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. It is now my pleasure to introduce Mr. Joey Rein, Director of Corporate Strategy at Trustmark. Please go ahead..

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..

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 3.

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 -- in -- or the same period last year, a 4.1% increase. Deposits totaled $15.1 billion, an increase of $26.1 million linked-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. Noninterest 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. Noninterest 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 nonperforming assets declined 8.9% from the prior year and recoveries exceeded 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 $0.23 per share payable June 15 to shareholders of record June 1. During the first quarter, Trustmark repurchased $9.1 million or approximately 279,000 shares of common stock. As of March 31, 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..

I'd be glad to, Duane. Looking to Slide 4 now. Loans held for investment, excluding PPP loans, totaled $10.4 billion at March 31, 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 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 5. 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 6. The bank's commercial portfolio was well diversified across numerous industry segments with no single category exceeding 12%. Moving to Slide 7. 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 8. We continue to post solid asset quality metrics.

The allowance for credit losses represented 0.95% of loans held for investment and 484% of nonperforming loans, excluding those that are individually analyzed. In the first quarter, recoveries exceeded charge-offs by $137,000.

Nonperforming assets remained relatively unchanged from the prior quarter and decreased $6.6 million or 8.9% from the prior year.

Duane?.

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..

Thanks, Duane and good morning, everyone. So looking at deposits on Slide 9. Deposits totaled $15.1 billion at March 31, 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 nonpersonal 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 accounting 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 continue to maintain a favorable deposit mix with 31% of balances in noninterest-bearing deposits and 53% 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 a net interest margin of 2.58%, representing a linked-quarter increase of 5 basis points.

Higher average loan balances contributed about $600,000 of lift linked-quarter, although there were 2 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 cost reduced interest expense linked-quarter by about $600,000.

Net interest margin, excluding PPP loans and Fed reserves, was 2.88%, 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 a loan portfolio mix with 47% variable rate coupon, the 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% for a 100 basis point 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.

Noninterest 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 a 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, noninterest 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, 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 noninterest expense and capital management..

Thank you, Tom. Turning to Slide 14, you will see the detail of our noninterest expenses broken out between adjusted, other and total. Adjusted noninterest 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's stock.

At March 31, we had $90.9 million in remaining authority under its existing stock repurchase program which expires December 31, 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 remained solid with a common Tier 1 ratio of 11.23% and a total risk-based capital ratio of 13.53% at March 31.

Tangible equity to tangible assets declined to 7.29% at March 31, 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 1.

Duane?.

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 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 noninterest 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 noninterest expense is expected to increase low single digits full year, subject to the impact of commissions and 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'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 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 the floor for questions..

[Operator Instructions] Our first question is from Will Jones with KBW. Please go ahead..

Hey, great, good morning, guys. .

Good morning, William..

Good morning..

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 2 of 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 to sort of dampen the impact of that revenue over time?.

Well, 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 forward-looking. So -- and 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 or 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..

Okay, 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 somewhat sort of a bottom on the margin? I mean forward-looking, with your new NII 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?.

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 ex PPP.

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 3 Fed rate hikes in 2022.

The updated guidance is based on the equivalent of 8 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, if you look at the low double-digit increase in NII, it's basically equally comprised -- approximately equal parts earning asset growth and net interest margin expansion..

Thanks for the color. That’s it for me..

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

Hey, good morning..

Good morning, Brad..

Good morning..

Thanks for taking my questions. Tom, maybe I just wanted to start with the balance sheet.

If I'm sort of following the guidance, maybe if you grow your loan portfolio another $0.5 billion from here, maybe a few hundred million in securities to get you up to that 25% number, still maybe leaves you with $1 billion of cash or so sitting on the balance sheet, particularly if your deposit growth kind of comes through as expected.

Am I thinking about that correctly? Is your plan to kind of maybe sit on more liquidity until you kind of see rates stabilize? Or do you anticipate maybe deposits running out into 2023 or something? Just trying to get a sense of kind of how you're managing the cash portion of the balance sheet..

Yes, 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.

I think it's very reasonable to expect that here in the second quarter, we would probably increase, say, another $200 million 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 million 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 2 things, right? We'll be -- well, 3 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, if you look under the hood, first quarter deposit growth of $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 in via 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..

Great. 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 that you had already seen one rate hike or just other changes in your assumptions? I'm probably missing something there but I was just kind of curious..

Well, it has more to do with the mix change, right? And so look, I think on a linked-quarter basis, our excess reserves at the Fed dropped from, 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 net out -- 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..

Great. Thank you. And just kind of moving on to the share buyback. Maybe you weren't exactly in the first quarter as I thought you might have been.

Duane, do you think it's a year where you guys repurchased 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 valuation, how aggressive you might be with that remaining $90 million?.

Yes. 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 of 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..

Yes. And Brad, this is Tom. 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 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 in earnings should be accelerating.

So we're probably in, 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 I would -- 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..

Great. And I appreciate that. And just final 2 kind of more housekeeping questions from 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? 15.5% going forward is a little lower than I thought this quarter. Thanks for answering my questions..

So just -- I'll start and then the Toms can add too. But the gain on sale was a one-time, happened to be an attractive market and we basically sold a location and relocated across the street and that represented a $800,000-plus pretax gain for the quarter. And so that was kind of a onetime deal.

So Tom or Tom, anything to add to that?.

What was the second -- what was the question, Brad?.

Just the tax rate is a little lower this quarter.

Just curious where it might head back to, if at all?.

Yes. 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 pretax net income, you have forecasted permanent differences that you can reduce your taxable expense on the tax return, etcetera. So there's 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. 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%..

Okay, great. Thank you..

[Operator Instructions] 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..

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..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..