TRMK - NASDAQ

Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's Fourth Quarter Earnings Conference Call. [Operator Instructions]. As a reminder, this call is being recorded. It is now 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 fourth quarter earnings release as well as the slide presentation that will be discussed on our call this morning are available on the Investor Relations section of our website at trustmark.com. During the course of our call, management may make forward-looking statements with 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 the actual results due to a number of risks and uncertainties, which are outlined in our earnings release as well as our 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 are Tom Owens, our Chief Financial Officer; Barry Harvey, our Chief Credit and Operations Officer; and Tom Chambers, our Chief Accounting Officer. We at Trustmark are very pleased with our full year and fourth quarter performance in a tumultuous and challenging operating environment. Trustmark's performance reflected a very strong year in net income after tax, in fact, a record year in that regard. Which are solid loan production and credit quality as well as continued deposit growth? Trustmark reported a fourth quarter net income of $36.1 million, representing diluted earnings per share of $0.59. For the full year 2023, Trustmark's net income totaled $165.5 million, which represented diluted earnings per share of $2.70. Let's review our financial highlights in a little more detail by turning to Slide 3. Loans held for investment increased $140.3 million or 1.1% linked quarter and $746.5 million or 6.1% year-over-year. During the fourth quarter, deposits grew $467.8 million or 3.1% linked quarter and $1.1 billion or 7.8% year-over-year. Net interest income totaled $140 million in the fourth quarter, which resulted in a net interest margin of 3.25%. For the year, net interest income totaled $566.3 million, up 11.7% from the prior year and resulted in a net interest margin of 3.32%, up 15 basis points from the prior year. Noninterest income in the fourth quarter totaled $49.8 million, an increase of 10.3% year-over-year. For the year ended 2023, noninterest income totaled $207 million and represented 27.2% of total revenue. Revenue for the year totaled $79.8 million, an increase of 8.6% from the prior year. Adjusted noninterest expense in the fourth quarter totaled $134.8 million. For the year, adjusted noninterest expense totaled $527.9 million, an increase of 5.9% from the prior year. Our credit quality remains solid. Net charge-offs during the fourth quarter totaled $2.2 million, representing 7 basis points of average loans. For 2023, net charge-offs totaled $8.2 million and represented 6 basis points of average loans. The provision for credit losses for loans held for investment was $7.6 million in the fourth quarter and for the full year 2023 was $27.3 million. We continue to maintain strong capital levels with common equity Tier 1 ratio of 10.04% and a total risk-based capital ratio of 12.29%. The Board declared a quarterly cash dividend of $0.23 per share payable on March 15 to shareholders of record as of March 1. At this time, I'd like to ask Barry Harvey to provide some color on our loan growth and credit quality.

Thank you, Duane. I would like to turn to Slide 4. Loans held for investments totaled $13 billion as of 12/31. That's an increase, as Duane mentioned, of $140 million for the quarter. Loan growth during Q4 came from commercial lending and our equipment finance line of business, as well as our real estate secured loans. We expect loan growth of mid-single digits during 2024. As you can see our loan portfolio remains well diversified, both by product type as well as by geography. Looking on to Slide 5. Trustmark CRE portfolio is 94% vertical with 70% being in the existing category and 30% in the construction land and development category. Our construction land development portfolio is 79% construction. Trustmark's office portfolio, as you can see, is very modest at $298 million outstanding, which represents only 2% of the overall loan book. 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 extremely strong. Looking on Slide 6. The bank's commercial loan portfolio is well diversified, as you can see, across numerous industries with no single category exceeding 13%. On Slide 7, our provision for credit losses for loans held for investment was $7.6 million during the fourth quarter, which was attributable to loan growth, net adjustments to the qualitative factors and changes in the macroeconomic forecast. The provision for credit losses for off-balance sheet credit exposure was a negative $888,000 and during the quarter. At 12/31, the allowance for loan losses for loans held for investment was $139 million. Looking to Slide 8. We continue to post solid credit quality metrics. The allowance for credit losses represents 1.08% of the loans held for investment and 249% of nonaccruals, excluding those loans that are individually analyzed. In the fourth quarter, net charge-offs totaled $2.2 million or 0.07% of average loans, both nonaccruals and nonperforming assets remain at reasonable levels. Duane?

