TRMK - NASDAQ

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Now, it’s 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 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, 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 the 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 Owens, 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, strong performance in our mortgage insurance and wealth management businesses and diligent expense management. For the fourth quarter, Trustmark reported net income of $50.3 million or $0.82 per diluted share. This level of profitability resulted in a return on average tangible common equity of 18.03% and a return on average assets of 1.1%. Let's look at our financial highlights in a little more detail by turning to Slide 3. We -- 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, an increase of $346 million linked quarter. Revenue in the first quarter totaled $189 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. Noninterest expense in the first quarter totaled $128.3 million, a decline of $2.2 million or 1.6% 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 320.8% of nonaccrual loans. Net charge-offs totaled $1.2 million and represented 4 basis points of average loans. Nonperforming assets represented 0.58% 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 1 of 9.76% and a total risk-based capital ratio of 11.95%. The -- the Board declared a quarterly cash dividend of $0.23 per share payable to June mid shareholders payable on June 15 to shareholders of record June 1. At this time, I'd like to ask Barry to provide some color on loan growth and credit quality.

I’ll be glad to, Duane. Thank you. Turning to Slide 4. Loans held for investment totaled $12.5 billion as of March 31, an increase, as Duane mentioned, of $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 5; Trustmark's CRE portfolio is 93% vertical with 62% being existing and 38% being construction land development. Our construction land development portfolio was 81% construction. Trustmark's office portfolio, as you can see, is very modest at $297 million outstanding, which represents 2% of the overall loan book. This quarter, the bank performed a review of all non-owner occupied office credits over $1 million, resulting in no additional risk rate or accrual status changes. The portfolio is comprised of credits with high-quality tenants, low lease turnover, strong occupancy levels and low leverage. The credit metrics on this portfolio remain strong. Turning to Slide 6; the bank's commercial loan portfolio is well diversified, as you can see across numerous industry segments with no single category exceeding 13%. Moving now to Slide 7; our provision for credit losses for loans held for investment was $3.2 million in the first quarter, primarily attributable to loan growth, increases in the remaining life of our mortgage portfolio and a little bit of deterioration in our credit quality metrics and 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 3/31 or 2020 30, the allowance for loan losses on loans held for investment was $122.2 million. Looking at Slide 8, we continue to post solid credit quality metrics. The allowance for credit losses represents 0.98% of loans held for investment and 321% of nonaccrual loans, excluding those that are individually analyzed. In the fourth quarter, net charge-offs totaled $1.2 million or 0.04% of average loans, both nonaccruals and nonperforming 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 9; we were pleased with our ability to drive deposit growth during the quarter. Deposits totaled $14.8 billion at March 31. That was a $346 million increase linked quarter. Linked quarter increase was driven primarily by increases in promotional time deposits, which more than offset decreases in other personal deposit products, while nonpersonal balances were off slightly about $17 million and public fund balances were up $122 million. As of March 31, our promotional time deposit book totaled $920 million with a weighted average rate paid of 4.27% and a weighted average term of about 9 months. We 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 3 months as of March 31. 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 quarter to 1.53%. Turning to Slide 10; Trustmark has a stable, granular and low exposure deposit base. During the first quarter, we had about 457,000 average accounts, personal and nonpersonal deposit accounts, excluding collateralized public fund accounts, with an average balance per account of about $26,000. Average accounts increased by about 8,000 or 1.8% 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 -- and maintain substantial secured borrowing capacity which exceeded $5 billion at March 31, representing 156% coverage of uninsured and uncollateralized deposits. Our first quarter total deposit cost of 1.13% represented a linked quarter increase of 62 basis points and a cumulative 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 costs, reaching a rate of about 1.91% in the fourth quarter, which would represent a cycle-to-date beta of 43%. We -- the forecast reflects market implied forward interest rates with the top of the Fed funds target range for the Fed funds rate, reaching 5.25% in May before declining to 5% in July and 475 in September and 4.5% 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 not said. Turning to revenue on Slide 11; net interest income FTE decreased $9 million linked quarter, totaling $141.1 million, which resulted in a net interest margin of 3.39% representing a linked quarter decrease of 27 basis points. Higher loan balances and yields contributed about $7 million and $12.4 million, respectively, of last linked quarter, which was more than offset by a $22.5 million increase in deposit costs and a $6.1 million increase in net borrowing expense. Drivers of the linked quarter progression in net interest margin included accelerated deposit betas in the increasingly competitive market for deposits, deposit mix change to interest-bearing from noninterest-bearing and excess on-hand liquidity maintained due to the challenging macroeconomic environment that pervaded during the first quarter. Turning to Slide 12; the 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 3 years and a received fixed rate of 3.67%, which brought the portfolio notional at quarter end to $850 million with a weighted average maturity of 3.1 years and a weighted average received fixed rate of 3.12%. We also added 25 million notional of sulfur floor at 4% with a maturity of 2.9 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. Turning to Slide 13; noninterest income for the first quarter totaled $51.4 million, a $6.2 million linked quarter increase and a $2.7 million decrease year-over-year. The linked quarter increase is principally due to mortgage banking net revenue, which increased by $4.2 million and an increase in insurance commission of $2.3 million, 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; a $4.2 million increase linked quarter, driven by a $1.8 million reduction in amortization of the mortgage servicing asset, a $500,000 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 7.6% 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 represented 28%. The majority of loans going into the portfolio continue to be -- consist primarily of 15-year and hybrid ARMs, while we continue to sell rather than retain our conforming 30-year loan originations. Gain on sale margin decreased by about 39% linked quarter from 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 you, Tom. Turning to Slide 15, you'll see a detail of our noninterest expenses broken out between adjusted other in total. Adjusted noninterest expense was $127.5 million during the first quarter, a linked quarter decrease of $2.2 million or 1.7%, mainly 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 31, our capital ratios remained solid with a common equity Tier 1 ratio of 9.76% and a total risk-based capital ratio of 11.95%. This market enough repurchased any of its common shares during the first quarter. Although we have a $50 million authority 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 lending. 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 decline by high single digits as cash flow runoff of the portfolio is 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 noninterest 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 in mortgage insurance and wealth management. We remain intently focused on our Fit to Grow initiatives as discussed throughout 2022. As noted, we've expanded our team of talented production staff added 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 and deploying new ATM and ITM technology. We believe this focus and investment positions 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. We will now begin the question-and-answer session. [Operator Instructions] First question will be from Kevin Fitzsimmons, D.A. Davidson.

