Trustmark (TRMK) Q1 2022 Earnings Call Transcript

Trustmark (TRMK 1.57%)
Q1 2022 Earnings Call
Apr 27, 2022, 9:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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. [Operator instruction] 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.

Joey Rein -- Director of Corporate Strategy

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 Duane Dewey, president, and CEO of Trustmark.

Duane Dewey -- President and Chief Executive Officer

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 $0.47 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 [inaudible] the same period last year, a 4.1% increase. Deposits totaled $15.1 billion, an increase of $26.1 million last 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 recoveries exceeded charge offs by $137 thousand. We also maintained strong capital levels with the Tier one ratio of 11.23% and a total risk-based capital of 13.53%. The board declared a quarterly cash dividend of $0.23 per share, payable June 15 to shareholders of record June 1st. During the first quarter, Trustmark repurchased $9.1 million, or approximately 279 thousand 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.

Barry Harvey -- Chief Credit and Operations Officer

We're glad to, Duane. Looking to slide four, our long tail for investment, excluding PPP loans total of $10.4 billion at March 31st, an increase of $149.3 million linked-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 both well for the future of 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 on loans held for investments totaled $98.7 million. Looking at slide eight, we continue to post solid asset quality metrics. The allowance for credit losses represented .95% of loans held for investments, and 484% of non-performing loans excluding those that are individually analyzed. In the first quarter, recoveries exceeded  charge-offs by $137 thousand.

Non-performing assets remained relatively unchanged from the prior quarter and decreased $6.6 million or 8.9% from the prior year, Duane.

Duane Dewey -- President and Chief Executive Officer

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.

Tom Owens -- Chief Financial Officer

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 2 basis points from the prior quarter to total 11 basis points, and we continued to maintain a favorable deposit mix with 31% of balances in non-interest-bearing deposits, and 53% of deposits in checking accounts. Turning our attention to revenue on slide ten.

Net interest income FTE increased $1.1 million linked-quarter, totaling $102.3 million, which resulted in an antitrust margin of 258, representing a linked-quarter increase of 5 basis points. Higher average loan balances contributed about $600 thousand 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 thousand due to higher average balances. The decline in interest-bearing deposit cost reduced interest expense linked-quarter by about $600 thousand.

Net interest margin excluding PPP loans and Fed Reserves was 288, an increase of 6 basis points linked-quarter. Turning to slide 11, the balance sheet remains well positioned for higher interest rates, with substantial asset sensitivity driven by 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 agent CMBS, 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. RU1 increase in net interest income to immediate interest rate shock is about 8% or 100 basis points shock, about 17% for a 200 basis point shock, and about 26% for a 300 basis point shock.

With the benefit in years 2 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, [inaudible] of $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, representing 71% of production, on loans held on balance sheet, representing 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.

Now, I'll ask Tom Chambers to cover non-interest expense and capital management.

Tom Chambers -- Chief Accounting Officer

Thank you, Tom. Turning to slide 14, you will see the detail of our non-interest expenses broken up 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, and $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 thousand 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 one ratio of 11.23%, and a total risk-based capital ratio of 13.53% at March 31st. Annual 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 $0.23 per share, payable June 15 to shareholders of record on June 1st, Duane.

Duane Dewey -- President and Chief Executive Officer

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.

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 for the 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 on 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 in mortgage insurance and 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 FIT2GROW, to enhance Trustmark 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 FIT2GROW, 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 our floor for questions.

Questions & Answers:

Operator

We will now begin the question and answer session. [Operator instructions] Our first question is from Will Jones with KBW. Please go ahead.

Will Jones -- Keefe, Bruyette and Woods -- Analyst

Hey. Great. Good morning, guys. I just wanted to start on the overdraft, and as 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 the minimum threshold on overdraft. Just curious where that stands today, and if you guys are in a position maybe to quantify an impact there, and then maybe take it on the flip side of that conversation. Maybe just talk about some natural offsets you may have on the expense, or revenue side to sort of dampen the impact of that revenue over time.

Duane Dewey -- President and Chief Executive Officer

Will, I'll start, and Tom or Tom, either can comment on where I miss, but regarding the NSF, we did quantify. We believe the NSF issue will be roughly 10% or less of overall OD or NSF total charges are 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, expense reduction across processes, and that sort of thing we believe will more than offset the NSF or overdraft changes.

