Q1 2023 Trustmark Corporation Earnings Call
Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's first quarter earnings Conference call.
This time, all participants are in listen only mode.
Following the presentation. This morning, there'll be a question and answer session.
To ask a question you May press Star then one on you touched on phone.
Your question. Please press Star then two.
As a reminder, this call's being recorded.
Oh, 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 first 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 <unk> 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, and 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 Securities and Exchange Commission at this time I'd like to introduce Duane Dewey President and CEO of Trustmark.
Thank you Joey and good morning, everyone. Thank you for joining US. This morning with me. This morning are Tom.
Once our Chief Financial Officer, Barry Harvey, our Chief credit and operations Officer, and Tom Chambers, Our Chief Accounting Officer.
Our first quarter financial performance reflects solid loan and deposit growth.
<unk> performance in our mortgage insurance and wealth management businesses and diligent expense management.
For the quarter Trustmark reported net income of $50 3 million or 82 cents per diluted share. This level of profitability resulted in a return on average tangible common equity of 18.03% and our return on average assets of one 1%.
Let's look at our financial highlights a little more detail by turning to slide three at March 31, 2023 loans held for investment totaled $12 5 billion, an increase of 293 million linked quarter, while deposits totaled $14 8 billion.
Increase of 346 million linked quarter.
Revenue in the first quarter totaled 199 million a decline of 1.5% linked quarter and an increase of 23, 1% from the same quarter in the prior year.
Net interest income totaled $141 1 million in the first quarter, a decrease of $8 9 million or 6% linked quarter.
Noninterest income totaled $51 4 million, an increase of $6 2 million or 13, 7% from the prior quarter and represented 27.2% of total revenue in the first quarter.
Net interest expense in the first quarter totaled $128 3 million a decline of $2 2 million or one 6% compared to the prior quarter, excluding the litigation settlement expense.
Credit quality remained solid as the allowance for credit losses for loans held for investment represented 328% of non accrual loans.
Net charge offs totaled $1 2 million and represented four basis points of average loans.
Nonperforming assets represented five 8% of total loans held for investment and loans held for sale at March 31, we continue to maintain strong capital levels with common equity tier one of 9.76% and a total risk based capital ratio of $11 95.
Percent.
The board declared a quarterly cash dividend of 23 cents per share payable to Jan 15th shareholders.
Payable on June 15 to shareholders of record just burst at this time I'd like to ask Barry to provide some color on loan growth and credit quality I'd be glad to do why do you think you are turning to slide four loans held for investments totaled $12 $5 billion as of March 31st an inquiry.
This is Dwayne mentioned up 293 million linked quarter.
We're pleased with our Q1 diversified loan growth, we do expect continued solid loan growth throughout the remainder of 2023.
Our loan portfolio continues to be well diversified based upon both product type as well as geography.
Looking at slide five Trustmark CRE portfolio is 93% vertical with 62% being existing at 38% being construction land development.
Our construction land development portfolio was 81% construction.
Trust box office portfolio as you can see is very modest at $297 million outstanding.
Which represents 2% of the overall loan book this.
This quarter's the buying performed a review of all non owner occupied office credits over a million dollars, resulting in no additional risk rating or accrual status changes.
Folio is comprised of credits with high quality tenants.
Low lease turnover strong occupancy levels and low leverage.
Metrics all of this portfolio remains strong.
Turning to slide six.
The bank's commercial loan portfolio is well diversified as you can see across numerous industry segments.
No single category of seating 13%.
Moving now to slide seven.
Our provision for credit losses for loans held for investment was $3 2 million in the first quarter, primarily attributable to loan growth.
Creases in the remaining life of our mortgage portfolio.
And a little bit of deterioration in our credit quality metrics.
Okay.
Excuse me in our qualitative metrics.
The negative provision for credit losses for off balance sheet credit exposure was $2 2 million for the first quarter, primarily driven by a decrease in unfunded commitments.
On 331 of 2023, the allowance for loan losses.
Loans held for investment was $122.2 million.
Looking at slide eight we continue to post solid credit quality metrics the allowance for credit losses represents 0.98% of loans held for investment.
And 321% of non accrual loans, excluding those better individually analyzed in the fourth quarter net charge offs totaled $1 2 million.
Or oh, 4% of average loans, both non accruals and non performing assets remain near historically low levels Duane.
Okay. 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.
Thank you Duane and good morning, everyone looking at deposits on slide nine we were pleased with our ability to drive deposit growth during the quarter deposits totaled $14 $8 million at March 31st.
$346 million increase linked quarter.
Linked quarter increase was driven primarily by increases in promotional time deposits, which more than offset decreases another personal deposit products.