I was wondering if we can dig into the margin outlook a little more. So first of all, Tom, I just want to make sure I was trying to keep up with you, I want to make sure I got it right. So the 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 a total deposit beta or that's an 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 1.53% for the quarter. And the $1.91 you cited, but in fourth quarter, what was that? That was total?

That's total deposits.

So coming from the $1.13 [ph], right, that we got incorrect? Okay. I just wanted to make sure I was looking byway Okay. That's good. And then can we talk about just having established all that, do you have to happen to have handy what your margin, what that 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. I think a lot of banks are saying there's 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 one way to think about it, Kevin, is...

If you look at our linked quarter increase in total deposit cost of 62 basis points. And as you see in the chart at 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 5% increase in the fourth quarter. So yes, definition by definition, then what that implies is a slowing rate of compression in net interest margin. And another key point would be 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 62 add those up at 99, right? Divide that by 2, 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 forward, which have essentially the Fed hiking one more time. I think it's early May and then a couple of cuts, I think one in July and 1 in September thereafter. And so -- we are forecasting the deposit costs continue to increase somewhat even in that environment. Obviously, maybe we'd have a different outlook if market implied forwards were for more substantial easing. And certainly, I think it would be the case that 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, then that introduces some different dynamics as well. And that's obviously what makes this environment so challenging.

Okay, that's very helpful. Maybe just a question about how you're 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 in the commentary 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 and what maybe there's some tailwinds 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 in production opportunities. Obviously, for CRE, whether you're talking about new construction mini farm, we do have -- we are seeing a significant slowing there of new opportunities and once we avail ourselves of. That would be true of any refinancing of the existing deals on the CRE side as well. So 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, we're being very selective, and that's even true on the public finance opportunities where they are bid processes. And there are less bidders out there, but we're being very selective not just on deals, but mostly on pricing as it relates to public finance, we're trying to maintain pricing discipline 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, what we are seeing as well on the CRE side, we are seeing continued funding 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 underwritten at the time the loan was decisioned and they're meeting all the qualifications to avail themselves of the additional option year. And therefore, we're having some balance and stay with us a little bit longer in a few cases than we would have anticipated and very pleased actually to see that because, I mean, these are well-performing projects, well priced, they're floating rate. I mean, everything about them is positive, and we're excited about seeing a few open today 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 is staying on the book. So those things in combination are what we see driving our growth going forward.

