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spk01: 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 1 on a touch-tone phone. To withdraw your question, please press star, then 2. As a reminder, this call is being recorded. It is now my pleasure to introduce Mr. Joey Rain, Director of Corporate Strategy at Trustmark. Please go ahead.
spk07: 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 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 Dwayne Dewey, President and CEO of Trustmark.
spk06: 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 22 with continued growth in loans and deposits, expanded total revenue, and continued strong credit quality. For the first quarter, Trustmark reported net income of $29.2 million, or 47 cents 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 same period last year, a 4.1% increase. Deposits totaled $15.1 billion, an increase of $26.1 million late quarter, and $730 million, or 5.1%, from this time last year. Revenue in the first quarter totaled $153.5 million, a $4.4 million or 2.9% increase linked quarter. Net interest income totaled $102.3 million in the first quarter, an increase of $1.1 million or 1.1% from the prior quarter. Non-interest 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 20.3% 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 1.7% increase from the prior quarter, and flat year over year. Credit quality remained solid this quarter as non-performing assets declined 8.9% from the prior year and recovery succeeded charge-offs by 137,000. We also maintained strong capital levels with a Tier 1 ratio of 11.23% and a total risk-based capital of 13.53%. The Board declared a quarterly cash dividend of 23 cents per share payable June 15th to shareholders of record June 1st. During the first quarter, Trustmark repurchased 9.1 million or approximately 279,000 shares of common stock. As of March 31st, Trustmark had 90.9 million remaining authority under its existing repurchase program which expires 12-31-22. At this time, I'd like to ask Barry to provide color on loan growth and credit quality.
spk03: We're glad to, Dwayne. Looking at slide four now, loans held for investment, excluding PPP loans, totaled $10.4 billion at March 31st, an increase of $149.3 million late quarter, and $413.4 million, or 4.1% from the prior year. We're 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 both product type and geography. Moving to slide five, Trustmark's CRE portfolio is 65% existing and 35% construction land development, which is 92% is vertical. Our construction land development portfolio 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 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, 2022, the allowance for credit losses of loans held for investments totaled $98.7 million. Looking at slide 8, we continue to post solid asset quality metrics. The allowance for credit losses represented 0.95%. of loans held for investment and 484 percent of non-performing loans, excluding those that are individually analyzed. In the first quarter, recoveries exceeded charge-offs by 137,000. Non-performing assets remained relatively unchanged from the prior quarter and decreased 6.6 million, or 8.9 percent, from the prior year. Duane?
spk06: 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.
spk04: Thanks, Duane, and good morning, everyone. So looking at deposits on slide nine, deposits totaled $15.1 billion at March 31st, a $26 million increase linked quarter, and a $730 million increase year over year. The 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 continue to maintain a favorable deposit mix with 31 percent of balances in non-interest-bearing deposits and 63 percent 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 an net interest margin of 258, representing a linked quarter increase of five basis points. Higher average loan balances contributed about $600,000 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 and about $400,000 due to higher average balances. The decline in interest-bearing deposit costs reduced interest expense linked quarter by about $600,000. Net interest margin excluding PPP loans and Fed reserves was 288, 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 driven by a loan portfolio mix with 47% variable rate coupon, a securities portfolio duration of 4.1 years, and a cash and due balance of $1.9 billion. 63% of the securities portfolio in agency MBS is backed primarily by a 15-year collateral which generates substantial cash flow for reinvestment and limits extension risk in a rising interest rate environment. Our year one increase in net interest income to immediate interest rate shocks is about 8 percent for a 100 basis point shock, about 17 percent for a 200 basis point shock, and about 26 percent 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 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, a $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 7.6%. For the quarter, non-interest income represented 35% of Trustmark's revenue, continuing to demonstrate a well-diversified revenue stream. Looking at slide 13, mortgage banking, revenue totaled $9.9 million in the first quarter. That was a $1.7 million decrease linked quarter and a $10.9 million decrease year-over-year. Mortgage loan production totaled $544 million in the first quarter, a decrease of 7.9% linked quarter, and 29% year over year. Retail production remained strong in the first quarter, representing about 80% of volume, or about $434 million. 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 non-interest expense and capital management.
