys.
Good morning, good morning.
Hey, guys I just wanted to start on the overdraft and is that I know you guys announced a handful of changes in late March.
You disclosed the impact that you thought that.
It would have.
So those programs, but I know you guys are still working through determining that the minimum threshold on overdrafts, just curious where that stands today and.
You guys are in a position maybe to quantify an impact there and then maybe thinking on the flip side of that conversation, maybe just talk about some natural offsets you may have on your expense or revenue side.
Sort of dampen the impact of that revenue over time.
Well I'll start.
Tom or palm either can comment on on.
Where I missed but.
Regarding the NSF, we did quantify we believe the <unk>.
NSF issue will be roughly 10% or less of overall o'dea, our NSF total charges.
Forward looking so.
And we're still working on the de Minimis level, we've not quite finalized our position on that issue but.
We look at our late fourth quarter early first quarter implementation of those changes as we make the systematic changes to them.
Get those in place.
Regarding offsets as noted in our discussion some of the branch.
Closure issues at all.
The overall program.
Optimization of our markets expense reduction across processes and that sort of thing, we believe will more than offset NSF overdraft fee changes.
Okay, Great Super helpful.
And then just moving over to the margin.
Really nice to see it in.
For the fourth quarter levels.
I guess two fold here is it fair to say that the fourth quarter was sort of a bottom of the margin.
Forward looking with your new NII guidance and following the forward curve.
How should we think about the cadence of NIM expansion.
As we move throughout the year or maybe more easily.
What would be the incremental margin pick up.
But you would see from.
Maybe every 25 basis points swing in rates.
Okay.
So well this is Tom Owens.
So, yes, well, let me start with what's in the forecast right. So.
We did increase our guidance too.
Low double digits year over year growth in net interest income ex PPP.
And obviously that increase in guidance from the prior guidance of mid single digits.
<unk> reflected the substantial increase in market interest rates experienced in the first quarter as well as.
The increase in market implied forward interest rates as a result, so for example.
The mid single digit growth guidance was based on three excuse me three fed rate hikes in 2022.
The updated guidance is based on the equivalent of 825 basis point rate hike.
Now in 2022.
So in terms of the cadence.
Net interest margin expansion I would say, it's going to be reasonably contemporaneous with the pace of the actual fed rate hikes.
In terms of the net interest margin expansion I would say if you look at the low double digit increase in NII.
Basically equally comprised.
Approximately equal parts, earning asset growth and net interest margin expansion.
Okay.
Okay, great understood.
Is it from me.
Again, if you have a question. Please press Star then one yes next.
Question is from Brad Milsap with Piper Sandler. Please go ahead.
Hey, good morning.
Good morning, Brad.
Sure.
Thanks for taking my questions.
Tom maybe just wanted to start with the balance sheet.
I'm sort of following the guidance maybe you can.
<unk> loan portfolio, another half a billion dollars for here.
Maybe a few hundred million in securities to get you up to that 25% number still maybe leaves you with $1 billion of cash or so.
Sitting on the balance sheet, particularly if your deposit growth kind of comes through as expected him I am I thinking about that correctly is your plan just to kind of maybe sit on more liquidity until you kind of see rates stabilize or.
Do you anticipate maybe deposits running out in 2023 or something just trying to get a sense of kind of how you are managing the cash portion of the balance sheet.
And yes, it's a great question, Brad and as you know.
We've sort of <unk>.
Strategically managed the balance sheet to remain underweight in terms of securities as a percentage of earning assets.
You saw that on a book basis, we increased the securities portfolio about $200 million in the first quarter I think it's very reasonable to expect that here in the second quarter, we would probably increase say another $200 million to $300 million.
And Youre right that would still leave us with substantial excess liquidity I would say you get past that guidance of $200 million to $300 million of growth in the securities portfolio here in the second quarter may well turn out to be the case that we do that again in the third quarter, that's obviously going to be a function of.
Our view.
We'll be watching two things right, we will be well three things really won't be watching what the fed actually does we'll be watching how the market reacts and what those opportunities turn out to be in the way of reinvestment and then as you alluded to we'll be watching the dynamics of the deposit portfolio.
As I.
Said in my prepared comments.
You look under the Hood.
First quarter deposit growth of $26 million.
It doesn't seem strong, but then when you bear in mind, we had some significant public fund run off.
We continue to see very strong consumer deposit growth or personal deposit growth and so certainly to the extent that those balances.
Exhibit.
Effective durations.
Yes.
Consistent with the back book.