While non personal balances were off slightly about $17 million and public fund balances were up $122 million.
As of March 31st our promotional time deposit book totaled $920 million with a weighted average rate paid of $4 two 7%.
On a weighted average term of about nine months.
We transcend transacted $150 million of brokered Cds during the quarter with a weighted average rate paid of $4 63, and a weighted average term of about three months as of March 31st.
Deposit mix change continued during the quarter with our 7% linked quarter decline in noninterest bearing DDA appearing to be in line with the industry median for the quarter.
Our cost of interest bearing deposits increased by 82 basis points from the prior to.
153%.
Okay.
Turning to slide 10, Trustmark has a stable granular and low exposure deposit base.
During the first quarter, we had about 457000 average.
Accounts personal and non personal deposit accounts, excluding collateralize public fund accounts with an average balance per account of about $26000.
Average accounts increased by about 8000, or one 8% linked quarter, which was an accelerated pace of account acquisition driven primarily by promotional campaign activity.
As of March 31, 62% of our deposits were insured and 16% were collateralized, meaning that only 22% of our deposits were uninsured and uncollateralized.
We maintain substantial secured borrowing capacity, which exceeded $5 billion at March 31st representing 156% coverage of uninsured and uncollateralized deposits.
Our first quarter total deposit cost, 1.13% represented a linked quarter increase of 62 basis points and accumulative beta cycle to date relative to the change in the fed funds rate of 22%.
Our forecast for the remainder of the year is for continued increase in deposit cost, reaching a rate of about $1, 91% in the fourth quarter, which would represent a cycle to date beta of 43%.
The forecast reflects market implied forward interest rates with the top of the fed funds target range for the fed funds rate, reaching five in a quarter in may before declining to 5% in July .
And $4 75 in September and four 5% in December .
So we are projecting some continued upward repricing of deposits during the third and the fourth quarters. Despite the potential onset of some moderate easing by the fed.
Turning to revenue on slide 11, net interest income FTE decreased $9 million linked quarter.
Mm $141 1 million, which resulted in a net interest margin of 339, representing a linked quarter decrease of 27 basis points.
Higher loan balances and yields contributed about $7 million and $12 $4 million, respectively of less linked quarter, which was more than offset by a $22 $5 million increase in deposit cost and a $6 1 million increase in net borrowing expense.
Drivers of the linked quarter compression in net interest margin included accelerated deposit betas in the increasingly competitive market for deposits.
Deposit mix change to interest bearing from noninterest bearing.
In excess on hand liquidity maintained due to the challenging macroeconomic environment provided during the first quarter.
Turning to slide 12.
Balance sheet remains well positioned for higher interest rates with substantial asset sensitivity driven by our loan portfolio mix with 51% variable rate coupon.
During the first quarter, we continued implementation of our cash flow hedging program to manage asset sensitivity by adding a $25 million notional interest rate swap with a maturity of three years and our receive fixed rate of 367%.
Which brought the portfolio notional at quarter end to $850 million with a weighted average maturity of three one years and a weighted average received fixed rate of $3 one 2%.
We also added 25 million notional of sulfur floor at 4% with a maturity of two nine years at quarter end.
Through implementation of the cash flow hedging program, we have substantially reduced our adverse asset sensitivity to a potential downward shock in interest rates, while maintaining upside potential from higher interest rates.
Yes.
Turning to slide 13, noninterest income for the first quarter totaled $51 $4 million or $6 $2 million linked quarter increase and a $2 $7 million decrease year over year.
The linked quarter increase was principally due to mortgage banking net revenue, which increased by $4 $2 million and an increase in insurance Commission of $2 $3 billion, which was largely seasonal.
For the quarter noninterest income represented 27, 2% of total revenue continuing to demonstrate a well diversified revenue stream.
Looking at Slide 14 mortgage banking revenue totaled $7 $6 million in the first quarter of <unk>.
$4 2 million dollar increase linked quarter, driven by a $1 8 million dollar reduction in amortization of the mortgage servicing asset.
$500000 increase in gain on sale and a $1 $8 million reduction in negative hedge ineffectiveness.
Year over year mortgage banking declined by $2 2 million driven primarily by reduced gain on sale.
Mortgage loan production totaled $361 million in the first quarter, a decrease of seven 6% linked quarter and a decrease of 33, 7% year over year.
Retail production remained strong in the first quarter, representing 80% of volume or about $287 million.
Loans sold in the secondary market represented 72% of production while loans held on balance sheet.
Presented 28%.
The majority of loans going into the portfolio continue to be a consists primarily of 15 year.