Thank you, Barry. I'd like to ask Tom Owens to now focus on deposits in the outlook statement.

Thanks, Duane. Good morning, everyone. Turning to deposits on Slide 9. We finished up the year with another good quarter, which continued to show the strength of our deposit base, amid an environment that remains exceptionally competitive. Deposits totaled $15.6 billion at year-end, a linked quarter increase of $468 million or 3.1% and a year-over-year increase of $1.1 billion or 7.8% and Deposit growth, excluding brokered deposits was also strong, up $616 million or 4.3% linked quarter and $556 million or 3.8% year-over-year. With a pretty strong reversal of public fund balances, which grew by $463 million during the fourth quarter after having declined by $373 million during the third quarter. We also had good growth in personal balances linked quarter, which were up $276 million, offsetting decreases in nonpersonal balances of $121 million and brokered balances of $151 million. Regarding mix, time deposits declined by $22 million linked quarter with nonbrokered CDs of $128 million and brokered CDs down $149 million. As of year-end, our promotional time deposit book declined by $44 million linked quarter, totaling $1.2 billion with a weighted average rate paid of 4.75% and the weighted average remaining term continued to shorten to about 3 months. Our broker deposit book declined by $149 million linked quarter, totaling $579 million with an all-in weighted average rate paid of about 5.46%. And the weighted average remaining term also shortened to about 3 months as of December 31. Also regarding mix, noninterest-bearing DDA balances declined $123 million linked quarter or 3.7% and noninterest-bearing DDA represented about 21% of the deposit base as of December 31. Our cost of interest-bearing deposits increased by 28 basis points from the prior quarter to 2.67%. That linked quarter increase was down from the prior quarter increase of 43 basis points during the third quarter. Turning to Slide 10. Trustmark continues to maintain a stable granular and low exposure deposit base. During the fourth quarter, we had an average of about 465,000 personal and nonpersonal deposit accounts, excluding collateralized public fund accounts, with an average balance of about $27,000. As of December 31, 64% of our deposits were insured and 14% were collateralized, meaning that our mix of deposits that are uninsured and uncollateralized was essentially unchanged linked quarter at 22%. We maintained substantial secured borrowing capacity, which stood at $6.2 billion at December 31, representing 181% coverage of uninsured and uncollateralized deposits. Our fourth quarter total deposit cost of 2.10% represented a linked quarter increase of 26 basis points and a cumulative beta cycle to date of 38%. Our forecast for the first quarter is for an increase in deposit cost to 2.19%, which would represent a cycling day beta of 42%. Turning to revenue on Slide 11. Net interest income FTE decreased $1.9 million linked quarter, totaling $140 million, which resulted in a net interest margin above 3.25%. And Net interest margin decreased by 4 basis points linked quarter as the 10 basis points of accretion due to asset raised volume was more than offset by the 14 basis points of dilution due to liability rate and [indiscernible]. On Slide 12, our interest rate risk profile remained essentially unchanged as of December 31, with substantial asset sensitivity, driven by loan portfolio mix with 50% variable rate coupon. During the fourth quarter, we entered into $75 million notional of forward starting swaps, which brought the swap portfolio notional at quarter end to $1.05 billion, with a weighted average maturity of 2.8 years and a weighted average received fixed rate of 3.18%. We also entered into $50 million notional of forward starting floors, which brought the floor portfolio notional at quarter end to $75 million with a weighted average maturity of 4 years and a weighted average SOFR rate of 3.58%. The cash flow hedging program substantially reduces our adverse asset sensitivity to potential downward shock in interest rates. Turning to Slide 13. Noninterest income for the fourth quarter totaled $49.8 million; a $2.4 million linked quarter decrease and for the full year totaled $206.9 million, a $1.8 million increase from the prior year. The linked quarter decrease was driven primarily by a normal seasonal decline of $2.1 million in insurance commissions. The full year increase was driven by increases of $3.8 million or 7.2% in insurance commissions and $1.3 million or 3% increase in service charges on deposit accounts. Those increases were offset somewhat by decreases of $2.7 million in bank card and other fees, which was primarily a decline in customer derivative revenue and $2.1 million decline in mortgage banking as both businesses faced significant headwinds from the interest rate environment. For the quarter, noninterest income represented 26.7% of total revenue, continuing to demonstrate well-diversified revenue strength. Turning to Mortgage Banking on Slide 14. Revenue totaled $5.5 million in the fourth quarter, bringing full year revenue to $26.2 million, which is a decline of $2.1 million. The full year decline was driven by increased negative net hedging effectiveness of $2.2 million resulting from the difficult hedging environment, which prevailed during 2023. While full year increases in mortgage servicing income and changing fair value of the servicing assets from runoff offset the decline in gain on sale of loans. Mortgage loan production totaled $1.5 billion in 2023, a decrease of 31.6% from the prior year. Retail production mix remained strong in the fourth quarter, representing 75% of volume or about $204 million. Loans sold in the secondary market represented 85% of production, while loans held on balance sheet represented 15%. Gain on sale margin remained under pressure in the fourth quarter, decreasing by 11 basis points quarter to 110 basis points. And now I'll ask Tom Chambers to cover noninterest expense and capital money.