spk05: Thank you, Tom. Turning to slide 14, you will see the detail of our non-interest expenses broken out between adjusted, other, and total. Adjusted non-interest expense was up $120.6 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, a $1.3 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 279,000 shares of Trustmark stock. At March 31st, we had $90.9 million in remaining authority under its existing stock repurchase program, which expires December 31st, 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 remain solid with a common Tier 1 ratio of 11.23%, and a total risk-based capital ratio of 13.53% at March 31st. Tangible equity to tangible assets declined to 7.29% at March 31st, 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 Duane mentioned earlier, the Board declared a quarterly cash dividend of 23 cents per share payable June 15th to shareholders on record on June 1st. Dwayne?
spk06: Dwayne Johnson 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 percent 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 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. 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 expected to increase mid-single digits full year. Adjusted non-interest expense is expected to increase low single digits full year, subject to the impact of commissions and mortgage insurance in the 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 enhance Trustmark's growth and profitability, we've accelerated our efforts to optimize our branch network, reflecting changing customer preferences and continued migration to mobile 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 in associate 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.
spk01: 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 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 KBW. Please go ahead. Hey, great.
spk00: Good morning, guys.
spk06: Good morning, Will. Good morning.
spk00: Hey, great. So I just wanted to start on the overdraft and NSF. I know you guys announced a handful of changes in late March, and you disclosed the impact that you thought NSF would have to those programs. But I know you guys are still working through determining that de minimis threshold on overdrafts. Just curious where that stands today and if 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 the expense or revenue side that could sort of dampen the impact of that revenue over time?
spk06: Well, I'll start, and Tom or Tom either can comment on where I missed. But regarding the NSF, we did quantify. We believe the NSF issue will be roughly 10 percent or less of overall OD or NSF total charges. forward-looking, so we're still working on the de minimis level. We've not quite finalized our position on that issue, but we look at a late fourth quarter, early first quarter implementation of those changes as we make the systematic changes to get those in place. Regarding offsets, as noted in our discussion, some of the branch closure issues and all of the overall program of optimization of our markets, of expense reduction across processes and that sort of thing, we believe will more than offset the NSF or overdraft changes.
spk00: Okay. Great. Super helpful. And then just moving over to the margin, you know, it was really nice to see it inflect off the fourth quarter levels. I guess just twofold here, is it fair to say that the fourth quarter was sort of a bottom of the margin? And forward-looking, with your new NII guidance and following the forward curve, how should we think about the cadence of new expansion as we move throughout the year? Or maybe more easily put, what would be the incremental margin pickup that you would see from maybe every 25 basis point swing in rates?
spk04: So, Will, this is Tom Owens. So, yes, well, let me start with, you know, what's in the forecast, right? So, we did increase our guidance to low double-digit year-over-year growth in net interest income, XPPP. And obviously, that increase in guidance from the prior guidance of mid-single digits 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, you know, the mid-single-digit growth guidance was based on three Fed rate hikes in 2022. The updated guidance is based on the equivalent of eight 25 basis point rate hikes now in 2022. So, in terms of the cadence of 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, You know, if you look at the low double-digit increase in NII, it's basically equally comprised. It's approximately equal parts earning asset growth and net interest margin expansion.
spk00: Okay, great. Understood. That's it for me.
spk01: Again, if you have a question, please press star, then 1. The next question is from Brad Millsaps with Piper Sandler. Please go ahead. Hey, good morning.
spk06: Good morning, Brad. Good morning.
spk02: Thanks for taking my questions. Tom, maybe you just wanted to start with the balance sheet. If I'm sort of following the guidance, you know, maybe if you grow your loan portfolio another half a billion dollars for here, you know, maybe a few hundred million in securities to get you up to that 25% number. still maybe leaves you with, you know, a billion dollars of cash or so sitting on the balance sheet, particularly if your deposit growth kind of comes to as expected. Am I thinking about that correctly? Is your plan just to kind of maybe sit on more liquidity until, you know, 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're managing the cash portion of the balance sheet.