And hybrid arms, while we continued to sell rather than retain our conforming 30 year loan originations.
Gain on sale margin decreased by about 39% linked quarter.
196 basis points in the fourth quarter to 120 basis points in the first quarter.
And now I'll ask Tom Chambers to cover noninterest expense and capital management. Thank.
Thank you Tom turning to slide 15, Youll see a detail of our noninterest expenses broken out between adjusted other income totaled.
Noninterest expense was $127 $5 million during the first quarter, a linked quarter decrease of $2 $2 million or one 7%.
Driven by a decrease in services and fees, resulting from lower professional fees during the quarter.
As noted on slide 16, Trustmark remains well positioned from a capital perspective.
At March 31st our capital ratios remained solid with a common equity tier one ratio of 976%.
Total risk based capital ratio of 11, 95%.
So smart enough purchase repurchase any of its common shares during the first quarter, although we have a $50 million.
Priority for the remainder of 2023 under our board authorized share repurchase program, we are unlikely to engage in stock repurchase in a meaningful way.
Our priority for capital deployment continues to be through organic.
Back to you Duane.
Okay. Thank you Tom turning to slide 17, let's review our outlook.
Let's first look at the balance sheet, we're expecting loans held for investment to grow mid to high single digits for the year.
Securities balances are expected to clock to decline by high single digits as cash flow runoff portfolios not reinvested and this of course is subject to the impact of changes in market interest rates.
Deposit balances are expected to grow mid single digits, driven by promotional campaign activity.
Moving on to the income statement, we are expecting net interest income to grow mid single digits, driven by earning asset growth and reflecting flat full year net interest margin based on current market implied forward interest rates.
The total provision for credit losses, including unfunded commitments is dependent upon future loan growth and current macro forecast and is expected to be above 2022 levels.
Net charge offs that require additional reserving are expected to be nominal based on the current economic outlook.
From a non interest income perspective, we expect service charges and bank card fees to remain stable, reflecting the elimination of consumer NSF fees and the implementation of transactional de minimis levels on consumer checking accounts as we previously announced.
Mortgage banking revenue is expected to stabilize at or above the prior year level insurance revenue is expected to increase high single digits full year with wealth management expected to increase mid single digits.
Noninterest expense is expected to increase mid single digits for the year. This reflects the general inflationary pressures and is subject to the impact of commissions and mortgage insurance and wealth management.
We remain intently focused on our fit to grow initiatives at this as discussed throughout 2022.
As noted we've expanded our team of talented production staff.
A significant new line of business expanded in growth markets, all of which will begin to contribute in 2023.
Additionally, we've invested in technology across the franchise to better serve customers and become more efficient we will continue to optimize the retail franchise streamlining offices.
New ATM and ITM technology.
We believe this focus and investment sensations trustmark for profitable growth into the future.
Finally, we will continue a disciplined approach to capital deployment with a preference for organic loan growth and potentially M&A. We will continue to maintain a strong capital base to implement corporate priorities and initiatives.
With that overview of our first quarter financial results and outlook commentary, we'd like to open the floor for questions.
Thank you well now begin the question and answer session ask a question you May Press Star then one on your Touchstone phone.
Is it a speakerphone please pick up your handset before pressing the keys.
Every time your question has been addressed and you'd like to withdraw your question. Please press Star then two.
At this time, we'll pause momentarily to assemble our roster.
First question from Kevin Fitzsimmons D. A Davidson. Please go ahead.
Hey, good morning, guys.
Good morning, Kevin.
Was wondering if we can dig dig into the.
The margin outlook, a little more so first of all Tom I just want to make sure I was just trying to keep up with you I want to make sure I got it right. So.
<unk> COO.
Cumulative beta at the end of the first quarter was 22%.
And you expect it to be 43% by the end of the year was that right.
That's right Kevin.
And is that total deposit beta or that's in interest bearing deposit beta right.
That is a total deposit beta.
Total, okay got it and you.
I guess your cost of interest bearing deposits was 153%.
For the quarter and the 191, you cited but in fourth quarter. What was that that was that's total that's total deposits.
Total coming from.
The 1.13 right that we got it correct.
Okay I just wanted to make sure I was looking right away.
Okay, that's great and then could we talk about.
Just you know having established all that do you happen to have handy what your margin.
The cost of total deposits or interest bearing deposits was for March or at the end of the quarter and then just more generally how you see.
The margin trajectory trajectory I think a lot of banks are saying theres further pressure in second quarter, but not at the pace. We saw in first quarter and then generally more stable in the back half of the year I don't want to put words in your mouth, but just interested in that kind of commentary.