Okay, great. Very helpful.

Thank you, Kevin.

Our next question will be from Catherine Mealor of KBW.

Just one follow-up on the CRE comment you just made, Barry. On the projects that you're seeing take extension options, are you seeing examples yet where you're needing to add additional collateral or there's any weakening in the underwriting to where you can get more capital or you need to, I guess, enhance the deal at all to perfect yourself? Or to your point, most of these is still performing well, they're just looking to extent that they can maybe get a better rate in the permanent financing market if rates are cut at some point in the future?

Yes, Catherine, we're not seeing any need to make any adjustments from how it was underwritten and how it was determined to qualify for 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, they've had substantial rate increases over the period of time from when the project was actually CO-ed and then they had numerous, numerous rate increases, which make it perform quite a bit better than how it was underwritten, even given the a little bit higher interest rate environment they find themselves in now versus when we underwrote it. So the projects are performing better than the pro forma, that are availing themselves of the extension options in general terms. But there's not any that we're needing to improve the collateral position or anything of that nature as part of the process. They're meeting all the hurdles that were defined at underwriting in order to avail themselves of the additional 1 year. And they are waiting for that better and they're starting to see -- we're starting to see in the secondary market. We're starting to see some attractive longer-term rates recently that are allowing a few projects to begin to decide to -- the developers decide 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 may be the reason for asking for the -- wanting the additional year is to wait for a little better entry point into that permanent market. The prime market is available to them. unequivocally, there's been no change there. They're just waiting for the right time from an interest rate perspective.

Great. Okay. And what's the process? Or what are you -- what's the process that you undertake to decide whether you will grant the extension or not? And what kind of financials are you looking at to make sure that you don't need to get additional collateral?

Sure. I mean what we -- typically, when you look at the determining factors and here again, these factors are established at underwriting. And so as the project gets to maturity, those hurdles were established, and it's -- here again, they're floating rates. So they're paying the full freight of the current rate environment in terms of meeting these hurdles. And typically, there's a 3-pronged approach to establishing the interest rate. Probably the one driving today is the actual rate, but there's also -- it's also tied back to a 10-year plus a spread, and there's other ways in which we go about establishing those potential interest rate hurdles that have to be met, the higher of, then there's also going to be the debt service coverage that the project has to hit from a hurdle perspective. The hurdle 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 $130 million to $140 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. And then it back to Tom about -- to talk about the margin. Is part of the higher expected total deposit costs, are you getting a little more conservative in how you're thinking about the mix shift in deposit balances? And how are you thinking about maybe were ultimately noninterest-bearing as a percentage of deposit land once we get through the next year?

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. What's interesting is you look back historically over a very long period of time, it historically would never really dropped below 20%. So as I said, we've got to go in a few points lower from where we are now at 22%, and we're going to have to continue and monitor that. So yes, it is a factor. I mean, I would characterize our outlook with respect to deposit dynamics and deposit cost as very 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 expectations for the beta to Kevin Fitzsimmons questions earlier. I understand the questions and maybe just wanting to make sure we're precise about interest-bearing deposit costs versus total deposit costs because in the past, I've always talked about interest-bearing deposit costs. And I know people think in terms of total deposit costs, including the potential mix change. And so we're giving you views both of those things now. And long-winded answer, the short answer again is yes. We are modeling internal continued pressure. We're just going to have to continue to monitor that.

It was interesting to feel like you were ahead of everyone in modeling now where these deposit betas were coming. Did you -- have you seen -- and your guidance really hasn't changed. So -- are you seeing -- I guess have you seen anything that has worsened since the recent bank failures and where everything kind of intensified? Or is 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 there's not much of it, right, but with Silicon Valley Bank, Signature Bank, First Republic under pressure. I mean, clearly, you have seen some heightened interest on the part of some depositors, usually larger, let's call them maybe more sophisticated or more aware depositors but we have seen really no unusual attrition or unusual deposit dynamics. I think we've fared very well here. And I think, again, it's this type of environment that demonstrates the quality of our deposit base.

Thank you. [Operator Instructions] This concludes our question-and-answer session. Now, I'd like to turn the conference back over to Duane Dewey for any closing remarks.

Okay. Well, thank you again for joining us this morning. 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.