Thank you, Tom. Turning to Slide 15, we'll see a detail of our total noninterest expense. During the fourth quarter, adjusted noninterest expense totaled $134.7 million, a linked quarter increase of $700,000 or 0.5%, mainly driven by an increase in FDIC assessment expense of $1.1 million, which is included in other expense. All other noninterest expense line items remain relatively unchanged on a linked-quarter basis. As noted on Slide 16, Trustmark remains well positioned from a capital perspective. As Duane previously mentioned, our capital ratios remain solid with a common equity Tier 1 ratio of 10.04% and a linked quarter increase of 15 basis points and a total risk-based capital ratio of 12.29%, a linked quarter increase of 18 basis points. Trustmark did not repurchase any of its common shares during 2023. As previously announced, Trustmark's Board of Directors authorized a stock repurchase program effective January 1, 2024, through December 31, 2024, under which $50 million of Trustmark's outstanding shares may be acquired. Although we continue to have a share repurchase program in place, our priority for capital deployment continues to be through organic lending. Back to you, Duane.

Thank you, Tom. Let's take a look now at our commentary outlook for commentary slide on Slide 17. First, let's look at the balance sheet. We're expecting loans to grow mid-single digits in 2024, while deposits are expected to grow low to mid-single digits. Securities balances are expected to decline by high single digits based on non-reinvestment of portfolio cash flows, which, of course, are subject to changes in market interest rates. Moving on to the income statement. We're expecting net interest income to decline low single digits in '24, reflecting continued earning asset growth and stabilizing deposit costs, resulting in full year net interest margin of approximately 3.2% based on market implied forward interest rates. For credit, the total provision for credit losses, including unfunded commitments is dependent upon future loan growth, the current macroeconomic forecast and credit quality trends. Net charge-offs requiring additional reserving are expected to be nominal based on the current economic outlook. From a noninterest income perspective, noninterest income is expected to grow mid-single digits, which reflects some modest improvement in mortgage, continued growth in insurance and some improvement in the wealth management business. For the last couple of years, we've talked about our FIT2Grow initiatives across the company in which we have invested in both growth initiatives, mostly in additional production talent as well as in technology and other key areas of the company. To that end, in 2024, we will begin to see efficiencies from those efforts, along with other heightened cost containment initiatives so that adjusted noninterest expense is expected to increase low single digits full year 2024. This is always subject to the impact of commissions in our commission-based businesses. Finally, we'll continue a disciplined approach to capital deployment with a preference for organic loan growth and potential M&A. We will continue to maintain a strong capital base to implement corporate priorities and initiatives. I'd like to now at this time, open the floor up to questions.