So first of all yes, I will be able to put my hands on that here momentarily.
I will say that.
We are in general agreement.
With what you just said.
So you know one way to think about it Kevin is.
You know when you look at our linked quarter increase in total deposit cost of 62 basis points.
And as you see in the chart on the bottom of Slide 10, we're guiding to we just had a 62 basis point linked quarter increase in total deposit costs, we're guiding to a 51 basis point increase in the second quarter, 22% increase in the third quarter and five <unk>.
<unk> increase in the fourth quarter.
Yes, you know definition by definition, then what that implies is a slowing rate of compression in net interest margin.
And one another key point would be you know.
We lagged significantly.
In the fourth quarter.
If you look at our linked quarter total deposit cost increase of 37 basis points and then if you look at our linked quarter increase in total deposit costs in the first quarter of <unk> 60 to add though that that's 99 right divide that by two that's 50 on average per quarter.
Which is about what we're guiding to for the coming quarter as well.
And then basically dropping in half in the third quarter and as I said in my prepared comments.
We are basing that on market implied forwards, which have essentially the fed hiking one more time. Thank.
I think it's early may.
Then a couple of cuts I think one in July and one in September thereafter.
So.
We are forecasting that deposit costs continue to increase somewhat.
Even in that environment, obviously, maybe we'd have a different outlook.
If if market implied forwards work performed.
More substantial easing.
And certainly I think it would be the case.
If the actual path of interest rates and the fed funds rate were to decline much more substantially than that.
In the second half of the year.
That introduces some different dynamics as well and you know that's obviously what makes this environment, so China challenging right.
Right right. Okay. Thanks very helpful.
Just a question about <unk>.
Uh huh.
How are you feeling about loan growth I know Barry you mentioned that you expect it to be solid and I see what's in the commentary but.
Based on the last time, you put this commentary out which.
Which in a in the commentary it doesn't seem to have changed too much. It seems like we're in a little different view of the economy, but I'm just wondering within that scope of loan growth what you might be.
Expecting to be a bit slower than what maybe there's some tail winds like like loans that are funding up that we have to be taken into account.
And Kevin This is Barry that's exactly correct, we are seeing some slowing and production opportunities obviously for CRE, whether you're talking about new construction and mini Perm. We do have we are seeing a significant slowing there of new opportunities and once we have been.
Ill ourselves of that would be true of any refinancing of all of the existing deals on the CRE side as well so that that that phenomenon definitely occurred in Q1.
From a C&I perspective, it is slower there as well for good opportunities and we're like all banks were being very selective and that's even true on the public finance opportunities, where where their bid processes and there are less there are less bidders out there, but we're being very selective.
Not just on deals, but all but mostly on pricing.
As it relates to public finance, we're trying to maintain pricing discipline, given our given our rising cost of funds. So with all that in mind, we are seeing a slowing in the production side, but to your earlier point, while we are seeing as well on the CRE side. We are seeing continued fundings of existing deals that were put on the books previously.
And then we are seeing a few well performing projects that are availing themselves of an extension option that was that was underwritten at the time the loan was decision and they're there they're meeting all of the qualifications to avail themselves of the additional option year.
And therefore, we're having some balances stay with us a little bit longer in a few cases than we would've anticipated and I'm very pleased to actually to see that because I mean, these are well performing projects well priced at floating rate I mean, everything about them is positive and we're excited about seeing a few of them stay because we lived in an environment.
For so long where things left us so quickly that we weren't able to get the full benefit of the balance of staying on the books so that.
Those things in combination are or what what we see driving our growth going forward.
Okay, great very helpful. Thanks.
You bet.
Thank you Kevin.
Thank you. Our next question will be from Catherine Mealor K B W. Please go ahead.
Thanks, Good morning, just one follow up on the theory.
How about you just say dairy on the projects that Youre seeing take extension options or are you seeing examples yet where you're you're needing to add there's no collateral whether any weakening in.
The underwriting to where you can get more capital that you need to I.
I guess enhance the deal at all to protect yourself right to your point a message. He is just still performing well.
Looking to extend to they can maybe get a better rate that permit.
If the market if rates are cut it's important that feature.
Yeah, Catherine we're not seeing any we're not seeing any need to make any adjustments from how it was underwritten and how it was determined to qualify for though that that extension option I will say definitively that the projects that are at that stage at this point most of them for example in the apartment category.
Laurie they've had substantial rate increases over the period of time from when the project was book of wax you see owed and then they had numerous numerous rate increases, which make it performed quite a bit better than how it was underwritten even given the little bit higher interest rate environment. They find themselves in now versus.