Will Jones -- Keefe, Bruyette and Woods -- Analyst

OK. Great. Super helpful. And then just moving over to the margin, it's 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 on the margin? I mean, forward-looking with your new 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 put, what would be the incremental margin pickup that you would see from maybe every 25 basis point swing in rates?

Tom Owens -- Chief Financial Officer

So, Will, this is Tom Owens. So, yes. Well, let me start with what's in the forecast, right? So we did increase our guidance to low double-digit year-over-year growth in net interest income XPPPP. 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, the mid single-digit growth guidance was based on three Fed rate hikes in 2022. The updated guidance is based on the equivalent of 825 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, 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.

Will Jones -- Keefe, Bruyette and Woods -- Analyst

Understood. That's it for me.

Operator

[Operator instruction] The next question is from Brad Milsaps with Piper Sandler. Please go ahead.

Brad Milsaps -- Piper Sandler -- Analyst

Hey. Good morning. Thanks for taking my questions. Tom, maybe you just wanted to start about, I'm sort of following the guidance, maybe if you grow your 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 a $1 billion of cash or so, sitting on the balance sheet, particularly if your deposit growth kind of comes through as expected. In my thinking about that correctly, is your plan is 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're managing that, the cash portion, the balance sheet.

Tom Owens -- Chief Financial Officer

And yeah, it's a great question, Brad. And as 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.

And it is 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 get past that guidance of $200 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? 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.

It said in my prepared comments, you look under the hood. First quarter deposit growth is $26 million, doesn't seem strong. But then when you bear in mind, we had some significant public fund runoff, 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, consistent with the back book, we would be inclined to leaning into deploying that liquidity.

We're always going to prefer deploying into a lending to the extent those opportunities do exist to do that prudently. But it's very reasonable to assume that we'll continue to grow the securities portfolio.

Brad Milsaps -- Piper Sandler -- Analyst

Great. Thank you. And Tom, just to follow-up, it look like your interest rate sensitivity to a 100 basis point shock was very down from where it was in the in the fourth quarter. Is that just a function of maybe already seeing one rate hike? or just other changes in your assumptions? I'm probably missing something there.

But just kind of curious.

Tom Owens -- Chief Financial Officer

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 have 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.

Brad Milsaps -- Piper Sandler -- Analyst

Great. Thank you. Just kind of moving on to the share buyback. You maybe weren't as active in the first quarter as I thought you might have been doing.

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 you're going to be more conservative? Just kind of curious with the stock, all bank stocks down and, at fairly attractive valuations, how aggressive you might be with that remaining $90 million.

Duane Dewey -- President and Chief Executive Officer

Yeah. I think right in our our 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, and 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.

Tom Chambers -- Chief Accounting Officer

Yeah, and Brad, this is Tom. I would add, I think if my memory serves me correctly of the last call, we gave that guidance. That our run rate deployment here in 22 would be 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, growth and earnings should be accelerating.

So we're probably in a, I'll call it 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. And then the final note, Brad, would be 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 we'll see how the rest of the year unfolds here.

Brad Milsaps -- Piper Sandler -- Analyst

Great. And I appreciate that. And just final Q 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 16% or so, 15 and a half going forward is a little lower than I thought this quarter. Thanks for answering my questions.

Duane Dewey -- President and Chief Executive Officer

So just I'll start the times can add to, but the gain on sale was a one time happened to be an attractive market, and we basically sold our location and relocated across the street, and that represented a $800 thousand plus pre-tax gain for the quarter. And so that was kind of a one-time deal. So Tom or Tom, anything that adds to that? what was the question, Brad?

Brad Milsaps -- Piper Sandler -- Analyst

Just the tax rate goes a little lower this quarter. Just curious where it might head back to, if at all?

Tom Chambers -- Chief Accounting Officer

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 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 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%.

Brad Milsaps -- Piper Sandler -- Analyst

OK. Great. Thank you.

Operator

[Operator instructions] No further questions. This concludes our question and answer session. I would like to turn the conference back over to Dwayne Dewey for any closing remarks.

Duane Dewey -- President and Chief Executive Officer

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.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Joey Rein -- Director of Corporate Strategy

Duane Dewey -- President and Chief Executive Officer

Barry Harvey -- Chief Credit and Operations Officer

Tom Owens -- Chief Financial Officer

Tom Chambers -- Chief Accounting Officer

Will Jones -- Keefe, Bruyette and Woods -- Analyst

Brad Milsaps -- Piper Sandler -- Analyst

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