[Operator Instructions]. The first question today comes from Graham Dick from Piper Sandler.

So I just wanted to start on NII and the NIM. I guess your guidance is implying the NIM to decline throughout 2024, which is a bit different than what most other of your peers are saying right now. Can you just walk through your thoughts on this? I know you guys have a fair amount of floating rate loans. I'm just interested to hear how your outlook might differ from other banks out there who say that fixed asset repricing will be enough to overcome any pressures from lower Fed rates.

Graham, this is Tom Owens. And I'd start by saying that to a great extent, I'm an agreement with the commentary that you just cited. I disagree somewhat with your interpretation so far of continuing compression in net interest margin. We've come off here what back-to-back linked quarter declines of 4 basis points in net interest margin. I think the quarter before those 2 was 6 basis points. And so I think with the continued increase that we anticipate in deposit costs, the guidance that we've given you for the first quarter, it's reasonable to assume that you're going to see another linked quarter decline in terms of a similar order of magnitude what the run rate has been. But we are anticipating. I think on last quarter's call, when asked about the inflection point in terms of net interest margin and net interest income. I think the guidance we gave then was second to third quarter. And I think at this point, it might come in a quarter to the second quarter. So we think that -- and obviously, as I said in my prepared comments, it remains a competitive environment for deposits. Who knows what the Fed is going to actually do? Our guidance is based on market implied forwards. But all that being said, we are modeling a similar linked quarter decline in the first quarter to what you've seen in the last several quarters. And then we are getting to an inflection point in terms of some modest accretion to net interest income and net interest margin. And I do agree with the commentary that repricing of the fixed rate assets on the balance sheet over time is enough to generally stabilize, if not accrete net interest margin modestly. So that's a long-winded answer. The short answer is we think the trough is probably in the first quarter here in terms of net interest margin. And then we do get some stabilization there and some modest accretion.

So then I guess as you look out past 1Q, then you're thinking stabilization, maybe a few basis points of accretion, but all in about 320 at the end of the day for the full year. What sort of rate -- I know you said you have the forward curve baked into the guidance right now. But what did that say when you guys built out this guidance, obviously changes [indiscernible] which I was just wondering…

I'd like to ask the question, Graham, because there's been some volatility in market implied forward. So yes, when we're putting our plan together. And our forecast, it did have the fixed cuts in it, which it still largely does, although the probability of the March cut has come out quite a bit. So 6 cuts on the year, ending the year with the top of the target range at 4%. But I will say again, whether that comes to pass or not, the ongoing repricing of the fixed rate assets, let's say the Fed was just on hold. Let's say the marketing platforms are completely wrong and the Fed is just on hold for the remainder of the year. I still think that because of what we've talked about here, the dynamic of the fixed rate assets continuing to reprice that you get into the back half of the year, and you start to see some lift to net interest margin and net interest income. So I really think that the wildcard is obviously what the Fed ends up doing and then what the competitive landscape looks like in terms of deposits. It stands to reason that, that's really going to bring some of the pressure for deposit competition down as the competition for deposits of the available yield declines. And so at that point, you need to be pretty reactive in terms of how you're repricing your deposit book. One of the reasons in my prepared commentary, I'll give you the details on our broker time deposit book and our promotional time deposit book is just to reiterate the point, at this point, the weighted average remaining term on those books, which together is something like $1.8 billion is about 3 months. So we think we're well positioned to react to whatever the Fed does. And I think that if the market implied forwards turn out to be right, clearly, there's a fair amount of skepticism in the industry as to whether the Fed begins to cut in March or not. But if they do turn out to be right, I really think that's going to take pressure off the cost deposits and provide the opportunity to reprice down the promotional and proper time deposit books.

So the way I'm hearing it, it sounds like Fed cuts would be better for the margin this year than the Fed saying on hold. Is that correct? I just want to make sure I understand that correctly.