Versus when we underwrote it so the projects are performing better than the pro forma better availing themselves of the extension options in general terms, but there's not any that we're needing to improve their collateral position or anything of that nature as part of the process. They're meeting all the hurdles that where the bond add ons.
Riding in order to avail themselves of the additional one year.
And they are waiting for that better and they're starting to see we're starting to see in the second in the secondary market. We're starting to see some attractive longer term rates recently better, allowing a few projects to began to decide to stay the developers decided to move forward and go ahead and get those put into the permanent market.
So we are seeing the early stages of some interest to move things into the permanent market that maybe the reason for asking for the warning. The additional year is to wait for a little better entry point into that permanent market Department market is available to them unequivocally theres been no change there, they're just waiting for the right time from an interest.
My perspective.
Great, Okay and then.
What's the process or what what are you with the process that you undertake to decide whether you will grant the extension or not and what kind of what kind of financial. Thank you looking at to make sure that you don't need to get additional collateral.
Sure I mean, what we're what we've typically when you look at the determining factors and here again. These factors are established that underwriting and so as the project gets to maturity those hurdles were established and it's in here again their floating rate. So there they're paying the full afraid of the current rate environment in terms of <unk>.
Meeting these hurdles and.
Typically there's a three pronged approach to establishing the interest rate.
Probably the one driving today is the actual rate, but theres also it's also it's also tied back to a 10 year plus a spread and there's other there's other ways in which we go about establishing those potential interest rate hurdles that have to be met the hire of then theres also going to be the debt service.
Coverage at the project has to hit from a hurdle perspective. It took the hardware itself from a debt service coverage perspective is driven by the product category, some have higher hurdles than others, but typically you're going to be in that one 130 to $1 40 range.
Of a debt service coverage in order for that hurdle to be available to them could be higher depending on the category.
Okay, Great that's super helpful.
I think that could come about to talk about the margin at park.
Higher expected.
Total deposit costs.
Are you getting a little more conservative in how youre thinking about the mix shift in deposit balances and how are you thinking it out anywhere ultimately noninterest bearing as a person that deposit ratio once we get through the next year.
Hey, Catherine.
Good question.
The answer to that is a little bit.
So obviously our mix change has continued I think we ended the quarter at about 22% in terms of noninterest bearing and our internal forecast we are.
Projecting continued pressure.
There I think we have it going down a few more points.
Between now and year end, you know what's interesting as you look back historically over a very long period of time.
It historically, we've never really dropped below 20%.
So we as I said, we've got to go on a few points lower from where we are now at 22% and we're gonna have to continue and monitor that so yes. It is a factor.
I Wouldnt character characterize our outlook.
With respect to deposit dynamics and deposit cost.
Very you know pretty pretty unchanged from the guidance, we gave on last quarter's call.
Obviously, what we've done with this quarter's deck, we added a slide to try and provide greater transparency.
In terms of our <unk>.
Our expectations for the data.
Kevin Fitzsimmons questions earlier, I understand the questions and maybe just wanting to make sure. We're precise about interest bearing deposit cost versus total deposit costs because in the past I've always talked about interest bearing deposit cost in <unk> and <unk>.
I know people think in terms of total deposit costs, including the potential mix change and so we're giving your views of both of those things now and long winded answer.
The short answer again is yes. We are we are modeling internally continued pressure.
We're just going to have to continue to monitor that.
It was interesting I feel like you were ahead of everyone. In modeling you know where these deposit betas were coming in did you have you seen your guidance really hasn't changed so.
Where are you seeing I guess have you seen anything that has worsened since.
You know the recent bank failures, and where everything kind of intensified whereas it.
Just kind of again coming.
It's all kind of playing out as you originally expected in your more conservative outlook at the start of the year.
Well clearly, what we have seen and theres not much of it right but.
With Silicon Valley Bank, Sydney signature Bank first Republic under pressure I mean, clearly you have seen.
Some heightened interest on the part of some depositors, usually larger edwards called them, maybe more sophisticated or more aware depositors.
But we have seen really no unusual attrition or unusual.
Unusual deposit dynamics I think we've we've fared very well here I think you know again, it's this type of environment demonstrates the quality of our deposit base.
Great great. Thank you.
Thank you Catherine.
Thank you and again if you have a question. Please press Star then one.
Thank you. This concludes our question and answer session.
Now I'd like to turn the conference back over to Duane Dewey for any closing remarks.
Yeah.
Okay, well. Thank you again for joining us this morning, and we appreciate.
Your.
Participation and look forward to being back with you at the end of the second quarter in July we hope everybody has a great week and we will talk to you then.
The conference has now concluded.
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Okay.