spk04: Yeah, it's a great question, Brad. And as you know, you know, we've sort of 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 to $300 million. And you're right, that would still leave us with substantial excess liquidity. I would say, you know, you get past that guidance of $200 million to $300 million of growth in the securities portfolio here in the second quarter. It 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. You know, we'll be watching two things, right? Well, three things, really. We'll 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 know, you look under the hood, first quarter deposit growth at $26 million, you know, doesn't seem strong, but then when you bear in mind we had some significant public fund runoff, you know, we continue to see very strong consumer deposit growth or personal deposit growth, and so certainly to the extent that those balances exhibit, you know, effective durations consistent with the back book, we would be inclined to leaning into deploying that liquidity. We're always going to prefer, you know, deploying it via lending to the extent those opportunities exist to do that prudently. But it's very reasonable to assume that we'll continue to grow the securities portfolio.
spk02: Great. Thank you. And, Tom, just to follow up, it looked like your interest rate sensitivity to 100 basis point shock was maybe down from where it was in the fourth quarter. Is that just a function of maybe already seeing one rate hike or just – you know, other changes in your assumptions? I'm probably missing something there, but I was just kind of curious.
spk04: Well, it has more to do with the mix change, right? And so, you know, you look, I think on a linked quarter basis, you know, our excess reserves at the Fed drop from, you know, in round numbers, 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 include the public fund decline, not very substantial deposit growth in the first quarter. And so the fact that we put that money to work in the securities portfolio, that's the dynamic that caused that decrease.
spk02: Great. Thank you. And just kind of moving on to the share buyback. You may be one of the actors in the first quarter that I thought you might have been. Dwayne, do you think it's a year where, you know, you guys repurchase kind of similar to the amount you did in 2021? Or do you think you're going to be more conservative, just kind of curious with the stock, you know, all bank stocks down and, you know, fairly attractive valuations, how aggressive you might be with that remaining $90 million?
spk06: Yeah, I think Brad 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'll continue to be opportunistic. Our 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, you know, considers the opportunities there. So kind of as we sit today, we'll likely be more conservative than we've been in the past, or at least in 2021 on that front. Yeah, and Brad, this is Tom.
spk04: I would add, I think, if my memory serves me correctly on the last call, we gave that guidance that our run rate deployment here in 22 would be, you know, substantially meaningfully below that of 21, 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 21 really being a trough, now that we've hit an inflection point in terms of net interest margin and net interest income, you know, growth and earnings should be accelerating. So, you know, we're probably in a, I'll call it a, a low point here in terms of deployment of capital via repurchase, and we'll see how the year progresses in terms of profitability and opportunity.
spk06: And then the final note, Brad, would be, you know, based on other uses of capital, I mean, we would rather grow organically. We still are very interested on the M&A front and would like to consider opportunities there. So, again, the capital deployment will be opportunistic, and, you know, we'll see how the rest of the year unfolds here.
spk02: Great, and I appreciate that. And just final two 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 or facility gain that impacted other income? And then would you expect sort of your tax rate to revert back to kind of a normal, you know, 16% or so, 15 and a half going forward is a little lower than I thought this quarter. Thanks for answering my questions.
spk06: So just I'll start and then the Toms can add too, but the gain on sale would say one time happened to be an attractive market and we, we, basically sold a location and relocated across the street, and that represented a $800,000 plus pre-tax gain for the quarter. And so that was kind of a one-time deal. So Tom or Tom, anything to add to that? What was the second? What was the question, Brad?
spk02: Tax rate. Just the tax rate. It's a little lower this quarter. Just curious where it might head back to, if at all.
spk05: Yeah, 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 that's required by GAAP accounting. You have to forecast out your estimated year-end tax rate. So within that forecast, you've 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, etc. So there's a several factors that play into that estimated forecasted tax rate. And right now, what you see in the quarterly effective tax rate of 13.85% during the first quarter, that's what we're looking at to see what our forecasted year-end tax rate is. 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%.
spk02: Okay, great. Thank you.
spk01: Once again, if you have a question, please press star then 1. Please stand by 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.
spk06: 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.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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