We would be inclined to leaning into deploying that liquidity.
So it's going to we're always going to prefer.
Deploying it via lending to the extent those opportunities do exist to do that prudently, but it's very reasonable to assume that we will continue to grow the securities portfolio.
Yes.
Great. Thank you and Tom just to follow up.
It looked like your interest rate sensitivity to 100 basis points shock was maybe down from where it was in the in the fourth quarter or is that just a function of maybe you're already seeing one rate hike or just.
Are there other changes in your assumptions I'm, probably missing something there, but was just just kind of curious.
Well it has more to do with the mix change right and so you look I think on a linked quarter basis.
Our excess reserves at the fed.
Dropped from in round number something like $2 1 billion to something like $1 7 billion and when you do the math what you see is that we had pretty good loan growth in the first quarter. We had again when you net out when you include the public fund decline.
Not very substantial deposit growth in the first quarter and so the fact that we've put that money to work.
In the securities portfolio, that's the dynamic that caused that decrease.
Great. Thank you and just kind of moving on to the share buyback.
Maybe we weren't as active in the first quarter that I thought you might have been.
Do you think it's a year, where you guys repurchase kind of similar to the amount you did in 2021 or do you think.
Youre going to be more conservative just kind of curious with the stock all bank stocks down and it's fairly attractive valuations, how how aggressive you might be with that remaining $90 million.
Okay.
Yes, I think Brian .
Brian in our.
Prior calls and particularly in the fourth quarter call.
We will be a little more conservative I think moving forward than we've been in the past I don't see us getting up to the same level as 2021.
But we will continue to be opportunistic R. R.
Capital Committee meets on a regular basis and looks at the market looks at the overall situation looks at our capital ratios and all the above.
Considers the opportunities there.
So kind of as as we sit today.
Likely be more conservative than we've been in the past.
At least in 2021 on that front.
Yes, Brad this is Tom I would add I think if my memory serves me correctly at the last call we gave that guidance.
That our run rate deployment here in 'twenty two would be.
Meaningfully below that of 'twenty one.
That has a lot to do with earnings power right and so as was alluded to here earlier on the call with the fourth quarter of 2000, and really being a trough now that we've hit an inflection point in terms of net interest margin and net interest income.
Growth in earnings should be accelerating so.
We're probably in a I'll call it a.
A low point here in terms of deployment of capital via repurchase.
And we will see how the year progresses.
In terms of profitability and opportunity.
And then the final note Brad would be based on on other uses of capital.
Westwood rather grow organically.
We still are very interested on the M&A front and I would like to consider opportunities. There. So again the capital deployment will be opportunistic in.
We will see how the rest of the year unfolds here.
Great.
I appreciate that and just final kind of more housekeeping questions for me I apologize I just didn't see it in the release, but just curious the amount of the.
Branch facility gain that impacted other income and then would.
Would you expect sort of your tax rate to revert back to kind of a normal.
16% or so 15, five going forward is a little lower than I thought this quarter. Thanks for answering my questions.
Just I'll start and then.
Tom's Ken can add too, but the gain on sale, let's say one time happened to be an attractive market and we basically sold a location and relocated across the street and that represented.
$800000 plus pre tax gain for the quarter.
So.
That was kind of.
One time deal, so Tom or Tom anything to add to that what was the second what was the question Brad.
Just the tax rate lower this quarter, just curious where it might head back to you if at all.
This is Tom Chambers Brad.
As you know our effective tax rate on a quarterly basis is based on an estimated year end tax rate.
It's required by GAAP accounting you have to forecast out your estimated year end tax rate. So.
Within that forecast you have got major factors such as forecasted pre tax net income you have forecasted permanent differences that you can reduce your taxable expense on the tax return et cetera. So there is several factors that play into that estimated for forecasted tax rate.
And right now.
What you see in the quarterly effective tax rate of 13, 85% during the first quarter. That's that's what we're looking at.
To see what our forecasted year end tax rate.
Obviously that changes as we March through the year, and we have better forecasts and so on and so forth, but at this point, it's $13, 85% right around 14%.
Okay, great. Thank you.
Once again, if you have a question. Please press Star then one.
These standby as we poll for questions.
Showing no further questions. This concludes our question and answer session I would like to turn the conference back over to Duane Dewey for any closing remarks.
Yes.
Well. Thank you again for joining us for this morning's call.
We feel like we had a pretty good quarter and are looking forward to the remainder of the year and we look forward to.
Getting back together at the end of the second quarter have a great rest of the week.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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