No. So I'll say it a different way. When I look at where analysts were in terms of expectations for '24, when I look at the range of analyst estimates, when I look at the median analyst estimate in terms of net interest income and net interest margin for full year '24, that's essentially where we were 90 days ago before the idea that, hey, the Fed is done here and they're going to start to cut and maybe they're going to cut 6x in 2024. Our internal modeling was already very similar to analyst estimates, both on NII and net interest margin. And so the guidance that we're giving you today just essentially reiterates that. We're slightly asset sensitive and so there's no question when you look at about half the book is floating rate. So there's no question that the Fed beginning to ease creates a headwind to net interest income. The question is how quickly you can react and reprice down your deposit book starting with promotional and broker deposits. But we've been increasing RAC rates that we pay on various products along the way as well. So we think we have the opportunity, however, it turns out in terms of the ultimate path of monetary policy this year to be in the range we're giving you in terms of net interest margin and net interest income.

And just one quick question on credit. Nonaccruals are up just a little bit again this quarter. Just wondering if you're comfortable with where the reserve is today relative to what you see on the nonperforming side. Like that's at about 1.25 coverage for the ratio of reserve to nonperformers. So just wondering if there's potential for maybe some reserve build in the future if you feel good where it is right now?

Graham, this is Barry. And I do feel good where the reserve is today. Maybe looking at it another way, I would say, of the $100 million of nonaccruals, we have $18.2 million worth of reserve when you include those that are individually analyzed or 18.2%. So I do feel like that the reserve we have on the nonaccruals, our nonperforming assets is solid even though if you capture from the standpoint of 1.2x, that feels a little different. But if you think about it in terms of 18.2% reserve on the nonaccruals, then that makes me feel good about where we are in that respect. A test a number of those are going to go larger credits, of course, are going to be individually analyzed and they're very precise in terms of what we know today in terms of the actual calculation.

The next question comes from Gary Tenner with D.A. Davidson.

I wanted to ask a bit of a follow-up just on the deposit outlook. I'm curious, in terms of the deposit beta; you got the guidance into the first quarter. What are you assuming on the way down? Do you think it's a pretty similar beta? And what kind of lag do you think there is until you're able -- you talked about the promotional deposits in brokered. But beyond that, what type of lag do you think you see on the repricing side?

Gary, this is Tom Owens. So the way I would answer it, I’ll give you the simple answer first, which is about 20% beta, assuming -- you got to start with the reference point, so let's assume that our guidance on first quarter deposit costs of about $219 comes to pass. And let's say that's the starting point and that the starting point is the Fed where they are currently at the top of the range is 5.5%. And so then if you said, well, by year-end, by the time we get to the fourth quarter, how much of the 150 basis points do you think -- what's the relationship between the decline in deposit cost and the 150 basis points? And what does that beta turn out to be, in round numbers? I would say, about 20%, right, which means 20% of 150 is about 30 basis points. So I think it would be reasonable to model from the 2019 in the first quarter, you take 30 basis points off of that, and that's probably where you're going to wind up, which is 189 or so, about, call it, $190 million. If you want to keep with super round, go from 220 in the first quarter to 190 in the fourth quarter, and relative to 150 basis points of Fed cuts, that's a beta of about 20%. And we're modeling that it's pretty linear -- well, it's pretty constant is the word I'll use. In other words, the first 75 and then the next 50 and then the next 25, we think it's pretty constant that we'll be able to get something like a 20% beta relative to those moves each quarter if those market platforms come to pass.

I wonder if you could just square this with me then. If you're looking at a 20% deposit repricing beta but your 50% variable rate loans and less than that if you factor in the hedges, of course, but still, that's a pretty decent repricing gap between the deposit beta and the variable rate on overall loan book.

Yes. I'd have to do that all in my head which is a little difficult on the fly, but the deposit base is a multiple, it's 2.5 to 3x as much as the floating rate loan book. Hard to do in my head on the fly, but mathematically, that's the answer.

If I can ask you a quick follow-up. Just in terms of the mid-single-digit deposit growth or low to mid for the year, does that assume any additional paydown in brokered over the course of time? Or do you think you just renew those as they come up?

I think that will be flat to down slightly, as I said in my prepared comments. We have really good growth in personal deposits in the fourth quarter. We had solid growth. When you think about it, ex the brokered having growth of for the full year of 3.8%, full year in an environment where bank deposits have been declining, we feel really good about that and especially having been able to raise those deposits at a competitive cost. And so yes, I think flat to down is the answer on that. Certainly, we do not view broker deposits as a permanent feature of our balance sheet. Utilization of broker deposits in 2023 was more to manage the repricing of the deposit book with 500 basis points of Fed rate hikes. So certainly, we're going to try and be opportunistic over time to continue to have the broker deposit book attrite.

[Operator Instructions]. The next question comes from Catherine Mealor with KBW.

Just one more follow-up on the margin. Do you have what percentage or the amount of fixed rate loans that you expect to reprice this year? And then similarly, do you have an amount of deposits that are indexed that will out the promotional maybe and a brokered just that it will immediately reprice lower. Just thinking about the immediate repricing lower month rates starting to be lower on the deposit side?

Catherine, this is Barry. I'll start with the first one and Tom will take the second part. But we do expect around $600 million of fixed rate loans to be repriced in the next 12 months. And then a little bit less than that, maybe $550 million of fixed rate loans to be repriced over the next 12 to 24 months.

And what's the rate on average that's coming up and repricing to?

The ones that are going to be repricing in the next 12 months, the average rate is 5.14%. And then those that were repriced 12 to 24 months out, the average rate is 4.07.

Catherine, we did not have a large portion -- we have some public fund balances and I'm a little reluctant to throw out a number because I don't have the numbers in front of me right now, but it's not a huge portion that reprices down immediately. I can think of some public fund balances did probably add up somewhere between $500 million and $1 billion. And then we also have what we call CTS corporate treasury services balances that repriced down that are indexed. And while we're on the call, I'm going to try and get my hands on that number, so I can give you a little more color on that piece. But those are really the 2 categories. I feel good about that range I just gave you on the public, and I'll see if I can get my hands on a more solid answer on the corporate deposits that are indexed.

And then any thoughts on -- we see some other companies do bond restructures, how do you all think about that? I know you're talking about just the bond books running off at a high single-digit pace throughout the year, but any thoughts around doing something more immediate on the bond book?

Catherine, we've gotten that question every quarter and understandably every time we've looked at it, the opportunity – I always struggle a little bit with whether you're truly adding economic value there or not, and there's 2 parts of that to me. One is the extent to which you are borrowing on a spread basis to fund securities in your portfolio that are not on a spread basis. And we have a pretty small percentage of the portfolio in the securities portfolio that fits that profile. But we certainly have continued to look at it. And I'll tell you, the other thing is obviously, in my prepared comments, I talked about the cash flow hedge portfolio and the steps that we've done there to rein in our asset sensitivity. We are very naturally asset sensitive. And as best we can tell from call report data, we feel like we're middle of the pack in terms of our asset sensitivity. But there is a decision to be made there as well with the uncertainty that we're facing with respect to the path of the Fed and monetary policy. And so potential restructuring of the securities portfolio is part of that calculus as well as what we do with the cash flow hedge portfolio. So I'd say we continue to look at it.

And any updated thoughts on the potential insurance sale? I don't know where you get that question every quarter. But just curious if any changes in how you're thinking about that.

No, I would say the same thing I've said in the prior quarters, Catherine. That's been a good business for Trustmark. I think this year was the 13th consecutive year of record revenue and profitability in that business. It's been a good business for us. That said we’re well aware of what is going on around us. We're well aware of valuations and the opportunities there. But at this point, where there's really no change from what we've guided to in prior calls.

[Operator Instructions]. This concludes our question-and-answer session. I would like to turn the conference back over to Duane Dewey for any closing remarks.

I just want to say thank you again for joining us this morning for our full year and fourth quarter earnings call. We look forward to getting back together with all of you again at the end of the first quarter and towards the end of April. We all have a great rest of the week. Thank you.